Bitcoin Halving Fuels Innovation and Investment with DeFi on the Rise

Amidst the recent Bitcoin halving, the blockchain has witnessed significant advancements with the launch of innovative programming features that aim to attract developers to its network. Historically, rival chains like Ethereum and Solana have surpassed Bitcoin in functionality due to their built-in smart contracts. However, recent post-halving upgrades have made DeFi on Bitcoin a reality, drawing the attention of coders and venture capital investors.

The Bitcoin Halving: A Turning Point for Innovation and Investment

As the highly anticipated Bitcoin halving event transpired, the blockchain witnessed a confluence of groundbreaking developments designed to attract an influx of developers to the network. For years, rival blockchains such as Ethereum and Solana have challenged Bitcoin's functional prowess, boasting natively integrated smart contracts within their base chains. However, recent enhancements introduced in the wake of the halving have transformed decentralized finance (DeFi) on Bitcoin into a scalable reality, captivating coders as Bitcoin's market capitalization soars past $1.3 trillion.

In the heart of Silicon Valley, 17 programmers working for Magic Eden, a renowned marketplace for non-fungible tokens (NFTs) known as ordinals, gathered in a sprawling rented house. Their mission: to dedicate a week to coding in preparation for the Bitcoin halving, an event embedded in the blockchain's code to curb inflation through programmatic monetary policy.

While much of the hype surrounding the halving, which occurs approximately every four years, centered on the impending reduction in the issuance of new coins, the block that triggered the halving also coincided with several other significant blockchain launches. These included cutting-edge programming innovations that promise to attract both a surge of coders and a substantial inflow of venture capital into the Bitcoin ecosystem.

In contrast to previous halving events, the world's largest cryptocurrency reached an unprecedented all-time high above $73,000 in March, driven by a surge of capital flowing into the Bitcoin ecosystem via newly launched spot Bitcoin exchange-traded funds (ETFs) in the United States.

"Bitcoin has never been healthier – what was missing previously was a vibrant developer ecosystem on top," asserted Zedd Yin, Magic Eden's co-founder and chief operating officer.

Amidst the coding frenzy, some Magic Eden programmers took brief respites to indulge in arcade games. The pop-up hacker house, while modest in scale, provided a few creature comforts to sustain the team throughout the week. These included Teenage Mutant Ninja Turtles and Street Fighter-themed arcade machines in the living room, complemented by a makeshift open bar on a collapsible plastic table in the dining room.

The engineers embarked on the hackathon with a clear understanding of their objectives. In the days leading up to the halving, Yin, 33, assembled his team under one roof in Northern California with a singular goal: to code and launch the definitive marketplace for a new wave of digital products emerging on Bitcoin's blockchain. On Monday morning, Magic Eden's Runes Platform went live, solidifying its position as the preferred platform for trading these novel Bitcoin offerings.

For years, rival chains like Ethereum and Solana have challenged Bitcoin's functionality, as both incorporate smart contracts, programmable pieces of code, directly into their base chains. This has been a primary reason why developers worldwide have flocked to these blockchains to build applications.

Enter Casey Rodarmor, a prominent Bitcoin coder who shattered this dynamic last year with the introduction of Bitcoin's version of NFTs, known as ordinals. Developers subsequently leveraged ordinals as a foundation for Bitcoin-issued coins called BRC-20 tokens. The launch was initially met with muted fanfare but ultimately garnered Rodarmor immense acclaim.

Late on Friday night, coinciding with the precise moment of the Bitcoin halving, Rodarmor unveiled his latest creation, runes, which essentially represents a superior and more efficient version of BRC-20 tokens.

"People really respect Casey and think that he sort of captured lightning in a bottle," said Nic Carter of Castle Island Ventures. "And so there's very high expectations for runes as well."

Technically, runes enable asset issuance of fungible tokens directly on Bitcoin's base chain. These assets could encompass stablecoins, memecoins, or any other type of fungible token.

The significance of runes for developers lies in their efficiency compared to existing BRC-20 tokens, Bitcoin's widely adopted fungible token standard that has already gained significant traction. Establishing a universally accepted token standard is considered crucial for unlocking the scalability of decentralized finance on Bitcoin. Decentralized finance, or DeFi, is a parallel banking system that eliminates intermediaries such as lawyers and banks, relying instead on code for enforcement.

"Fungible tokens are a significant part of every meaningful ecosystem like solana and ethereum, so runes is an important step in the evolution of bitcoin," said Yin, who previously led institutional trading product development at Coinbase.

Bill Barhydt, the CEO of Abra, a company that offers a suite of services to miners, including auto liquidations, and possesses access to industry-wide macro data, posits that Bitcoin cannot scale 100% on-chain via its own layer one. This impediment stems from the absence of built-in smart contract capabilities within Bitcoin's blockchain, which are essential for replicating the banking stack of blockchains like Ethereum or Solana.

"BRC-20 tokens and ordinals, its successor runes, sidechains such as stacks, and DeFi on bitcoin are all showing strong promise in user adoption which stands to dramatically increase the demand for bitcoin block space and adoption, which I believe will create a positive feedback loop further driving bitcoin price gains in the coming years," Barhydt said. "It's truly remarkable the level of new development work happening around bitcoin," he added.

Venture investors echo these sentiments.

"I've never seen deal pacing move this aggressively in the bitcoin space in my entire career," Carter tells CNBC.

Surging Interest in Bitcoin Layer Two

Indeed, the appetite of venture capital firms for these layer two Bitcoin projects has witnessed a marked uptick in recent months.

PitchBook indicates that the final quarter of 2023 was the first time in nearly two years that deal value in the crypto sector had increased, reaching $1.9 billion – a 2.5% increase from the previous quarter. While still a far cry from the $31 billion high recorded in 2021, funds are gradually rebuilding their interest and trust in the space.

"There's definitely been an awakening of capital interest in the bitcoin layer two space," said Muneeb Ali, co-founder of Stacks – an open-source blockchain network that brings smart contracts to Bitcoin.

Stacks operates as a separate chain from Bitcoin, but the two can interoperate. The project also launched an upgrade at the time of the halving block, reducing transaction time to five seconds, significantly faster than the 10 to 30 minute block times associated with Bitcoin's base chain.

"Having so much VC interest just cements that the bitcoin ecosystem is primed to grow," said Ali, noting that the pace of projects launching on Bitcoin has also accelerated in the past six months, from a handful of live projects to over 50.

A recent report published by Austin-based venture capital firm Trammell Venture Partners revealed that the Bitcoin startup sector experienced a breakout year at the pre-seed stage, with a notable 360% year-over-year surge in transaction count.

"Founders really want to be building on bitcoin specifically," said Christopher Calicott, the fund's managing director and founding partner, regarding the study's findings.

The report further indicated that early-stage, Bitcoin-native startups raised just under $1 billion from 2021 through 2023.

Alpen Labs, for instance, a layer two project introducing cutting-edge scaling technology known as zero-knowledge proofs to Bitcoin, recently emerged from stealth mode with Ribbit Capital leading a $10.6 million funding round. Another prominent layer two solution, dubbed "Build on Bitcoin" or BOB, has secured $10 million in seed funding.

"Ordinals, BRC-20s and other innovations that came about in 2023 really helped build momentum ahead of the halving," Ali said. "They made bitcoin fun again for developers and showed that users will favor NFTs, assets, and apps on bitcoin if given the opportunity."

DeFi on Bitcoin Rails

For years, developers have endeavored to incorporate additional functionality into Bitcoin's base chain. Barhydt tells CNBC that demand for DeFi – especially yield and lending – is a key driver of crypto adoption.

Sidechains like Stacks, for instance, have been diligent in their efforts to introduce the speed and competitive transaction costs of Solana-like rails into the Bitcoin ecosystem, aiming to decongest the main chain and enable the overall Bitcoin economy to scale.

With runes, these existing projects have acquired a new tool for growth, as it empowers them to potentially integrate with a native, lightweight token system on the main Bitcoin chain rather than having to establish their own independent token environment.

"Runes presents an efficient system for creating and managing fungible tokens directly on bitcoin in a way that reduces blockchain bloat and improves scalability compared to other token standards," said Hong Fang, president of crypto exchange OKX. "This has major implications for layer two solutions and sidechains that are working to scale bitcoin," added Fang, who previously spent almost a decade at Goldman Sachs.

Stacks's Ali dubs the post-halving environment "bitcoin season two."

"Season two is all about the return of builders to bitcoin. Users are finally separating bitcoin the asset from Bitcoin, as the rails," he said.

For Yin and his team, one other significant takeaway from the runes hackathon was the need for enhanced due diligence when selecting Airbnb properties.

The team encountered an inoperable outdoor gas fireplace that emitted a persistent odor of gas throughout the week, the rental's WiFi was inoperable for the entire first day, and several individuals contracted Covid.