About Rachel

Rachel Wolfson is a journalist, podcast host, author, and speaker. Rachel has been writing about the cryptocurrency and blockchain space since 2017. Her work has been published in Forbes, Bitcoin Magazine, and Cointelegraph. Rachel also spends time traveling the world, focusing on interviews and speaking in the Web3 space, aiming to educate others on how to apply this technology to real-world use cases.

The following is the full text of the interview.

Rachel Wolfson: Hello everyone, welcome back to the Web 3 Deep Dive Podcast. I'm your host, Rachel Wolfson. On today's show, I'm interviewing Jeff, the CEO and founder of Merlin Chain. I'm really excited about this interview because we're going to be diving deep into BTC DeFi, Bitcoin Layer 2. So, without further ado, let's get started today's show. Jeff, how are you?

Jeff: Good. A little tired, but OK.

Rachel Wolfson: Yeah, I know there's a big time difference between you being in Singapore and me being in the US, so I can understand why you're tired. But we really appreciate you coming on the show today. Thank you.

Jeff: Yes, thank you for having me. First of all, Merlin Chain is my first project in the Web3 space. We started this journey last year, and this is my first foray into the Web3 industry. However, I already have more than 12 years of experience in the Web2 space. I started my first company in 2012, and it was an incredible experience growing it from just me to 3,000 employees. Interestingly, the main investor in that company also invested in Coinbase and Ripple at the time. They introduced me to Bitcoin and blockchain in 2013. I was immediately attracted to the concept and started buying Bitcoin. Many of my friends turned to the crypto industry during the ICO boom in 2016-2017, DeFi Summer, and the NFT and GameFi waves.

I’ve been through basically every major evolution in the crypto and blockchain space, buying a ton of tokens and making some profits along the way. My interest in crypto has always been strong even during my time working on Web2. When Bitcoin Ordinals came out last year, I was immediately attracted to the concept. I joined the community and started building some really cool decentralized applications on Bitcoin Layer 1. At the end of last year, we launched Merlin Chain to continue this exciting journey in the Web3 space.

Rachel Wolfson: Got it. So, let's talk about Merlin Chain. What is Merlin Chain?

Jeff: Merlin Chain is an EVM-compatible Bitcoin asset chain. I think that's the easiest way to understand it. Basically, we have Bitcoin on Layer 1, and you can bridge it to Merlin. Then you have an ERC-20 version of Bitcoin. In addition, we accept all these assets from Ordinals, NFTs, and Runes. Users can bridge these assets to Merlin and enjoy better liquidity, superior user experience, lower gas, and faster transaction times.

That's the basic concept of Merlin Chain. But in my opinion, we are very different from other Layer 2 solutions. Our goal is to bring this liquidity, community, users, and assets to Merlin to build DeFi, games, and other cool things. This is our main mission on Merlin Chain.

Rachel Wolfson: Got it. "Make Bitcoin Fun Again" seems to be a major goal of Merlin Chain, right? I see that slogan all over your website.

Jeff: Exactly. When we started building, the focus was not on assets. Ordinals was very niche at the time and 99% of the crypto community thought they were a joke. I couldn’t even tell my friends in Singapore that I was working on Ordinals. Our focus was purely on how to make Ordinals fun.

We built a lot of on-chain content. This is not something you typically see on Ethereum because most of the content there is not on-chain. But on Bitcoin, it's different. We created a decentralized on-chain forum and an on-chain email system, and all the content you send is on Bitcoin. We also built an on-chain game engine and a metaverse called BitMap, and a modular content protocol called BRC-420. All of these tools are available for free on Layer 1.

We didn't think about revenue or profitability initially. Our focus was to make fun things happen, because everyone loves fun things. That's the goal of Merlin Chain. We took a very different approach, not just wanting to do great things, but to make them fun.

Rachel Wolfson: Got it. I'm sure most of the listeners are already familiar with Bitcoin Layer 2, Ordinals, and Runes, but let me ask you, what are Ordinals for those who may not be familiar?

Jeff: From my perspective, Ordinals is about engraving or embedding content in the Bitcoin blockchain. You can engrave a picture, a video, audio, or just text, and that content will stay on the Bitcoin chain forever. People are starting to use this technology, this protocol to engrave NFTs and utility tokens, like BRC-20. That's what started happening last year. Before that, Bitcoin Layer 1 didn't have this ability to launch assets or host content. That's a huge difference.

Rachel Wolfson: So why are we seeing the overall rise of Bitcoin Layer 2 this year and not before?

Jeff: Yeah, I think it’s because we have millions of assets on Bitcoin Layer 1, and millions of users are trading these assets. Naturally, they want a better place to trade them. For example, in April, when the Bitcoin halving happened, gas spiked to 1,000 sats or 2,000 sats. That means if you buy something, you have to pay $100 or $200 in gas, which is more than the value of most assets. It just doesn’t make sense. Also, there are no smart contracts on Layer 1, you can’t provide liquidity, and there are no DeFi protocols and dApps. That’s why there are so many Layer 2 solutions emerging. Users really need a better place to trade these assets and improve liquidity, which drives the development of these Layer 2 solutions.

Rachel Wolfson: Right. Let’s talk about Runes, how Runes came about, and why is Bitcoin’s gas so high? Is it because of Runes?

Jeff: Yeah, I mean, gas was also very high last year because of BRC-20 and Ordinals. Basically, there was a new asset that was launched on Layer 1 for fair distribution, and all these users were competing for these assets. So they had to participate in this gas war. That's what happened with Runes. You know, fungible tokens always trigger a sense of FOMO. Some people think that Runes is more elegant, more efficient, and has more advantages than BRC-20. When you see that BRC-20 has a market cap of a billion dollars, people naturally have high expectations for Runes. That's why when this protocol was launched, everyone was writing, minting, and doing various activities within the Runes protocol. That's basically it.

Rachel Wolfson: Runes gas has dropped significantly recently, and some people think this indicates that Runes may just be hype. What do you think?

Jeff: Yeah, I think for any fungible token protocol, there will always be ups and downs and a certain level of hype. That's what's happening with new coins. Paradoxically, when there's a lot of hype, people are eager to trade, gas is high, which in turn discourages trading. Right now gas is very low because there's no FOMO and people aren't trading as frequently, so fees are down. Whenever gas is high, market activity is high, but costs are also higher. That's why trading these assets on Bitcoin Layer 1 doesn't make sense in the long run.

Rachel Wolfson: Got it. Do you think Runes Protocol is just hype and may become a short-lived trend, or do you think it has staying power?

Jeff: Personally, I have more history with BRC-20, so I naturally prefer it. But frankly, I think Runes is a great protocol. I don't think it will go away. I believe Runes will achieve similar success as BRC-20, but it will take time. The launch of new assets on Bitcoin Layer 1 is an ongoing trend. I don't think it will stop this year or next. However, there are still many problems to be solved for Runes and BRC-20. You can't expect to have millions of meme tokens on Layer 1 and hope that all of them will increase in value. The liquidity on Bitcoin Layer 1 is simply not enough to support this.

Rachel Wolfson: Right. Let's talk about BTC DeFi. With the rise of Layer 2, we've seen the emergence of BTC DeFi. In your opinion, what does BTC DeFi look like? What are the use cases, and which ones are you excited about?

Jeff: BTC DeFi is a broad concept that covers many aspects. For example, the average Bitcoin user cannot trade as easily on Bitcoin Layer 1 as on Uniswap. But when you move to a Layer 2 solution like Merlin, decentralized exchanges (DEX) become a new innovation for Bitcoin users. We have encountered various questions from users, such as how to add new tokens, understand token contracts, and provide liquidity. These users are relatively new, but they are enthusiastic about trading assets on Layer 2. For example, Merlin Swap has seen over $800 million in trading volume in the past two months, and the total locked value (TVL) is currently over $100 million. Users actively trade assets, and for tokens like Runes, their liquidity and trading volume on Merlin exceeds the Layer 1 market. Participating in these DEXs and providing liquidity can bring returns to asset holders, rather than just holding assets on Layer 1, which does not generate returns.

Over the years, Ethereum holders have enjoyed a variety of native incentives such as staking rewards, liquidity mining, and yield farming. Bitcoin holders, on the other hand, do not have similar opportunities. Holding Bitcoin does not generate yield in and of itself; historically, holders have relied on buying low and selling high. However, Merlin changes this by introducing yield for Bitcoin holders. By bridging Bitcoin from Layer 1 to Merlin and staking it, users can earn rewards. Additionally, through staking, users can earn over 150% annual percentage yield (APY) by staking Bitcoin. We are also working with projects like StakeStone and Solv Protocol (LRT) to provide additional yield opportunities for Bitcoin holders. We are also working with Babylon and are about to launch features like the Bitcoin version of Ethena to provide more avenues for yield generation. Users can bridge or use Bitcoin across various protocols and ecosystems such as Linea, Scroll, Arbitrum, Ethereum, zkLink, and more, increasing its utility and potential profits. In the past 45 days alone, over $13 billion of Bitcoin has moved in and out of Merlin, exceeding the trading volume of many exchanges. Over $700 million of Bitcoin has been allocated from Merlin to other chains such as Linea and Scroll. These developments show that BTC DeFi is gaining momentum on Layer 2, providing new opportunities and benefits for users and holders.

Rachel Wolfson: If I hold Bitcoin and want to earn interest through Merlin, how do I do that?

Jeff: First, you bridge Bitcoin to Merlin using our Merlin Bridge. As a result, you lock that Bitcoin on Layer 1 and receive an ERC-20 version of Bitcoin on Merlin. Then, stake that Bitcoin to Merlin's Proof of Stake (POS) mechanism to earn MBTC, similar to stETH. This will generate yield from network fees. In addition, you can stake MBTC to Solv Protocol to obtain SolvBTC to participate in DeFi activities on Merlin or other chains. You can also leverage DeFi protocols to earn funding rates for your Bitcoin. After that, you have a lot of options. You can provide liquidity with SolvBTC, participate in lending, or bridge your SolvBTC to Linea to earn points and future Linea tokens, or explore other opportunities. Many of these use cases are similar to those found in Ethereum's DeFi ecosystem.

Rachel Wolfson: Got it. So some of these BTC DeFi use cases are similar to Ethereum DeFi use cases.

Jeff: Yes, initially we are seeing similarities. However, I don’t think this is a lack of innovation. This is similar to when cell phones came out; they were initially similar to computers, but eventually they evolved to be different. Basic DeFi applications, such as lending and decentralized exchanges, were the first to be adopted. What will happen next is uncertain because it is still very early for the Bitcoin ecosystem.

Rachel Wolfson: I want to ask you what are the main challenges of Bitcoin Layer 2? Is it scalability or user experience?

Jeff: I think when you build something new, there are always a lot of challenges. The first challenge is bias, a lot of people think that Bitcoin Layer 2 doesn't make sense because they think Bitcoin doesn't have Layer 2. I'll explain this in a technical way later. But for me, I think it's a political issue because the word Layer 2, this term didn't exist before, right? It's not like the earth, the moon, all these objects. But Layer 2 was invented by blockchain, by Ethereum and these things. So this doesn't affect anything. Since Bitcoin Layer 1 doesn't have smart contracts, Bitcoin can't have a real Layer 2 at the moment. This is a fact because it can't be settled on Bitcoin Layer 1.

So I think that's the first challenge. When Bitcoin has this smart contract on Layer 1, yes, we can have real Layer 2. But now everyone is a sidechain. From day one, we said Merlin Chain is a sidechain. But when everyone else is doing the concept of Layer 2, we can't call ourselves a sidechain because everyone is doing the concept of Layer 2.

The second challenge is that since Layer 1 doesn't have the ability to settle these Layer 2 transactions, you have to multi-sign all of these assets, which can be thought of as something more like custody. So whether it's Merlin, B Square, BitLayer, or any other Bitcoin Layer 2, they're all doing this multi-signature thing. But with multi-sig, people can use better or more fancy terms to address this, but at the end of the day it's still multi-sig. So I think the security of the assets is very important because if something bad happens, you will lose those assets and you will never get them back.

Jeff: So I think this is a problem that all Layer 2s face. For example, Merlin Chain, we had $4 billion TVL before and already had $13 billion in and out of the bridge, and we encountered zero security issues because from day one, we worked with MPC solutions like Fireblocks, Cobo, Ceffu, Antalpha, etc. that have a good reputation and experience in handling billions of dollars of assets. We don't really trust a simple multi-signature of a few parties because if something happens, users will lose their assets.

So I think the security issue is the second challenge. I think the third issue is bringing real assets to your chain to be traded. Because if you go to Arbitrum or other Ethereum Layer 2, yes, there are Ethereum stablecoins, meme coins. So the assets are already there, there are billions of dollars of these assets already there.

But for Bitcoin, imagine if you launch a new Bitcoin Layer 2 today, what kind of assets do you want to bring to your chain? Right? You can't just bring Bitcoin. If you only bring Bitcoin and stablecoins, it doesn't make sense. Because if you want to trade Bitcoin, you can go to Coinbase or Binance, which is the easiest way. I would say the best because they are the first choice for trading Bitcoin. So you have to bring all kinds of assets to your chain, like Runes, BRC-20, atomics, ordinarys. It's very difficult to do this. I would say that at present we are still the only Bitcoin Layer 2 that can bridge BRC-20 to our chain, and we have more than $100 million worth of these assets on our chain, attracting users to trade here. So I think bringing the right assets to your chain and building actual products and ecosystems there is a long-term and biggest challenge.

Rachel Wolfson: Absolutely. I think the security challenge is always going to be a concern, but it's great to know that you're working with companies like Fireblocks to address that. So do you think BTC DeFi will eventually be used by enterprises? Right now we're only seeing users and retail investors, but do you think institutions will use BTC DeFi in the future?

Jeff: Frankly, first of all, we are working with more than 10 institutions on Merlin now. They are participating in BTC DeFi and investing millions of dollars with us. So initially, I think institutions are very willing to do it because Bitcoin is actually cheaper than Ethereum. What does this mean? Currently, if you want to get Ethereum from institutions or users, it is very difficult because it has various use cases and they make profits by holding Ethereum. You have to promise them higher returns to get their Ethereum, which is risky because not everyone can deliver on these promises. But for Bitcoin, imagine you are an institution with 500 Bitcoins in your wallet. You have no yield. So it is much easier for a team like us to convince you to allocate 500 Bitcoins to our solution because we can provide a 10% annual yield, which is higher than the previous 2%. So this is why I say Bitcoin is cheaper than Ethereum. Therefore, I think there will be more institutions participating in this BTC DeFi revolution.

Rachel Wolfson: Yeah, that’s interesting. So Jeff, what can we expect next from Merlin? What’s the future of Bitcoin Layer 2?

Jeff: Yeah, I think there are a few things to address. First, as I mentioned, we will continue to upgrade the technology. For example, this Friday, we will upgrade our mainnet to reduce gas and increase TPS. In addition, we are still the only team to launch ZK rollups, and there is no other Layer 2. So continuous technical upgrades are very important to solve security issues and make the network more decentralized and trust-free. This is our focus for the next three to five years or even longer.

The second thing is to bring liquidity to Layer 2. Users need liquidity, faster transactions, and lower gas. This demand is real. When gas is high, it indicates that the market is hot, but high gas hinders transactions. Imagine using a centralized exchange in a hot market - transactions are slow and expensive, and may cause the exchange to go bankrupt. So this liquidity problem needs to be solved by bringing assets to Layer 2 solutions. However, despite its importance, there are currently no clear tools to solve this problem because they lack bridges between related assets.

Last but not least, in the long term, is to bring native benefits to Bitcoin, because Bitcoin holders didn't have this benefit before, and they are very eager to have this benefit of holding Bitcoin, of course in a very secure and very trustless way. So bringing Bitcoin to the EVM, bringing Bitcoin to all these Bitcoin Layer 2, Ethereum Layer 2, Layer 1, bringing liquidity, bringing these use cases for these holders and users. I think these are the main tasks we are going to solve in the next few months and years.

Rachel Wolfson: Yeah, absolutely. It's been really interesting and really fun to see how Bitcoin has evolved over the years. I've been in the industry since 2017 and it's just really interesting to see what people are building on Bitcoin right now.

Jeff: In addition, we have a lot of crazy ideas, frankly, like storing content on Bitcoin Layer 1. To me, this is very cool because I don't trust my content to be stored on Google, Amazon, or centralized file storage like Dropbox, because these protocols don't really store the content on the Ethereum chain. But you can store this kind of content decentralized on Bitcoin. Imagine if I want to record my personal biometric data, like my palm or my eyes, I can use my Bitcoin wallet to encrypt this information and store this content forever on Bitcoin, no one can touch it, no one can delete it. So I think that using Bitcoin Layer 1 as a storage chain is also a very cool idea. So I do think that the potential of Bitcoin is much greater than it has been before.

Rachel Wolfson: Yeah, I know, it's interesting. I'm really excited about the future and looking forward to seeing more of these use cases evolve. Is there anything else that we didn't talk about that you'd like our listeners to know?

Jeff: Yeah, I think for me, people should be patient. Just like we saw with Ethereum in 2017, when people came up with the idea of Layer 2, a lot of people laughed at it, and even when we had Ethereum, a lot of Bitcoin users laughed at the idea, right? They thought Bitcoin is everything we need, we don't need Ethereum. So that's why the Ethereum token price was so low at the time.

After years of development, we have Polygon's Plasma mechanism, we have Optimistic Rollups, we have ZK Rollups. After five, six, seven years, we are finally close to these Layer 2 ideas, and now these ZK chains and so on are actually starting to work. But Bitcoin is still very new. Last year, we just had these assets on Bitcoin Layer 1. Now we are building scaling solutions, we are building DeFi for Bitcoin, and like every developer, building together, we say, Make Bitcoin Fun Again.

Rachel Wolfson: Absolutely. I like the slogan, Make Bitcoin Fun Again.