Ethereum is surrounded by a trilateral war between the BTC ecosystem, ETH, and Solana

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

1. The competitive game between BTC and ETH is ongoing

In 2021, Ethereum's role as an "ultrasonic currency: heading for deflation" and "flipping: surpassing Bitcoin" are two important narratives.

At the moment, the dynamics of the competition-game between Ethereum and Bitcoin have changed a lot. In 21 years to date, three new variables have emerged:

(1) Bitcoin is gaining greater recognition as the only inflation hedge and store of value – institutional investment in Bitcoin far exceeds Ethereum.

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

(3) Bitcoin's layer-2 solution is emerging, shattering the narrative that Bitcoin can't be used to build applications and that Bitcoin isn't a productive asset.

This is not an article about the end of Ethereum. Ethereum probably still has a lot of room to grow and is already adding value to our industry. The goal here is to analyze the changing dynamics and new environment.

Second, the essential attributes of the two are more distinct

Bitcoin – Inflation-Resistant Asset

Bitcoin vs. Ethereum: Bitcoin as an asset (BTC) has more clearly emerged as the only inflation hedge. Several factors contribute to this:

(1) Bitcoin's fixed supply of 21 million bitcoins is more concise and convincing than Ethereum's supply dynamics (e.g., post-Merge).

(2) Bitcoin fees have increased by a factor of 50 thanks to Ordinals, undermining the arguments against Bitcoin's underlying security.

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

Ethereum - Public Chain Monopolist

As a public chain, Ethereum's market is primarily for decentralized applications. Much of the argument about "disruption" is based on the growth of developers and users using applications on Ethereum (e.g. more gas fee revenue, etc.). In 2021, there are no real competitors in this market. People call other first-level chains "ghost towns", "too small", or "insecure". Solana changes that. Other contenders are also on the rise. Solana's success has also influenced another aspect – the dominance of EVM. Solana is not EVM-based, which shows how non-EVM solutions have gained market share.

3. The trilateral war of BTC ecology, ETH and Solana

Ethereum and Solana Bilateral War

The unilateral war between Ethereum and Bitcoin has turned into a bilateral war, with Solana joining the fray. **

Not only has Solana brought more competition to Ethereum, but the resurgence of Bitcoin developers has also fueled the growth of the Bitcoin developer activity and fee market. **

Most of the new Ethereum user growth is likely to happen on ETH layer 2s like Arbitrum and Optimism. Bitcoin's layer-2 solutions, such as the soon-to-be-released Stacks Nakamoto, allow developers and users to run applications on a full virtual machine, and Bitcoin can circulate freely as an asset on layer 2. Solutions like BitVM can dramatically improve the trust assumption that Bitcoin moves between the primary and secondary chains without any upgrades to the Bitcoin primary chain.

The Trilateral War of BTC Ecology, ETH, Solana

Bitcoin's developer revival is happening both at the top 1 (Ordinals, BitVM, etc.) and at the 2 (new rollup projects like Stacks Nakamoto, sBTC, ZeroSync, etc.).

As Bitcoin's Layer 2 solutions and projects on the Tier 1 chain further mature, Ethereum's bilateral war could turn into a trilateral war:

(1) Bitcoin serves as an inflation hedge against the ultrasonic currency of Ethereum's burning gimmick

(2) Solana's ability to scale against the use of Ethereum layer 1, and finally

(3) Bitcoin Layer 2 vs. Ethereum Layer 2. The last category is currently the smallest, but could be more mature in 2024.

However, the increased competition for Ethereum is good for the industry and decentralization.

Fourth, BTC-L2s is not easy, and there are still three problems. **

The second layer of Bitcoin, as an important part of the trilateral war, is also facing the problem of "impossible triangle"

Among the three desirable properties

(a) Open Networks

(b) No new tokens

(c) Full/Global Virtual Machine).

Developers can only choose two of them

In 2023, we've seen a noticeable increase in interest in Bitcoin's layer-2 solutions (or sidechains if you prefer the term). Unlike the rest of the cryptocurrency industry, the Bitcoin community is more skeptical of new tokens, which introduces an interesting technical trichondrum for designing Bitcoin layer 2 solutions. **

The options are as follows:

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

(b) not to introduce a new token (ideal), or to introduce one.

(c) have a full/global virtual machine, or have a restricted off-chain contract.

Liquid selects (b) and (c) and operates as a federation. Lightning Network selects (a) and (b) and does not have a global state or full virtual machine. Stacks selects (a) and (c) and introduces a new token (STX).

The attempt to solve this triangle puzzle aims to use existing Bitcoin miners to mine the second layer. RSK and Stacks are examples of this. In these approaches, the incentives of miners are an open question, as gas fees alone, especially in the early stages, may not be enough to motivate them.

The introduction of new opcodes on the Bitcoin L1 chain could help solve this triangle problem, while the introduction of new opcodes like op-snark-verify on the Bitcoin L1 chain could be used to verify the computation of the L2 chain.

It is very difficult to perform a soft fork or hard fork of the Bitcoin L1 chain, so there may not be a new opcode on the L1 chain for some time. In the coming months and years, we will need a vibrant ecosystem of hundreds of Bitcoin Layer 2 to grow the Bitcoin economy. This means that developers need to make trade-offs between Bitcoin's Layer 2 and Layer 3 puzzles.

Personally, I think that (a) having an open network where anyone can mine and move freely in and out, and (b) providing developers with a complete execution environment for contracts with global state are essential attributes. Most systems like Ethereum and Solana have both of these attributes, and developers expect them as basic requirements. Overall, let's enable various types of experiments as Bitcoin L2. The market can decide which technology compromise is the winner.