Introduction

After ABCDE Capital, OKX Ventures also announced a strategic investment in Bitlayer on May 20. In this year’s Bitcoin Layer 2 narrative surge, Bitlayer, the first Bitcoin Layer 2 network based on the BitVM paradigm, has garnered significant investor interest due to its security inherited from Bitcoin Layer 1 and enhanced scalability and programmability. Bitlayer places a strong emphasis on ecosystem development, hosting the Ready Player One event and offering $50 million in incentives to attract projects to deploy on the platform. This has led to the rise of numerous high-quality projects across various sectors, including Nekoswap, the first native rune exchange on Bitlayer.

Despite runes not performing as expected in the market post-launch, and founder Casey making self-deprecating remarks, it doesn’t mean the rune ecosystem lacks potential. At its peak, runes dominated Bitcoin ecosystem transactions and fees, making up to 80% of network activity, showcasing the potential and popularity of rune technology. The recent decline in rune activity is mainly due to the overall market downturn, with falling Bitcoin prices and slow altcoin growth, leading to a cooling sentiment towards new technologies. As market sentiment improves and Bitcoin prices rise, can the rune ecosystem experience a new growth wave? Can Nekoswap, as the first native rune and token cross-chain exchange on Bitlayer, successfully manage the future liquidity of runes and Bitlayer? This article aims to explore these 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 May 21, it has created a new Bitcoin asset market with nearly 90,000 issued assets valued at $1.28 billion.

However, the initial design of BRC-20 has caused considerable pressure and resource waste on the Bitcoin mainnet, resulting in a lot of useless data. For Cassy, who values simplicity and efficiency, this was unacceptable. Thus, on September 26, 2023, Cassy introduced the concept of the Runes protocol. Due to Cassy’s focus on building the Ordinals protocol infrastructure, 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 seen as an upgraded version of the BRC-20 protocol. It resolves the issues of BRC-20’s reliance on centralized indexing and excessive useless on-chain data, offering more convenient and customizable asset issuance features such as pre-minting, batch airdrops, flexible listings, and unlimited time-limited minting.

These enhancements position the Runes protocol alongside BRC-20 and ARC-20, creating a tripartite structure within the BTC ecosystem assets.

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

Current State of the Runes Protocol

At the initial release of the Runes protocol, market sentiment was extremely high, with major project parties vying for the deployment rights of runes numbered 1-9. Consequently, gas fees reached an astonishing 3,604,819 sat/vB in the Bitcoin halving block. 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 a small difference compared to the BRC-20 market. Achieving such progress in such a short period, coupled with the fact that there is still no dominant rune comparable to Ordi for BRC-20 or Atom for ARC-20 in the current rune market, indirectly indicates that there are still many potential opportunities for the Runes protocol, and market users are still optimistic about it.

Meanwhile, despite the recent overall downturn in the Bitcoin ecosystem market, there is still continuous good news for the rune market. First, Kraken and Binance recently released research reports on runes. Kraken even hinted that runes might be listed on their trading platform. Second, the current Bitcoin ecosystem lacks stablecoins like USDT and USDC. The emergence of runes could precisely fill this gap by introducing USDC or USDT as runes on Bitcoin. 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 and lending dApps improve user experience, this demand will increase.

The Significance of Rune Fragmentation

Rune fragmentation generally refers to measures to increase rune circulation, addressing demand exceeding supply. Readers who have been in the community for more than two years will recognize these narratives, similar to those faced by NFTs a few years ago. The author refers to this as a narrative rather than a demand because the primary needs of the target differ. Those who experienced the NFT boom will recall the high entry barriers, prompting proposals for fragmentation solutions to lower these thresholds. However, when these solutions were implemented, many NFT projects faced much noise but little progress. Why do seemingly reasonable solutions face PMF issues? The concept of fragmentation can broadly refer to any solution that lowers entry barriers. For instance, in Ethereum’s PoS mechanism, many joint mining and LSD approaches aim to lower participation thresholds to increase stake distribution. According to Dune data, the current staking rate is 27%. This ratio can be broken down into push and pull factors:

1. Push factors: Users seeking stable, long-term “risk-free” returns; Ethereum’s decentralized political needs.
2. Pull factors: Participating in more DeFi Legos through LSD; Maintaining network security.

Whether through push or pull factors, the “demand” for Ethereum is crucial, indicating whether the product’s underlying logic requires “fragmentation.” Now consider a typical NFT, where Project A claims the NFT is painted by a well-known artist, offering community benefits. When facing fragmentation solutions, we understand it as follows:

1. Push factors: Enjoying community benefits, status symbol.
2. Pull factors: Traders need better price discovery mechanisms; High entry barriers for newcomers.

For the project itself, fragmentation is an added value service, not a core demand, with no need for “more people” to join. From this reasoning, we see that differing primary needs for the target determine the value of fragmentation solutions. Returning to the rune scenario, does the rune currently need a fragmentation solution?

Native rune fragmentation on BTC is challenging unless done through another token protocol, relying on an indexer to execute the state. Therefore, fragmentation solutions are expected to appear in Layer 2.

Runes protocol analysis:

1. Push factors: Traders need better price discovery mechanisms and high entry barriers for newcomers.
2. Pull factors: High transaction fees on Layer 1, slow efficiency.

Theoretically, we can refer to the ETH PoS narrative, describing rune fragmentation as a pursuit of “decentralization” to strengthen the need for rune fragmentation.

The fundamental difference from NFTs is that NFTs provide “identity,” while runes offer “returns.” Therefore, the next development path for runes might be fragmentation solutions, and how to fragment them is just a matter of choosing the solution.

Nekoswap:

Decentralized Rune and Token Cross-Chain Exchange

To address the issues with runes, Nekoswap has launched the first native decentralized rune and token cross-chain exchange on Bitlayer. The following are project details:

Business Overview

The business aspects of Nekoswap can be divided into two categories: BTC derivative assets and ERC20 operations.

1. BTC Derivative Asset Business

Nekoswap will provide 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 may be used to realize asset liquidity. $Rneko will eventually unlock $Neko (Nekoswap’s native token). Neko sats will be launched fairly, with the project team holding 2% of $RNeko, and all other tokens being airdropped (to loyal users and specific NFT holders) or added to the liquidity pool.
• Sats Marketplace: Users can mint BTC derivative assets, such as runes, BRC-20, and ARC-20, on Layer2, and trade them using ETH, BTC, BRC-20, and other tokens. Inspired by Unicross, users will receive stToken (a mapped version of the derivative asset) after minting BTC derivative assets. Layer1 assets will be managed by a multi-signature address, including Unicross, Layer2 officials, and other key builders.

1. ERC20 Business

Nekoswap adheres to standard DEX operations, offering services such as Swap, LPing/Farming, and IFO.

• Swap: Supports ERC20 token pair trading. Users executing trades will pay a 0.3% fee, distributed as follows: 0.02% to liquidity providers, 0.15% to the treasury, 0.08% for $Neko buyback and burn, and 0.05% to Neko Rune holders.
• LPing/Farming: Liquidity providers can stake their LP tokens to earn mining rewards in native tokens.
• IFO (Initial Farm Offering): Users can participate in early project public sales. While specific participation methods are not detailed, it is expected that Nekoswap will have a low participation threshold.

Token Model

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

1. $Neko

Total supply: 2,100,000,000 tokens

Public sale: 10%, with 100% (210,000,000) circulating at TGE.

Airdrop: 10%, with 10% (21,000,000) circulating at TGE.

Trading rewards: 22%, not included in TGE circulation.

Treasury and LP pool: 33%, not included in TGE circulation.

Genesis liquidity treasury: 10%, with 100% (210,000,000) circulating at TGE.

Marketing: 5%, not included in TGE circulation.

Team: 10%, with 0% circulating at TGE.

Total TGE circulation: 441,000,000, representing 21% of total liquidity.

1. $Rneko

37% airdropped to users completing specific tasks (details yet to be disclosed).

37% allocated for LP formation.

24% airdropped to specific NFT holders (Bitlayer helmet holders, Merlin penguins holders, and bitSmiley pre-season users, each receiving 500 $Rneko tokens).

2% reserved for market promotion.

Note: 4200 $Rneko is equivalent to 1 Neko Rune. The official method for Layer2 rune fragmentation is currently undisclosed, but it may follow the Unicross business model. Neko Rune is Neko sats. $Rneko will eventually be converted to $Neko at a rate of 10 Neko: 1 Rneko if all $Neko airdrop portions are issued as $Rneko.

1. Neko sats

No detailed information is available, but based on $Rneko, 5000 runes will be issued, with rune holders enjoying 0.05% of platform transaction fee revenue. The narrative direction of Neko sats can be somewhat aligned with Ethereum PoS, offering:

• Push factors: Fair launch (corresponding to decentralized political needs); more rights distribution (corresponding to PoS returns).
• Pull factors: Participation in more DeFi Legos through FT/fragmentation (corresponding to LSD).

Competitive Analysis

Data as of May 21

Valuation Forecast

Three methods to estimate valuation:

1. ATH Method: Estimating the macro factor by comparing the current crypto market cap/benchmark project’s ATH market cap, which can be used to assess the expected valuation and TGE price when Nekoswap benchmarks a specific project.
   

2. ERC20 Business Cash Flow Forecast: Estimating valuation through trading fee revenue.
   

3. BTC Derivative Asset Cash Flow Forecast: Estimating valuation through potential trading volume. Given Nekoswap’s positioning as a BTC derivative asset trading platform on Layer2, assessing the potential of current BTC Layer2 is crucial for Nekoswap’s valuation.
   

Roadmap

• Q1 2024: Team formation.
• Q2 2024: Website construction.
• Launch Bitlayer asset $RNeko.
• Community building and development.
• Q3 2024: Neko V2 DEX mainnet launch.
• TGE, airdrop.
• Begin rune staking and experimental dividends.
• Q4 2024: Start rune trading testing and function release.
• Release rune trading function.
• Establish a decentralized autonomous organization (DAO) community for comprehensive standardization.

Recent Developments

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

On Twitter, Nekoswap announced collaborations with several projects, including @pumpad_io, @Pika_Web3, and @SatoshiBEVM.

Evaluation

• Business Analysis

  Nekoswap’s main business resembles current conventional DEXs but introduces a rune fragmentation solution and provides a Layer2 BTC derivative asset trading platform. This unique positioning, combined with the anticipated BTC halving, potential BTC price increase, and support from the Bitlayer ecosystem, presents a promising narrative for the second half of the year.

• Competitive Analysis & Valuation

  Unlike conventional DEXs, Nekoswap offers a BTC derivatives trading market. However, the turnover rate (trading volume/TVL) for BTC ecosystem DEXs has shown signs of slowing down, partly due to market constraints. This suggests that initial market expectations may not match actual performance. For reference, Macaron’s current trading volume can be considered. Based on the three valuation methods mentioned earlier, a reasonable first-year valuation for Nekoswap is estimated to be between $10-30 million.

• Recent Performance

  Nekoswap’s 4th place in the Ready Player One event indicates user interest. However, given Macaron’s past performance, it is prudent to remain cautious about the product’s performance after its official launch in Q3. On the same day as this evaluation, Bitlayer launched another event, assessing 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 the current roadmap, Nekoswap can only participate in the second phase, allowing observation of the first phase’s user interaction with BTC Layer2 to evaluate Nekoswap’s subsequent performance.

6 Summary and Evaluation

Despite a recent market downturn affecting rune activity, the development potential of runes remains promising. Traditional exchanges have shown interest in the rune ecosystem, and using runes as a stablecoin carrier has significant potential. As the market recovers, runes are expected to ride the next wave of growth in the Bitcoin ecosystem. The demand for rune fragmentation solutions is crucial to meet the underlying asset needs.

Nekoswap, as the first native rune and cross-chain token exchange on Bitlayer, addresses these issues. Its innovative rune fragmentation solution lowers the participation threshold, enhancing rune liquidity. The Sats Marketplace supports minting and trading BTC derivatives, enriching the Bitcoin ecosystem’s asset types. Nekoswap’s ERC20 operations, including Swap, LPing/Farming, and IFO, offer a seamless trading experience and a solid revenue foundation for the project.

As early investors, Eureka Partners believe that with the improvement in Bitcoin ecosystem liquidity, Nekoswap will become a significant player in the rune and Bitlayer ecosystems. We look forward to Nekoswap’s growth and its positive impact on the rune ecosystem and the broader Bitcoin world.

Attached: 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 a qualified professional before making any investment or financial decisions.

Disclaimer

1. This article is reposted from Eureka Partners, and the copyright belongs to the original authors Oliver, Andy, and Howe. If there are any objections to the repost, please contact the Gate Learn team, and the team will process it according to the relevant procedures.

2. The views and opinions expressed in this article are those of the authors and do not constitute any investment advice.

3. Other language versions of this article were translated by the Gate Learn team and may not be copied, disseminated, or plagiarized without mentioning Gate.io.