(Bloomberg) -- After the long-anticipated launch of US Bitcoin exchange-traded funds in January, and the once-every-four-years software update called the “halving” last month, the big question on a lot of crypto investors’ minds has been, what will power the largest cryptocurrency’s next rally?

A slew of developers think they have the answer: adding programmability to the Bitcoin blockchain. Today, Bitcoin is viewed by many as digital gold — a token you hold for appreciation, but can’t do much else with. While you can use its biggest rival, Ether, to swap coins and earn yield on the Ethereum network, the Bitcoin blockchain lacks the ability to easily support apps via so-called smart-contract functionality that allows for features such as self-executing agreements stored on the blockchain.

For years, developers have tried to rectify that intentional design flaw in various ways. They built Bitcoin “Layer 2” networks, such as Lightning, designed to scale Bitcoin for applications like payments. Some have proven to be unreliable, and so-called bridges — software infrastructure to move tokens between networks — have been prone to hacks, making many users hesitant to use them. And many Bitcoiners haven’t been interested in using the tokens for payment, anyway, and are holding them on the long-term bet prices will rise in what’s become known as “hodling.” However, without a fresh catalyst to maintain investor enthusiasm about Bitcoin, the original cryptocurrency has retreated from its all-time high of almost $74,000 set in March.  

Things have changed recently, though, once Bitcoin Ordinals — a way to create nonfungible tokens by embedding data onto satoshis, as the smallest denomination of Bitcoin is called — began last year. Soon after, an anonymous developer named Domo proposed BRC-20 tokens, which use the same inscriptions mechanism to issue tokens on the Bitcoin blockchain. That, in turn, has sent teams of developers scouring for ways to enable even greater Bitcoin programmability. The Bitcoin community is considering proposals like OP_CAT, which would be a software upgrade to the network itself and make programmability easier to implement. Approaches being worked on include one from a team that Domo is involved with, the Layer 1 Foundation. Another approach, from startup Arch, just raised $7 million in a round led by Multicoin Capital.

“It’s a huge unlock for Bitcoin,” said Kyle Samani, co-founder of Multicoin. “It’s really good for users.”  

Expected to open to all developers as soon as this month, Arch runs an application platform on top of Bitcoin that uses software that will potentially allow apps from the Solana network to be ported onto Bitcoin, Arch Chief Executive Officer Matt Mudano said. Already, about 20 developer teams are building apps for functions such as borrowing and lending against Ordinals, as well as decentralized exchanges and stablecoins, he said.

Layer 1 Foundation, meanwhile, is building out a programmable module for the so-called BRC-20 metaprotocol, which is essentially just messages stored in code layered on the Bitcoin blockchain. An indexer can find these messages and run computations in a similar way to smart contracts on Ethereum. Because Bitcoin has much longer block confirmation times than Ethereum - 10 minutes versus 12 seconds currently — that leaves more time to perform computations, “we can actually do more,” said Eril Ezerel, founder of Best in Slot, Ordinals aggregator and explorer. 

“It’s like chapter two in crypto, Ezerel said. “It’s big. It makes us question how we build things.” While building with metaprotocols is simpler, it’s enough to support most financial applications, he said.

Not everyone in the Bitcoin programing community is convinced this is the cryptocurrency’s future. Jeff Garzik, a one-time Bitcoin core developer and co-founder at crypto infrastructure and app builder Bloq, expects Layer 2s will ultimately win out, as using them for transactions will be less expensive than running apps on Bitcoin.

“Bitcoin programmability is increasing — by virtue of these new Bitcoin L2s expanding Bitcoin’s reach,” said Garzik, who is working on a fusion of Bitcoin and Ethereum Layer 2. “This simultaneously boosts the Ethereum ecosystem, and also competes freshly with the Ethereum ecosystem.”

Even so, the new ventures are betting that this new type of programmability could lead to an influx of decentralized finance apps on Bitcoin. Currently, the total value of tokens locked in the Bitcoin DeFi market is about $1.1 billion, compared with $52.7 billion for Ethereum, according to data tracker DeFi Llama.

“Bitcoin’s DeFi ecosystem could grow to the largest in all of crypto,” said Toby Lewis, a founder of OrdinalsBot. “It is possible that the Bitcoin DeFi ecosystem could grow to trillions of dollars of market cap over the next few years, and it appears to be one of the major drivers of growth in crypto this cycle.”     

And if demand materializes, possibly the next catalyst that Bitcoin investors appear to be waiting on. 

©2024 Bloomberg L.P.