Bitcoin Ecosystem Evolution: From Zero Knowledge, to The Future Decentralized Finance

The discussion around the 2025 narrative in crypto has previously touched on layer 2 blockchains and cryptographic technologies such as Zero Knowledge. Interestingly, both of these are also being integrated into the Bitcoin ecosystem. This signifies a significant evolution of Bitcoin, known as the “grandfather” of crypto assets.

Innovations in Bitcoin since 2023, such as ordinal inscriptions, PRC20, and Runes, have been the defining points that have driven its development. The year 2025 is predicted to be increasingly driving, during which Bitcoin’s fundamental value as a decentralized and censorship-resistant store of value will be maintained. Integrating Zero Knowledge (ZK) cryptography will drastically expand Bitcoin’s capabilities.

Four Pillars of Bitcoin Ecosystem Development

The various advances that have been achieved have the potential to make Bitcoin a suitable platform for Decentralized Finance (DeFi). Four main pillars support the development of the Bitcoin ecosystem:

Scalability and Programmability

ZK-Rollups technology can help improve Bitcoin’s scalability. However, the main foundation lies in developing Bitcoin’s layer one.

Improving Bitcoin’s Programmability:

Once considered a final product and only served as a store of value, Bitcoin is now transforming. Various new implementations allow Bitcoin to be programmed, opening up opportunities for developing diverse applications. Here are some initiatives worth looking into:

• MATT (Merklize All The Things): The first step in bringing programmability to Bitcoin.
• BitVM: Facilitates off-chain computing with a fraud proof mechanism for data verification. BitVM continues to evolve through several versions:
  • 0 BitVM: The initial version that implements off-chain computing and fraud proof mechanisms.
  • BitVM 1: More efficient and supports general program verification.
  • BitVM 2: Offers increased security, as well as time and cost efficiency.
  • BitVM X: Uses different data structures to produce smaller data sizes, hence more lightweight.
• CatVM: It relies on OP_CAT, a simple instruction originally found in Bitcoin. Satoshi Nakamoto removed this instruction in 2010 due to concerns about DDoS attacks. However, a solution has now been found to overcome these potential attacks. OP_CAT is now being proposed again through the BIP 42 proposal, but its security implications still being debated in the Bitcoin community.

Data Availability Layer

Scalable solutions such as rollups, sidechains, and plasmas require a data availability (DA) layer to guarantee data integrity. Layer one Bitcoin itself is the main option for the DAlayer. Innovations such as ordinals inscription and the BRC20 token standard, made possible by Taproot and SegWit updates, have been stored directly on the Bitcoin blockchain.

In addition, some Rollup SDKs offer Bitcoin adapters. For example, Sovereign Labs, Rough Labs, Tarroot Wizard, and Roll Kit provide adapters that allow rollups to integrate with the Bitcoin DA layer. For example, a rollup on Starknet can publish data to Bitcoin as an inscription, thus inheriting Bitcoin’s security and decentralization.

However, Bitcoin’s layer one has performance limitations and high costs, especially when on-chain activity increases. Another alternative is to use an off-chain DA layer like BitVM offers. However, this raises the issue of finality, where verification of inaccurate data is time-consuming and costly.

A middle solution that bridges Bitcoin’s layer one and alternative DA is Newbit. Newbit leverages BTC staking in Babylon to gain Bitcoin security, and has a lightweight decentralized validator network. Newbit also implements technologies such as Data Availability Sampling, Erasure Codes, and KZG similar to Celestia, to guarantee data integrity and availability. In addition, Newbit sends data commitments to the Bitcoin blockchain and uses the Lightning Network for efficient bridging between Bitcoin and Newbit. This combination offers a balance between cost, scalability, and security.

Bridging

Significant improvements in Bitcoin bridging technology are seen in 2024. The second version of BitVM can be used for bridging, while a strata implementation by Alpen Labs shows that trustless bridging can be achieved without changing the Bitcoin protocol. This technology is expected to be ready in early 2025, enabling more efficient transfer of crypto assets between the Bitcoin blockchain, layer 2, and other blockchains.

Another example is the OP_CAT bridge, which was demonstrated by Starkware. This bridge could become active if the Bitcoin community supports the implementation of OP_CAT through a soft fork. If realized, bridging can be done with almost instant settlement while considering security aspects.

The Collider Script developed by Blockstream researchers also shows the untapped potential of Bitcoin’s capabilities. However, fees reaching 1 million dollars per transaction are still an obstacle.

ZK-Rollups

While ZK-Rollups is a promising scalability solution, its adoption in the Bitcoin ecosystem is still in its infancy. Some projects have adopted BitVM and the Bitcoin data layer, but others are still cautious and choose layer one infrastructure or other data to reduce costs and wait for the Bitcoin infrastructure to mature.

Some of the layer 2 teams that are actively contributing and experimenting in the Bitcoin ecosystem include:

• Starknet: Has stated its intention to build a layer 2 for Bitcoin, but has not disclosed whether it will use the same rollup as the existing Starknet or build a new one.
• Bitlayer: ZK-Rollup that uses stock proof, bridging with BitVM, and can interact with data outside the blockchain through oracle contracts.
• Citrea: ZK-EVM rollup that utilizes RISC Zero to generate proofs. Citrea uses Bitcoin as the data layer by storing inscriptions, and settlements that rely on ZK proofs using BitVM. Itsbridging is also BitVM-based.
• Yona: Validium-shaped and applies SVM (Solana Virtual Machine) for execution, and is connected to the AVS (Actively Validated Services) Eigen Layer. Yona uses SVM for execution, Eigen Layer for bridging, BitVM for transaction settlement, and an alternative data layer. Yona plans to adopt Bitcoin technology gradually.
• BOB (Build on Bitcoin): Anoptimistic rollup that currently exists on Ethereum and uses BitVM. In the future, BOB will switch to Bitcoin security by utilizing Bitcoin miners and full nodes. Currently, BOB has no active fraud proof and is still using the Ethereum data layer. However, they are considering switching to Bitcoin data layer or using merged mining to utilize Bitcoin security. The BOBsequencer is still centralized, but it is planned to implement Proof-of-Work in the second phase to increase security and decentralization.

More information on Bitcoin’s layer 2 development can be accessed at bitcoinlayers.org, which lists 25 mainnet projects and 25 upcoming projects.

Conclusion

With a more mature infrastructure, Bitcoin adoption is expected to continue to increase. Bitcoin, in increasing utilization and security, are the main attractions. Users can access the decentralized lending protocol and DeFi system in Bitcoin without relying on the new centralized blockchain. Bitcoin’s smart contract capabilities will also be much more advanced than before.

The year 2025 has the potential to witness a growing number of ready-to-use bridging solutions, a significant decrease in cryptographic fees, and the emergence of innovative DeFi applications such as Lava, which utilize advances in ZK and bridging technologies. Bitcoin seems to be entering a new phase where it serves not only as a store of value, but also as a productive asset that is the foundation of DeFi. This development is not just adding features but expanding the capabilities of the Bitcoin blockchain while maintaining its core principles of decentralization and security.