Investing in BOB (Build on Bitcoin)

Publish Date: May 1, 2024

With the launch of BOB Mainnet today, we are excited to share our investment thesis in Build on Bitcoin (BOB), the first of its kind hybrid L2 that connects Bitcoin and Ethereum.

We invested in the seed round led by Castle Island Ventures, alongside Mechanism Capital, CMS Holdings, Bankless, Alliance DAO, and a collection of deeply principled Bitcoiner angels including Dan Held and Domo (BRC-20 creator).

Market Opportunity

BOB is focused on unlocking the largest asset base in crypto: Bitcoin. While Bitcoin continues to be crypto’s most important asset, its native chain has among the lowest deployment in DeFi TVL.

This is not to say that activity has been nascent. Over the last year, we’ve seen an explosion in on-chain activity on Bitcoin driven by BRC-20, Ordinals, and Runes mania. These innovations brought token standards common in other ecosystems (fungible / non-fungible) to the Bitcoin ecosystem.

While fungible token volumes remain volatile, Ordinals volume has been remarkably robust, with many collections now rivaling the market cap of top blue-chip Ethereum NFT counterparts.

Demand for assets secured by Bitcoin remains encouraging and we are continuing to see new and emergent use-cases for Bitcoin blockspace.

Bitcoin Scaling

DeFi penetration in Bitcoin has been nascent largely because of its primitive programming script. Natively, Bitcoin script is not Turing-complete, which prevents the deployment of common DeFi primitives such as AMMs, Lend/Borrow, and DEXs as smart contracts.

Consequently, we’ve seen these DeFi primitives move off-chain – either to federated Bitcoin sidechains or to centralized counterparties like BlockFi and Celsius.

The lessons from the last crypto market cycle are clear: multi-sig bridges and centralized counterparties represent undue risk to market participants.

We contend that for DeFi on Bitcoin to truly blossom, a scaling solution must exist with the following properties:

Native EVM smart contract support (or a similar developer ecosystem with a high degree of abstraction and community)
Trustless bridging (for Bitcoin native assets)
Strong security guarantees (via Bitcoin)

BOB stands to implement all 3 properties and usher in the next stage for the Bitcoin ecosystem.

Team

When we met Alexei, we were extremely impressed by his technical expertise. Alexei and his co-founder Dominik are Bitcoin OGs, doctorates in computer science, and have been building in the space since 2015.

They are also extremely plugged in to innovation on the Bitcoin stack and can quickly leverage these innovations into their product. The team is the exact combination of commercial and technical that is needed to lead an ambitious product like this.

Unique Design

BOB is a new Bitcoin L2 that aims to bring full EVM compatibility, with its rich programmability and UX, to Bitcoin’s security and power. It aims to allow developers to deploy applications from existing EVM networks while leveraging native Bitcoin assets and liquidity.

While the long-term goal is clear, the BOB team is pragmatic and recognizes this is not possible in the near-term because of Bitcoin script’s lack of programmatically. Given the lack of Turing-completeness, it is not possible to evaluate fraud proofs on Bitcoin so building a traditional roll-up is not feasible today.

While there is reason to be excited by the recent advances of BitVM, a new computing paradigm that aims to bring fraud proof verification to Bitcoin, there is still not a live implementation. Consequently, BOB is planning a phased roll-out where they can initially leverage Ethereum’s security model, programmatically, and liquidity while eventually bringing the guarantees of Bitcoin’s security model.

**Phase 1:** Optimistic rollup to Ethereum (built on OP Stack) with a Bitcoin light client built into the sequencer
This enables a trustless bridge with Ethereum to bring stablecoins and ERC20 assets and some trustless communication with Bitcoin to enable cross-chain swaps, auctions, and contract executions. In terms of native BTC asset support, BOB plans to launch with the tBTC bridge, which provides a good trade-off of trust and liquidity.

Phase 2: Bitcoin PoW Merge Mining with Ethereum Optimistic Rollup

This enables stronger Bitcoin-native security guarantees as Bitcoin merge-miners now validate rollup blocks (in order to generate fees) and their commitments are now validated in the Ethereum L1 proof-verification contract. On an asset basis, this phase will still likely not have native BTC support despite the stronger PoW security guarantees.

Phase 3: Bitcoin Optimistic Rollup with Ethereum Rollup

By this phase, the expectation is BitVM is production ready, such that fraud proofs can now be natively verified on Bitcoin L1. This will bring much stronger PoW security guarantees as well as native Bitcoin asset support via trustless bridging. Ethereum bridged assets will continue to be verified on the Ethereum L1 contract such that ETH assets are secured by Ethereum and Bitcoin assets bridged to the rollup are secured by Bitcoin.

Ultimately, we believe this model will be the holy grail of Bitcoin scaling because it will have a robust developer experience, native bridging to both Bitcoin and Ethereum, and strong security guarantees.

Traction

In terms of traction, BOB has launched its Spice Liquidity campaign, ahead of its mainnet launch. In less than a month of going live, this campaign has already attracted $300M TVL (~1/4 of total TVL deployed on Bitcoin) and growing steadily.

We expect TVL to continue to inflect after mainnet launch for a few key reasons:

Numerous Ethereum dApps already announcing their deployment to BOB, including Velodrome, Frax Finance, Socket, and others
Mainnet will include familiar support for 350+ EVM wallets, block explorers, account abstraction, data analytics, and oracles
BOB will have wallet support for all the top Bitcoin wallets (Leather, Unisat, Xverse) to create a consistent environment for Bitcoiners making their foray into DeFi.

BOB is also planning to build a rollup ecosystem (like the OP stack) where it will license its technology to institutions and other Bitcoin L2s. Marathon Digital, one of the largest American Bitcoin miners, has already committed to building Alys, a Bitcoin side-chain focused on institutional demand and real-world asset tokenization atop the BOB stack.

We are excited to partner with Alexei and team as they continue to push the Bitcoin renaissance forward. BOB is continuing to build out its launch partners, so please get in touch and we would be happy to connect you with the team.

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