Ethereum is surrounded by the tripartite war of the BTC ecosystem, ETH, and Solana.

Ethereum finds itself at the center of the three-way battle between the BTC ecosystem, ETH, and Solana.

Author: muneeb.btc
Source: X (formerly Twitter) @muneeb

1. The competition between BTC and ETH is unfolding

In 2021, Ethereum played two important narratives:

– “Sound money: moving towards deflation”
– “Flippening: surpassing Bitcoin”

Currently, there have been significant changes in the dynamics of competition between Ethereum and Bitcoin. In the year 2021, three new variables have emerged:

(1) Bitcoin, as the only inflation hedge and store of value, has gained greater recognition – institutional investment in Bitcoin far outweighs that in Ethereum.

(2) Ethereum, as a public chain, is facing real competition from Solana. In 2021, Ethereum excelled in the field of public chains, but now it faces genuine competition in this dominant market.

(3) Bitcoin’s Layer 2 solutions are emerging, breaking the narrative that Bitcoin cannot be used to build applications and is not a productive asset.

This is not an article about the end of Ethereum. Ethereum still has significant growth potential and has added value to our industry. The goal here is to analyze the changing dynamics and new environment.

2. The essential attributes of both are becoming more distinct

Bitcoin – an inflation-resistant asset

A comparison between Bitcoin and Ethereum: Bitcoin, as an asset (BTC), has become clearly the only hedge against inflation. Several factors contribute to this:

(1) Bitcoin’s fixed supply of 21 million coins is more concise and compelling compared to Ethereum’s dynamic supply (e.g., post-merger).

(2) Bitcoin’s transaction fees have increased 50-fold due to Ordinals, which disrupts arguments against Bitcoin’s underlying security.

(3) Institutional investments in Bitcoin (Microstrategy, BlackRock, etc.) are far ahead of any ALT Coin competitors.

Ethereum – the monopolizer of public chains

As a public chain, Ethereum’s market mainly consists of decentralized applications. Most of the arguments about “disruption” are based on the growth of developers and users using applications on Ethereum (e.g., more fuel fee revenue, etc.). In 2021, there are no real competitors in this market. Other Layer 1 chains are referred to as “ghost towns,” “too small,” or “insecure.” Solana has changed this situation. Other competitors are also rising. Solana’s success also affects another aspect – the dominance of the EVM. Solana is not EVM-based, which shows how non-EVM solutions are gaining market share.

3. The three-sided war between BTC ecosystem, ETH, and Solana

The bilateral war between Ethereum and Solana

The one-sided war between Ethereum and Bitcoin has evolved into a two-sided war, with Solana joining the fray.

Not only has Solana brought more competition to Ethereum, but the revival of Bitcoin developers has also driven growth in developer activity and fee markets for Bitcoin.

Most of the new Ethereum user growth is likely to occur on Layer 2 solutions like Arbitrum and Optimism. Second layer solutions for Bitcoin, such as the upcoming Stacks Nakamoto, allow developers and users to run applications on a complete virtual machine, and Bitcoin can freely circulate as an asset on the second layer. Solutions like BitVM can greatly improve the trust assumption for Bitcoin’s movement between the first and second layers without requiring any upgrades to the Bitcoin first layer.

The three-sided war between BTC ecosystem, ETH, and Solana

The revival of Bitcoin developers is happening both on the first layer (Ordinals, BitVM, etc.) and on the second layer (Stacks Nakamoto, sBTC, ZeroSync, and other new Rollup projects).

As Bitcoin’s second layer solutions and projects on the first layer further mature, Ethereum’s two-sided war may evolve into a three-sided war:

(1) Bitcoin as an inflation hedge asset, countering Ethereum’s hype of burning tokens

(2) Solana’s scalability against Ethereum’s layer 1 usage, and finally

(3) Bitcoin’s second layer against Ethereum’s second layer. Currently, the last category is the smallest in scale, but it may become more mature by 2024.

However, the increase in competition for Ethereum is beneficial for the industry and decentralization.

IV. BTC-L2s are not easy and still face three dilemmas.

And Bitcoin’s second layers, as an important part of the three-sided war, also face the “impossible triangle” dilemma.

Among the three ideal attributes

(a) Open network

(b) No new tokens

(c) Complete/global virtual machine)

Developers can only choose two of them.

In 2023, we saw a significant increase in interest in Bitcoin second layer solutions (or if you prefer, sidechains). Unlike other parts of the cryptocurrency industry, the Bitcoin community is skeptical of new tokens, which introduces an interesting technological dilemma for designing Bitcoin second layer solutions.

The choices are as follows:

(a) Either an open network (ideal) or a federation.

(b) Not introducing new tokens (ideal) or introducing one.

(c) Having a complete/global virtual machine or having restricted off-chain contracts.

Liquid chooses (b) and (c) and operates as a federation. The Lightning Network chooses (a) and (b), without global state or a complete virtual machine. Stacks chooses (a) and (c), and introduces a new token (STX).

Attempts to solve this triangular problem aim to utilize existing Bitcoin miners to mine the second layer. RSK and Stacks are examples of this. In these approaches, the incentive for miners is a pending issue as transaction fees alone, especially in the early stages, may not be sufficient to incentivize them.

Introducing new opcodes on the Bitcoin base chain can help solve this triangular problem, while introducing new opcodes similar to op-snark-verify on the Bitcoin base chain can be used to verify the computation of the second layer.

Soft or hard-forking the Bitcoin base chain is very difficult, so it may take some time before new opcodes occur on the base chain. In the coming months and years, we need a vibrant ecosystem of hundreds of Bitcoin second layer solutions to develop the Bitcoin economy. This means that developers need to weigh in on the three dilemmas of the Bitcoin second layer.

Personally, I believe that having an open network (a) that anyone can mine and freely enter and exit, as well as (b) providing developers with a complete execution environment for contracts with global state, are essential attributes. Most systems like Ethereum and Solana possess these two attributes, and developers also expect them as basic requirements. Overall, let’s enable various types of experiments as Bitcoin L2. The market can determine which technological trade-off is the winner.