Introduction

Following ABCDE Capital, OKX Ventures also announced a strategic investment in Bitlayer on May 20. Amidst the Bitcoin Layer 2 narrative boom this year, Bitlayer, as the first Bitcoin Layer 2 network based on the BitVM paradigm, has attracted significant attention from investors due to its inherited security from Bitcoin Layer 1 and greatly enhanced scalability and programmability. Bitlayer places great emphasis on the development of the on-chain ecosystem, hosting the Ready Player One event and offering $50 million in incentives to attract projects to deploy on its ecosystem. This has led to the emergence of numerous high-quality projects across different sectors, including Nekoswap, the first native rune exchange on Bitlayer.

Although the market performance of runes after their launch did not meet expectations, leading to self-deprecating remarks from its founder Casey, this does not imply a lack of development potential for the rune ecosystem. In fact, at its peak, runes dominated Bitcoin's ecosystem transactions and fees, accounting for up to 80% of network activity, demonstrating the potential and popularity of rune technology. The recent decline in rune activity is more influenced by the overall market downturn, with Bitcoin prices falling and altcoin growth slowing, leading to a cooling of market sentiment towards new technologies. As market sentiment warms and Bitcoin prices recover, can the rune ecosystem usher in a new wave of growth dividends? Can Nekoswap, as the first native cross-chain exchange for runes and tokens on Bitlayer, handle the future liquidity of runes and Bitlayer? This article aims to share our views on these two questions.

Overview of the Runes Protocol

The Emergence of the Runes Protocol

The BRC-20 protocol was released as a social experiment inspired by the Ordinals protocol. As of the time of writing (May 21), it has formed a new Bitcoin asset market with nearly 90,000 issued assets valued at $1.28 billion.

However, due to the initial design flaws of the BRC-20, it caused significant pressure and resource waste on the Bitcoin mainnet, leaving a lot of useless data. This was unacceptable to Cassy, who pursued simplicity and efficiency. Therefore, on September 26, 2023, Cassy released the concept of the Runes protocol. However, due to Cassy's focus on the infrastructure of the Ordinals protocol, the Runes protocol was not officially released until April 20, 2024, coinciding with the Bitcoin halving.

 

Features of the Runes Protocol

The Runes protocol can be simply understood as an upgraded version of the BRC-20 protocol. It addresses the BRC-20's over-reliance on centralized indexing and excessive on-chain useless data, and provides more convenient and customizable functions for asset issuance, such as pre-minting by project parties, batch airdrops, flexible order placement, and time-limited unlimited minting.

These improvements have led to a situation where the Runes protocol, BRC-20 protocol, and ARC-20 protocol form a tripartite structure of BTC ecosystem assets.

The differences between the Runes protocol and other BTC asset protocols are shown in the figure below👇🏻

Current Status of the Runes Protocol

At the initial release of the Runes protocol, market sentiment was extremely fomo, with major project parties competing for the deployment rights of runes 1-9. As a result, we saw gas fees in the BTC halving block reach an astonishing 3,604,819 sat/vB. As of the time of writing (May 21), the current market value of Runes is close to $1 billion, with nearly 70,000 issued assets, which is only slightly behind the BRC-20 market.

Achieving such progress in such a short time, coupled with the fact that the rune market has not yet seen a dominant rune like Ordi for BRC-20 or Atom for ARC-20, indirectly indicates that the Runes protocol still has many potential opportunities, and market users remain optimistic about the Runes protocol.

Meanwhile, we can see that although the overall Bitcoin ecosystem market has been relatively sluggish recently, the rune market continues to receive positive news.

Firstly, Kraken and Binance have recently released research reports on runes. Kraken even hinted that runes might be listed on their trading platform.

Secondly, the current Bitcoin ecosystem lacks stablecoins like USDT and USDC, and the emergence of runes can fill this gap. That is, USDC or USDT can be launched on Bitcoin in the form of runes. Circle/Tether can pre-mint trillions of Runes tokens and issue/exchange them as needed. Currently, the demand for stablecoins in the Bitcoin ecosystem is low, but as Bitcoin AMM, lending, and other dApps improve user experience, this demand will increase.

What is the Significance of Rune Fragmentation?

Rune fragmentation generally refers to a series of measures to increase the circulation of runes, addressing the core issue of demand exceeding supply. Readers who have been in the circle for more than two years are certainly familiar with this, as it is a narrative that NFTs encountered in previous years. Here, the author refers to it as a narrative rather than a demand because the primary needs of the target are different.

Friends who have experienced the NFT wave in previous years can realize that at that time, the threshold for NFTs was very high, making it quite difficult for many newcomers to enter. Therefore, many people proposed fragmentation solutions to address the threshold issue. However, when the solutions were introduced, many NFT projects faced a situation where the noise was loud, but the results were small. Why did seemingly reasonable solutions face PMF issues?

Let's first step back and look at the entire concept of fragmentation. In fact, this concept can generally refer to any solution that lowers the threshold. For example, in Ethereum's PoS mechanism, we can also understand it through fragmentation. Currently, many joint mining and LSD are increasing the degree of chip dispersion by lowering the user participation threshold. According to data from Dune, the current staking rate has reached 27%. We can break down this staking ratio through push and pull factors:

  1. Push factors: Users seek stable long-term "risk-free" returns; Ethereum's decentralized political needs
  2. Pull factors: Participate in more DeFi Legos through LSD; maintain network security

We can clearly see that whether it is push or pull factors, Ethereum's "demand" is very important, which also means whether the underlying logic of the product needs "fragmentation".

Now let's look at a conventional NFT. Project A claims that this NFT is painted by a famous artist, and holding this NFT can gain some community rights. When facing fragmentation solutions, we can understand it as follows:

  1. Push factors: Enjoy community rights, status symbol
  2. Pull factors: Traders need a better price discovery mechanism; high entry threshold for newcomers

This time we can see that for the project itself, fragmentation is actually an added value business, but it is not a core demand, nor is there a need to let "more people" enter the market.

From the above inference, we can see that the primary needs of the target will determine the value of the fragmentation solution. Returning to the rune scenario, does the rune now need a fragmentation solution?

It should be noted that it is difficult to natively implement a rune fragmentation solution on BTC unless through another token protocol and relying on an indexer to execute the state. Therefore, it is foreseeable that fragmentation solutions will appear on Layer2.

Runes protocol breakdown:

  1. Push factors: Traders need a better price discovery mechanism; high entry threshold for newcomers
  2. Pull factors: Layer1 transaction fees are expensive and inefficient.

In theory, we can refer to the ETH PoS narrative and describe rune fragmentation as a pursuit of "decentralization" to strengthen the demand for rune fragmentation.

The most fundamental difference from the above NFT is that the primary needs of the target are different. NFTs provide "identity," while runes provide "returns" themselves. Therefore, the next development path for runes may be a fragmentation solution, and how to fragment is just a matter of choice.

Nekoswap — Decentralized Rune and Token Cross-Chain Exchange

To address the issues with runes mentioned above, Nekoswap is working on

Bitlayer has launched the first native decentralized rune and token cross-chain exchange. Below are the project details:

Business

The business side can be divided into two categories: BTC derivative asset business and ERC20 business

BTC Derivative Asset Business

Nekoswap will offer native runes (Neko sats), rune fragmentation solutions (Rneko), and a BTC derivative asset exchange (Sats Marketplace)

  • Neko sats: The first utility rune asset on Nekoswap, mapped through $Rneko (ERC-20) to enhance rune liquidity. If the technical time cost is high, other methods will be used to realize equity monetization. $Rneko will unlock $Neko (Nekoswap native token) in the future. Neko sats will have a fair launch, with 2% of $RNeko held by the project team, and all other tokens will be airdropped (loyal users, specific NFT holders) or added to the liquidity pool.
  • Sats Marketplace: Users can mint BTC derivative assets on Layer2, such as runes, BRC-20, ARC-20, and support trading with ETH, BTC, BRC-20, and other tokens.

Referencing Unicross's implementation: After minting BTC derivative assets, users will receive stToken (the mapped version of the derivative asset), and Layer1 assets will be managed by a multi-signature address, with signatories including Unicross, Layer2 officials, and other important Builders.

2. ERC20 Business

Nekoswap meets the standard DEX business criteria, offering Swap, LPing/Farming, and IFO services.

  • Swap: Supports ERC20 token pair trading. Users executing trades need to pay a 0.3% fee, with 0.02% income going to liquidity providers, 0.15% to the treasury, 0.08% for $Neko buyback & burn, and 0.05% to Neko Rune holders.
  • LPing/Farming: Liquidity providers' LP tokens can be further staked to earn native token mining rewards.
  • IFO: Users can participate in early project public sales. The specific participation method is not detailed yet, but it is expected that Nekoswap's participation threshold will not be too high.

Token Model

Nekoswap has three types of assets: $Neko, $Rneko, and Neko sats

1️⃣ $Neko

Total circulation of tokens is 2,100,000,000, of which:

Public sale - 10%, TGE circulation 100%, i.e., 210,000,000

Airdrop - 10%, TGE circulation 10%, i.e., 21,000,000

Trading rewards - 22%, TGE circulation not included

Treasury and LP liquidity pool - 33%, TGE circulation not included

Genesis liquidity treasury - 10%, TGE circulation 100%, i.e., 210,000,000

Marketing - 5%, TGE circulation not included

Team - 10%, TGE circulation 0%

Total TGE circulation is 441,000,000, accounting for 21% of total liquidity

2️⃣ $Rneko

  • 37% airdropped to users who complete specific tasks (no further information yet)
  • 37% used to form LP
  • 24% airdropped to specific NFT holders: currently, Bitlayer helmet holders, Merlin penguins holders, and bitSmiley pre-season users can each receive 500 $Rneko token airdrops.
  • 2% reserved for market promotion

It is worth noting that 4200 $Rneko is equivalent to 1 Neko Rune. As for how the official will achieve rune Layer2 fragmentation, there is no further information yet. The relevant plan can refer to the Unicross business described above.

Neko Rune is Neko sats.

Additionally, $Rneko will be exchanged for $Neko in the future. Based on the total issuance, if the $Neko airdrop portion is all issued as $Rneko, the exchange rate will be 10 Neko: 1 Rneko.

3️⃣ Neko sats

Neko sats currently have no detailed content, but based on $Rneko calculations, 5000 runes will be issued, and these rune holders can enjoy 0.05% platform transaction fee income.

Attentive readers can find that the narrative direction of Neko sats can be somewhat referenced to Ethereum PoS, providing:

  1. Push factors: Fair launch (corresponding to decentralized political needs); more equity sharing (corresponding to PoS income)
  2. Pull factors: Participate in more DeFi Lego through FT/fragments (corresponding to LSD)

Competitive Analysis

Data as of May 21

Valuation Forecast

Based on the above competitive content, we can estimate the valuation in three ways:

Data as of May 21

1. ATH method: Calculate the macro factor based on the current crypto market cap/benchmark project ATH market cap, which can be used to evaluate the expected valuation and TGE price when Nekoswap benchmarks a certain project.

2. ERC20 business cash flow forecast: Estimate the valuation by calculating trading fee income.

3. BTC derivative asset cash flow forecast: Estimate the valuation by assessing potential trading volume.

Since Nekoswap is positioned as a Layer2 BTC derivative asset trading platform, the author believes that evaluating the current potential of BTC Layer2 is important for Nekoswap's valuation.

Roadmap

  • Q1 2024 - Team formation
  • Q2 2024 - Website construction
    • Release Bitlayer asset - $RNeko
    • Community building and development
  • Q3 2024 - Neko V2 DEX mainnet launch
    • TGE, airdrop
    • Start rune staking and experimental dividends
  • Q4 2024 - Begin Rune Trading Testing and Feature Release
    • Release Rune trading feature
    • Establish and fully standardize the Decentralized Autonomous Organization (DAO) community

Recent Developments

In Bitlayer's Ready Player One event, as of May 10, Nekoswap ranked 4th on the Bitlayer Dapp Leaderboard.

On Twitter, Nekoswap also officially announced collaborations with multiple projects such as @pumpad_io, @Pika_Web3, and @SatoshiBEVM.

Evaluation

  • Business: The main business is similar to the current conventional DEX, but the product introduces a fragmented rune solution and provides a Layer2 BTC derivative asset trading platform, which is expected to capture market signals through first-mover advantage. Based on the halving expectation in the second half of this year, BTC price increase expectation, and Bitlayer ecosystem support, this narrative is relatively promising.
  • Competitor Analysis & Valuation: The significant difference from conventional DEXs in terms of business is the provision of a BTC derivatives trading market. However, the turnover rate (trading volume/TVL) of BTC ecosystem DEXs has significantly slowed down, partly due to market constraints, and the market expectations may not match the actual performance upon launch. Macaron's current trading volume can be referenced. Based on the above three valuation methods, a reasonable first-year valuation is approximately 10-30 million.
  • Recent Developments: Previously ranked fourth in Bitlayer's Ready Player One event, indicating some level of user expectation. However, given Macaron's previous performance, there should be some reservations about the product's performance after its official launch in Q3. On the same day this article was written, Bitlayer launched another event evaluating business metrics such as TVL and trading volume. The first phase runs from May 23 to June 23, and the second phase from June to August. According to Nekoswap's current roadmap, it can only participate in the second phase, allowing us to observe the specific user interaction volume with BTC Layer2 in the first phase to evaluate subsequent Nekoswap business performance.

Conclusion

Despite the recent market downturn affecting rune activity, we believe its development potential is still worth market anticipation. We have already seen signals of traditional exchanges paying attention to and even laying out plans for the rune ecosystem. Additionally, using runes as a stablecoin carrier has considerable imaginative space. Therefore, when the market recovers, we believe runes are likely to ride the next wave of the Bitcoin ecosystem and take off again. Furthermore, through the analysis of the fragmented rune market solution demand, we see that the future development of runes requires such solutions to meet the underlying asset needs.

Nekoswap, as the first native cross-chain exchange for runes and tokens on Bitlayer, is committed to solving the above issues. Nekoswap's innovative fragmented rune solution can lower the participation threshold for users, thereby increasing rune liquidity. Meanwhile, the Sats Marketplace supports users in minting and trading BTC derivative assets, further enriching the types of assets in the Bitcoin ecosystem. Additionally, Nekoswap's ERC20 business features such as Swap, LPing/Farming, and IFO, not only provide users with a smooth trading experience of existing DEXs but also lay a solid foundation for the project's revenue. As an early investor in Nekoswap, Eureka Partners believes that with the improvement of Bitcoin ecosystem liquidity, Nekoswap will become an important member of the rune ecosystem and Bitlayer ecosystem. We also look forward to seeing Nekoswap's development and witnessing its positive impact on the rune ecosystem and the entire Bitcoin world.

Appendix: References

https://dune.com/cryptokoryo/runes#runes-overview

https://www.coingecko.com/en/categories/brc-20

https://nekoswap.gitbook.io/nekoswap/tokenomics

https://www.nekosats.io/

https://dune.com/hildobby/eth2-staking

Disclaimer: This content does not constitute investment advice or financial planning. Please consult qualified professionals before making any investment or financial decisions.