Bitcoin layer-2 solutions confront harsh market realities

The shutdown of Botanix has prompted a challenging question for Bitcoin developers: Is there a real demand for programmable BTC, or is the market primarily interested in better methods for borrowing, lending, and earning yields on it?

— Botanix is ceasing operations after determining that programmable Bitcoin «did not work» under current market conditions.

— Developers in the Bitcoin space assert that general-purpose layer-2 ecosystems are facing difficulties, while bitcoin-backed lending, staking, and yield generation still maintain interest.

— A multitude of projects emerged during the bullish phase of Bitcoin from 2024-2025, but the current subdued sentiment suggests that users are primarily focused on BTC’s role as a store of value.

When Botanix revealed last week that it would be shutting down, the Bitcoin layer-2 project made no effort to soften its message.

«It did not work,» the team stated in a social media announcement regarding the closure. «At least not in this market and not in this timeframe.»

Botanix was among several projects promoting 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 activities isn’t where real-world users are right now.»

Current market conditions may not be the most favorable for investing in the utility and programmability of the world’s original cryptocurrency. The primary appeal of Bitcoin for most investors lies in its status as a store of value, which may overshadow other potential uses of BTC when its fundamental function is not performing convincingly.

This raises a difficult question: has the Bitcoin utility boom lost its allure?

The data does little to alleviate skepticism. DefiLlama reports that Ethereum has around $39 billion in total value locked, while Bitcoin’s on-chain DeFi activity is below $5 billion, despite its total market capitalization being four to five times larger than that of Ethereum.

Rootstock, one of the longest-established Bitcoin smart contract platforms, reports about $101 million in total value locked, according to DefiLlama. Citrea, a newer Bitcoin zero-knowledge rollup, has a market capitalization of under $1 million for its stablecoin.

New economic landscape

However, the remaining builders in the sector argue that Botanix’s failure does not signify the death of Bitcoin utility. Instead, they believe it demonstrates that the market is moving away from a more simplistic thesis: that Bitcoin needs its own version of Ethereum or Solana.

David Tse, co-founder of the staking project Babylon, remarked that the issue with many Bitcoin layer-2 projects is that they are «attempting to bootstrap a brand new economy.»

Babylon’s approach, he explained, is different. Rather than creating a new application ecosystem on Bitcoin, the project seeks to integrate Bitcoin into existing liquid markets like Ethereum DeFi.

«We’re introducing Bitcoin to Ethereum as the initial use case,» Tse stated. «Aave is the largest DeFi protocol on Ethereum. So we’re bringing it to the central hub of the smart contract economy.»

This distinction is significant. Wrapped Bitcoin products such as WBTC, Coinbase’s cbBTC, and Circle’s recently launched synthetic Bitcoin product already enable BTC to circulate within DeFi. However, Tse mentioned that many Bitcoin holders are reluctant to relinquish custody in exchange for synthetic tokens.

«Most users, many users, are not in favor of it,» he said. «They do not want to forfeit ownership; they do not want to give up custody.»

Bitcoin layer-2 challenges

Orkun Mahir Kılıç, co-founder and CEO of Chainway Labs, the developer behind Citrea, provided a more straightforward critique of the sector’s earlier ambitions.

«Trying to replicate the same functionalities as Solana on your launch day does not make any sense,» he asserted.

Bitcoin layer-2 projects should cease presenting themselves as general-purpose blockchains, he added. The market already has established ecosystems for trading, lending, consumer applications, and perpetual futures.

Instead, Kılıç suggested that Bitcoin layer-2s should concentrate on products «uniquely enabled by Bitcoin’s security and settlement.»

«There are still challenges to be addressed in the Bitcoin layer-2 markets,» he noted. «But certainly, the focus on general-purpose ecosystems, like competing with Ethereum applications from day one, is quite difficult to achieve.»

Diego Gutierrez Zaldivar, CEO and co-founder of Rootstock Labs, observed that Botanix’s closure illustrates another lesson: constructing a blockchain ecosystem is significantly more challenging than merely resolving the technical issues.

«Building an ecosystem is more akin to establishing a new city than launching a new application,» he explained.

He also noted that users do not adopt infrastructure because it is aesthetically pleasing. «Users do not care about technology,» he said. «Their primary concern is utility.»

BTC-backed lending

For Rootstock, that utility increasingly translates to bitcoin-backed lending and institutional products. Gutierrez Zaldivar stated that the downfall of centralized lenders like Celsius, BlockFi, and Voyager did not negate bitcoin lending; rather, it underscored the need for transparent, protocol-based alternatives.

«If I can demonstrate to you that your Bitcoin is securely held in a protocol in real-time, that it is safe and not being rehypothecated multiple times, then you can create a product that can scale,» he noted.

The irony, he added, is that weaker market conditions may help to differentiate speculative hype from genuine demand. «As the speculative elements of the ecosystem diminish, the productive aspects increase,» he stated. «Now we are having more discussions about Bitcoin-backed lending than we did over the past year.»

The aspiration of transforming Bitcoin into a general-purpose application platform seems to be waning. While Botanix may not have definitively proven that Bitcoin utility is dead, it did reveal the limitations of attempting to build «Ethereum on Bitcoin» and waiting for users to arrive.

The next stage of Bitcoin development may focus less on making Bitcoin perform every function and more on identifying the few tasks that only Bitcoin can accomplish.