Institutional top of mind | #12

Keep up with the top industry updates as we present bi-weekly market insights that are important to traders in the institutional space.

In this week's edition, Kelvin Lam, CFA, Head of Institutional Research for OKX, delves into the Bitcoin ecosystem and its latest developments. He elaborates on why the Bitcoin ecosystem may have been overlooked and why it matters to institutions. Additionally, he shares key metrics to track the Bitcoin ecosystem and highlights key development trends to watch in 2024.

Why does the Bitcoin ecosystem hold promise in 2024?

TL;DR

• Bitcoin's recent spot ETF approval has grabbed the attention of financial institutions, driving interest in the broader Bitcoin ecosystem. Institutions are exploring blockchain technology, tokenization, and Bitcoin DeFi can be an avenue for innovation and market opportunities.

• There are useful key data and metrics that can be used to assess the health and activity of the Bitcoin ecosystem. These metrics provide valuable insights into the adoption, economics, and new trends of the network.

• The development of the Bitcoin ecosystem is occurring at an unprecedented rate in recent times. Behind the scenes, we believe that the introduction of asset issuance protocols, the implementation of smart contracts on Bitcoin (BitVM), Bitcoin covenants, and the integration of related Layer 2 solutions will propel the Bitcoin ecosystem to new heights in 2024.

Why does the Bitcoin ecosystem matter to institutions?

The recent approval of spot Bitcoin ETFs has significantly heightened the focus of traditional financial institutions on Bitcoin and cryptocurrencies. While Bitcoin is often regarded as "digital gold" or a vehicle for generating attractive risk-adjusted returns, the implications extend beyond its monetary value.The underlying technology behind Bitcoin and the broader Bitcoin ecosystem are expected to reap substantial benefits from this development. Similar to how oil traders analyze supply and demand dynamics to gain market insights, studying the activities within the Bitcoin network and ecosystem can provide valuable indicators for predicting Bitcoin's price movements.

Financial institutions have been actively exploring blockchain technology and tokenization, harnessing the power of blockchains and smart contracts. The rise of institutional DeFi gained significant momentum in 2021, particularly during the "DeFi summer," with a strong focus on popular layer 1 chains like Ethereum, Avalanche, Algorand, and more. Bitcoin DeFi is now gaining traction, positioning Bitcoin to swiftly catch up with other prominent chains. Given its potential, the Bitcoin ecosystem demands attention as an emerging avenue for financial institutions to explore and delve into blockchain applications.

Essential data and metrics to track in the Bitcoin ecosystem

The non-zero address count refers to the number of unique addresses on the Bitcoin blockchain that hold a non-zero balance of Bitcoin. This metric is used to track the growth and adoption of Bitcoin by measuring the number of active participants in the network. In November 2023, this count exceeded 50 million and has continued to climb, currently standing at a remarkable 51.3 million as of the end of January 2024. The significant growth observed over the past year can be primarily attributed to the increasing popularity of ordinal inscriptions within crypto space.

Source: Glassnode

Transaction fees play a critical role in the Bitcoin (and Ethereum) networks, compensating miners (Bitcoin) and validators (Ethereum). During periods of heightened market attention, such as bull markets, these fees historically experience a surge. This increase is driven by factors like heightened user participation, network congestion, and the need for faster transaction confirmations. An interesting observation is that transaction fees on the Ethereum network are typically higher due to its popularity for executing transactions. However, in November 2023, Bitcoin transaction costs surpassed those on Ethereum, marking a notable shift in fee dynamics between the two networks.

Source: The Block

The Lightning Network capacity is defined as the total amount of BTC both locked, and circulating within the Lightning Network. The Lightning Network in Bitcoin was developed to address the scalability challenges faced by the Bitcoin network, as it enables faster and more cost-effective transactions by facilitating off-chain payments through an interconnected system of payment channels. The chart below clearly illustrates the rapid growth of the Lightning Network in 2023, signifying a substantial increase in transactional and payment adoption leveraging the usage of Bitcoin.

Source: Glassnode

Bitcoin ecosystem development trends to watch in 2024

There are some key technological innovations and developments to watch in 2024 in the Bitcoin ecosystem as outlined by our colleagues in OKX Ventures team. Asset issuance protocols are paving the way for innovation within the Bitcoin ecosystem. Several protocols have gained traction in recent months. Ordinals, for instance, enable the creation of unique NFTs using sats. However, concerns about network congestion and centralized risks have also emerged. RGB is another protocol that focuses on optimizing the network's privacy and scalability. Taproot assets, on the other hand, enhance privacy and efficiency within smart contracts. When combined with the Lightning Network, they facilitate accelerated asset issuance and transfers, revolutionizing the Bitcoin ecosystem.

Smart contracts on the Bitcoin ecosystem have been gaining attention and undergoing developments in recent years. While Ethereum and other blockchains are more commonly associated with smart contracts, there are emerging concepts and technologies that aim to enhance the programmability of Bitcoin without altering its core protocol. BitVM is a new concept that aims to enhance the programmability of Bitcoin without the need to upgrade the core protocol. It achieves this by utilizing a combination of off-chain computation and on-chain validation. The goal is to enable complex smart contract verification while reducing the burden on the on-chain data and increasing fraud protection within the Bitcoin ecosystem.

The developments in Bitcoin covenants are also significant for increasing the diversity and security of smart contracts. They enable the implementation of more complex and secure contract logic, opening up new possibilities for decentralized applications and financial instruments on the Bitcoin network. Additionally, advancements like OP_TXHASH and OP_CHECKTXHASHVERIFY contribute to scalability and efficiency, supporting the widespread adoption of Bitcoin as a global payment system.

Lastly, the innovations among Bitcoin Layer 2 solutions encompass various technologies, including sidechains, plasma, and rollups. These Layer 2 solutions are designed to address the scalability and efficiency challenges faced by the Bitcoin network, making it more practical for everyday use and enabling it to handle a larger volume of transactions. One key distinction between rollups and sidechains lies in their functionality during mainnet failures. Rollups rely on the mainnet for consensus, rendering them unable to operate independently in such situations. On the other hand, sidechains can continue functioning autonomously even when the mainnet fails, thanks to their independent consensus mechanism.

Check out the OKX Ventures 2024 Bitcoin Outlook Report for more on these Bitcoin ecosystem developments.

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