🔍 Bitcoin: More Than Just Digital Gold?

In just the span of 1 month, over 100,000 Bitcoin Ordinals were inscribed in a parabolic NFT minting frenzy that has brought attention to Bitcoin in a way it hasn’t seen in years. Ordinal theory ascribes a unique number to each satoshi (the smallest unit of BTC) and enables inscribing of metadata to each satoshi, functionally turning them into “NFTs”. The metadata can include pictures, gifs, and videos with a maximum size of 4MB, the upper limit for a Bitcoin block. The pixel art of the skull in the image above is the first Ordinal ever inscribed on Dec. 14, 2022. Users inscribing metadata to specific satoshi units can fundamentally change Bitcoin’s fungibility.

This added functionality has reignited the demand for Bitcoin block space. The average size of a block has increased from about 1.2 MB to 2 MB since the start of the year. Ordinals could be a godsend in ensuring the sustainability of the Bitcoin blockchain. As users pay to inscribe metadata, miners find a new, much-needed stream of revenue.

So far, users are primarily inscribing derivatives of popular NFT collections on Ethereum. However, we are now seeing interest from big players as well, especially with Yuga’s most recent Twelvefold auction. Yuga Labs auctioned off 288 Ordinals that sold for an average of 2.55 BTC for a total of $16.5M generated. As our analyst Aaron wrote on our member portal yesterday:

”There was a large spread between the 1st and 288th Ordinal. The first Ordinal sold for 7.1159 BTC, while the 288th sold for 2.25 BTC. A premium for Yuga’s 1/300th Ordinal is not surprising, but commanding a 3x multiple for that first spot seems high. I want to see how these will trade on secondary markets and if the first few Ordinals will maintain their premium.”

We cover Ordinals in more detail in our deep dive report, available exclusively for Delphi Pro members here. The buzz around Bitcoin being used as something other than digital gold has led to other players exploring Bitcoin’s functionality to stand out, particularly Rollkit and Stacks.

Rollkit is a modular framework for rollups created by the Celestia team. The framework enables developers to plug in custom execution layers and data availability layers. Rollups can combine transactions and post them to blocks on the data availability layer, thereby inheriting their security. Initially, Rollkit only supported Celestia as an option for data availability. Now, they are unveiling a module for Bitcoin where “sovereign rollups” can manage their own execution while offloading consensus and data availability to Bitcoin.

This makes it possible to run EVMs as sovereign rollups on Bitcoin. According to Celestia, a rollup chain is sovereign if it does not enshrine a settlement layer to determine the canonical chain and the transaction validity rules of the rollup. Sovereign rollups are easy to launch as they don’t have to bootstrap or maintain their own consensus layers and validator sets.

Let’s look at another interesting innovation on Bitcoin – Stacks, a layer that can host smart contacts and settle its transactions in Bitcoin blocks. Its consensus mechanism is called Proof of Transfer (PoX). Users must pay a fee to miners in STX to send a transaction or deploy smart contracts on Stacks. STX holders can also participate in “stacking” by locking up tokens to earn BTC. Users who lock tokens earn BTC rewards that are paid by miners, who are required to spend BTC to prove computing resources.

The project aims to “bridge” BTC via sBTC, a version of BTC that lives on Stacks and is pegged 1:1 to the BTC used to mint it. The sBTC token is intended to be as close to native BTC as possible, increasing its functionality without compromising on security.

For sBTC, the peg operations happen on Bitcoin and thus inherit the chain’s censorship resistance. Users who want to mint sBTC send BTC to a multi-sig wallet on Bitcoin, paying only the transaction fees. The Stacks chain mints the corresponding sBTC when the transaction is confirmed. The multi-sig wallet is controlled by “stackers” or those who’ve locked up STX. The stackers are incentivized to participate without introducing any additional peg fees. The Stacks layer settles all transactions on Bitcoin with complete finality, giving it strong security guarantees.

With projects like Rollkit and Stacks, the design space is so novel that the two may have the opportunity to be complementary. There is already some R&D work to use Stacks contracts as an execution layer for sovereign rollups. The trust-minimized sBTC can then be easily used in such sovereign rollups with DA coming from Bitcoin, e.g., by using Ordinals.

Ordinals, Stacks, and Rollkit are potentially the beginning of a vibrant on-chain ecosystem that leverages Bitcoin. With a market cap of $428B, just a fraction of the supply being used for on-chain activities could have a large impact. Combined, these projects represent a new path forward for Bitcoin: one where it is more than just digital gold.

📅 This Week in Delphi Research

MakerDAO’s 2022 Fundamentals

MakerDAO is probably the oldest DeFi protocol still existing and thriving. DAI is a foundational layer for the entire DeFi ecosystem. In this report, Aaron analyzes MakerDAO to see how it performed in 2022 and weathered current market conditions. The report looks at the positive and negative catalysts, how the traditional markets may affect Maker, and how it’s stacking up against competitors.

February Gaming Roundup

February 2023 displayed a slight retrace from the unexpected highs seen by the crypto gaming scene in the previous month. This monthly update on the sector by Joseph touches on the price rise in ImmutableX’s IMX token, decreasing gaming wallet interactions and volume, the Square Enix web3 project, Limit Break and their Super Bowl ad, and much more!

Enforceable Creator Royalties

As the competition among NFT exchanges heats up, creators have become collateral damage as exchanges have callously removed the enforcement of royalty fees. However, with the advent of enforceable on-chain royalty solutions, such as EIP-4910 and further developed by Limit Break, the power balance may change again. In this report, Jimin explores enforceable royalties for creators and collectors alike and hypothetical implementations in future games.

Radiant Capital Finds Initial Traction, But Will It Sustain?

Arbitrum’s DeFi ecosystem has been popping off, but rather than just launching carbon copies of established DeFi brands, the leading protocols on Arbitrum have unique value propositions. In this report, Gen takes a look at Radiant Capital, a money market that is shaping up to become a dominant player, leading even Aave in terms of TVL.

📖 Delphi Reads

Last week, we covered the launch of Base, a layer-2 network incubated by Coinbase and built using Optimism’s open-sourced OP Stack. A tweet thread here by @rayzhueth predicts that Coinbase will make USDC transfers free on Base to compete with payment networks like Visa and Mastercard. This is an interesting theory that introduces a backdoor way for Coinbase to monetize Base via its partial ownership of Centre, issuer of the USDC stablecoin.

In August 2022, US authorities sanctioned Tornado Cash while those in Netherlands arrested its lead developer, Alexy Pertsev. They cited the protocol’s use by North Korean state-sponsored hackers to launder money. A new fork of Tornado Cash called Privacy Pools works by allowing users to show publicly that their withdrawals are not linked to bad actors. Read more about how the project works in a tweet thread here by @ameensol.

🔥 Meme of the Week

Silvergate announced last week that it would delay filing its annual report as it needed to answer requests from its auditors and deal with regulatory actions. Subsequently, a majority of the bank’s clients like Coinbase, Circle, Paxos, Crypto.com, Bitstamp, Cboe Digital Markets, Galaxy, and Gemini stopped doing business with the bank. Silvergate also closed its network used by institutions to move money to crypto exchanges. And now, the bank is talking to FDIC examiners about how to salvage the bank’s conditions.

Meme via @tier10k.