Bitcoin layer-2s face a bear-market reality check

4 min readMake preferred on ShareShare this articleCopy linkX iconX (Twitter)LinkedInFacebookEmailMake preferred on (CoinDesk)SummaryShowBotanix is winding down operations after concluding that programmable Bitcoin "did not work" in the current market.Bitcoin builders say general-purpose layer-2 ecosystems are struggling, but bitcoin-backed lending, staking and yield still have demand.Numerous projects emerged while bitcoin was in a buoyant mood from 2024-2025, but muted sentiment may mean users are mainly concerned about BTC's role as a store of value. When Botanix announced last week that it would be winding down operations, the Bitcoin layer-2 project did not try to sugarcoat its message. "It did not work," the team wrote in a social media post announcing the shut down. "At least not in this market and not in this timeline." Botanix was one of a number of projects pitching Bitcoin as a new frontier for decentralized finance (DeFi), staking, zero-knowledge rollups and smart-contract applications. Its conclusion was that "making Bitcoin programmable, productive and integrated into real financial activity isn't where real-world users sit right now." Current market conditions might not be the most fruitful ground for investing in utility and programmability under the hood of the world's original cryptocurrency. Bitcoin's role as a store of value is what attracts the majority of investors, who may not be drawn to other potential functions of BTC when it is not performing its most fundamental one very convincingly. That raises an uncomfortable question: has the Bitcoin utility boom lost its shine? The data does little to dispel the skepticism. DefiLlama shows Ethereum with around $39 billion in total value locked, while Bitcoin's onchain DeFi activity sits at less than $5 billion, despite its total market cap being four to five times bigger than Ethereum's. Rootstock, one of the longest-running Bitcoin smart-contract platforms, has about $101 million in TVL, according to DefiLlama. Citrea, a newer Bitcoin zero-knowledge rollup, has less than $1 million in stablecoin market capitalization. Yet the builders still standing in the sector argue Botanix's failure does not prove Bitcoin utility is dead. Instead, they say it shows the market is abandoning a more naïve thesis: that Bitcoin needs its own version of Ethereum or Solana. David Tse, co-founder of staking project Babylon, said the problem with many Bitcoin layer-2 projects is that they are "trying to bootstrap a brand new economy." Babylon's approach, he said, is different. Rather than create a new application ecosystem on Bitcoin, the project aims to bring bitcoin into existing liquid markets such as Ethereum DeFi. "We're bringing bitcoin to Ethereum as the first use case," Tse said. "Aave is the biggest DeFi protocol on Ethereum. So we're bringing it to the biggest center of the smart-contract economy." The distinction matters. Wrapped bitcoin products such as WBTC, Coinbase's cbBTC and Circle's recently announced synthetic bitcoin product already allow BTC to circulate in DeFi. But Tse said many bitcoin holders dislike giving up custody in exchange for synthetic tokens. "Most users, many users, do not like it," he said. "They don't want to give up title, they don't want to give up custody." Orkun Mahir Kılıç, co-founder and CEO of Chainway Labs, developer of Citrea, offered a blunter critique of the sector's earlier ambitions. "Trying to do the same things as Solana the day you launch doesn't make any sense," he said. Bitcoin layer-2s should stop pitching themselves as general-purpose blockchains, he added. The market already has mature ecosystems for trading, lending, consumer applications and perpetual futures. Instead, Kılıç said, Bitcoin layer-2s should focus on products "uniquely enabled by Bitcoin security and settlement." There are still things that wait to be solved on the Bitcoin layer-2 markets," he said. "But definitely general-purpose ecosystem focus, like trying to compete with Ethereum applications on your day one, is a little bit hard to achieve." Diego Gutierrez Zaldivar, CEO and co-founder of Rootstock Labs, said Botanix's closure reflects another lesson: building a blockchain ecosystem is much harder than solving the technical problem. "Building an ecosystem is more like settling a new city than it is like launching a new application," he said. He also said users do not adopt infrastructure because it is elegant. "The users don't care about technology," he said. "The first thought is utility." For Rootstock, that utility increasingly means bitcoin-backed lending and institutional products. Gutierrez Zaldivar said the collapse of centralized lenders such as Celsius, BlockFi and Voyager did not invalidate bitcoin lending. It validated the need for transparent, protocol-based alternatives. "If I can show you that your bitcoin is there in a protocol in real time, they are safe, they are not being rehypothecated multip

Bitcoin layer-2s face a bear-market reality check

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