Panoramic Analysis of BTC Ecology

Forward the Original Title：Panoramic analysis of BTC ecology: Reshape history or start the next bull market?

Introduction: Historical development of BTC ecosystem

The recent popularity of Bitcoin Inscription has caused a craze among Crypto users. Originally considered as “digital gold”, Bitcoin was once more used as a store of value. Due to the emergence of the Ordinals protocol and BRC-20, people have begun to pay attention to Bitcoin again. Ecological developments and possibilities.

As the earliest blockchain, Bitcoin was born in 2008 by an anonymous entity named Satoshi Nakamoto. It marked the birth of a decentralized digital currency and challenged the traditional financial system.

Bitcoin is an innovative solution born in response to the inherent shortcomings of the centralized financial system. It introduces the concept of a peer-to-peer electronic cash system without the involvement of a middleman, thereby achieving trustlessness and disintermediation. The underlying technology of Bitcoin, blockchain, revolutionizes the way transactions are recorded, verified and secured. The Bitcoin white paper released in 2008 laid the foundation for a financial system that emphasizes decentralization, transparency and immutability.

After its birth, Bitcoin has experienced a stage of gradual and steady growth. Early adopters were mainly tech enthusiasts and cryptography supporters who started mining and trading Bitcoin. The first recorded actual transaction occurred in 2010, when programmer Laszlo purchased 2 pizzas for 10,000 Bitcoins in Florida, marking a historical moment in cryptocurrency adoption.

As Bitcoin attracts increasing attention, related ecological infrastructure begins to take shape. Exchanges, wallets, and mining pools have emerged in large numbers to meet the needs related to Bitcoin, a new digital asset. With the development of blockchain technology and market, the ecosystem has expanded to more stakeholders, including developers, entrepreneurial teams, as well as financial institutions and regulatory agencies, promoting the diversification of the Bitcoin ecosystem.

The market has been dormant for a long time in 2023. The popularity of the Ordinals protocol and BRC-20 Token has brought about the summer of Inscription, which has also made people re-focus on Bitcoin, the oldest public chain, and what will be the future development of the Bitcoin ecosystem. ? Will the Bitcoin ecosystem become the engine of the next bull market? This research report will delve into the historical development of the Bitcoin ecosystem and the two most core sub-track asset issuance protocols and expansion solutions in the ecosystem, analyze the current status, advantages and challenges of its development, and discuss the future of the Bitcoin ecosystem.

Why do we need the Bitcoin ecosystem?

1. Characteristics and development history of Bitcoin

Before discussing why we need the Bitcoin ecosystem, let’s first take a look at the basic characteristics and development history of Bitcoin.

Bitcoin is different from traditional financial accounting methods in that it has three core characteristics:

• Decentralized distributed ledger: The core of the Bitcoin network is blockchain technology. It is a decentralized distributed ledger that records all transactions on the Bitcoin network. The blockchain is composed of blocks, and each block contains the hash value of the previous block, forming a chain structure to ensure the transparency and non-tamperability of transactions.
• Accounting through Proof of Work (PoW): The Bitcoin network uses a Proof of Work mechanism to verify transactions and account for money. This mechanism requires network nodes to verify transactions by solving mathematical puzzles and record them on the blockchain. This ensures the security and decentralization of the network.
• Mining and Bitcoin Issuance: Bitcoin issuance is accomplished through mining. Miners solve mathematical puzzles to verify transactions and create new blocks, and as a reward, miners are awarded a certain number of Bitcoins.

It can be seen that unlike our common Paypal, Alipay and WeChat Pay, Bitcoin does not implement transfers by directly increasing or decreasing the account balance like this type of account model, but uses the UTXO (Unspent Transaction Output) model. .

Here we briefly introduce the UTXO model to help everyone understand the technical solutions of subsequent ecological projects. UTXO is a way of tracking Bitcoin ownership and transaction history. Each unspent output (UTXO) represents a transaction output in the Bitcoin network. These unspent outputs have not been used by previous transactions. They can be used to construct new transactions. Its characteristics can be summarized as the following three aspects:

Each transaction generates a new UTXO: When a Bitcoin transaction occurs, it consumes the previous UTXO and generates new UTXO, which are used as inputs for future transactions.

• Transaction verification relies on UTXO: When verifying a transaction, the Bitcoin network will check whether the UTXO referenced by the transaction input exists and has not been used to ensure the validity of the transaction.
• UTXOs as transaction inputs and outputs: Each UTXO has a value and an owner’s address. When making a new transaction, some UTXOs will be used as transaction inputs, while others will be created as outputs of the transaction, possibly used by the next transaction.
• The UTXO model can provide greater security and privacy because each UTXO has its own owner and value, and transactions can be tracked more granularly. Additionally, the design of the UTXO model allows for parallel processing of transactions, as each UTXO can be used independently without resource contention.

However, due to block size limitations and non-Turing complete development languages, Bitcoin has largely played the role of “digital gold” and failed to host more projects.

After the birth of Bitcoin, colored coins appeared in 2012. By adding metadata to the Bitcoin blockchain, some Bitcoins can represent other assets; in 2017, a hard fork occurred due to the dispute over large and small blocks, including BCH, BSV, etc.; after the fork, BTC also began to continue to explore scalability improvement solutions. The SegWit upgrade launched in 2017 introduced extended blocks and block weights, expanding the block capacity; the Taproot upgrade starting in 2021 has improved Improve transaction privacy and efficiency. These key upgrades also laid the foundation for the subsequent development of various expansion protocols and asset issuance protocols, and also led to the popularity of the Ordinals protocol and BRC-20 Token that we are familiar with later.

It can be seen that although Bitcoin was positioned as a peer-to-peer electronic cash system when it was born, there are always many developers who do not want Bitcoin to just stay in the value of “digital gold” and are committed to improving Bitcoin’s scalability and based on The Bitcoin blockchain does more, such as having its own ecological applications.

2. Comparison between Bitcoin Ecosystem and Ethereum Smart Contracts

During the development of Bitcoin, Vitalik Buterin proposed another blockchain, Ethereum, in 2013, which was subsequently co-founded by Vitalik Buterin, Gavin Wood, Joseph Lubin and others. The core concept of Ethereum is to provide a programmable blockchain on which developers can build various applications, not just currency transactions. This feature of programmability makes Ethereum a smart contract platform that allows people to create and run blockchain-based applications that can execute automated contracts without trusting third parties.

It can be seen that one of the most significant features of Ethereum is smart contracts, and developers can develop various applications on Ethereum. With this feature, Ethereum has gradually become the leader of the entire Crypto. Various Layer 2 applications, as well as various asset types such as ERC20 and ERC721 have appeared, and many developers have gathered to build and enrich the city-state of Ethereum.

So since Ethereum can already realize the development of smart contracts and various Dapps, why do people still need to go back to BTC to expand and develop applications? The core reasons can be summarized in the following three aspects:

• Market consensus: Bitcoin is the earliest blockchain and cryptocurrency and has the highest visibility and trust among the public and investors. Therefore, it has a unique advantage in acceptance and recognition. The current market value of Bitcoin has reached 800 billion US dollars, accounting for about half of the entire encryption market value.
• Bitcoin has a high degree of decentralization: Among mainstream blockchains, Bitcoin has the highest degree of decentralization. The founder Satoshi Nakamoto has disappeared, and the entire chain is promoted by the community; while Ethereum still has vitalik and ether. The Fang Foundation is controlling the development.
• Retail investors’ demand for Fair Launch: The demand for Web3 is inseparable from the way new assets are issued. In traditional project Token issuance, whether it is FT or NFT, the project party is basically the issuer, and the income of retail investors strongly depends on the market making of the project party and the VC behind it; in the Bitcoin ecosystem, inscriptions appear This type of innovative Fair Launch venue gives retail investors more say and thus gathers more money and wealth in the BTC ecosystem. The renewed attention of the Bitcoin ecosystem this time is largely inseparable from the characteristics of Inscription Fair Launch.

This is why although BTC is weaker than Ethereum in terms of TPS and block time, and its original purpose was to be used in the context of cryptocurrency transactions, there are still a large number of developers who hope to introduce smart contracts on it for application development.

In summary, just as the rise of BTC stems from value consensus - people generally agree that Bitcoin is a valuable digital asset and medium of exchange, the innovation in the Crypto world is also closely related to the properties of assets.The current popularity of the BTC ecosystem is mainly driven by inscribed asset types such as the Ordinals protocol and BRC-20. This popularity has also fed back to the entire Bitcoin ecosystem, causing more people to begin to return their attention to the Bitcoin ecosystem.

Different from previous bull markets, the influence of retail investors in this round of market is increasing. Traditionally, VCs and project parties have dominated the crypto market, investing in and promoting the development of many blockchain projects.However, as retail interest in crypto assets continues to increase, they want to play a larger role in the market and participate in the development and decision-making of projects. To some extent, retail investors have also driven this round of development and renewed prosperity of the Bitcoin ecosystem.

So although the Ethereum ecosystem is more flexible in terms of smart contracts and decentralized applications, the Bitcoin ecosystem as digital gold and stable value storage, as well as its leading position and market consensus, make it still unparalleled in the entire cryptocurrency field. important position. Therefore, people continue to pay attention to and work hard to develop the Bitcoin ecosystem to continue to tap its potential and possibilities.

Analysis of the development status of Bitcoin ecological projects

In the process of developing the Bitcoin ecosystem, it can be seen that Bitcoin currently has two main difficulties:

• The Bitcoin network has low scalability. If you want to build applications on it, you need a better expansion solution;
• There are few applications in the Bitcoin ecosystem. The development of the Bitcoin ecosystem requires some popular applications/projects to gather more developers and produce more innovations.

Around these two dilemmas, the Bitcoin ecosystem is mainly constructed from three aspects:

• Related agreements surrounding asset issuance
• Expansion plan: on-chain expansion and Layer2
• Infrastructure projects such as wallets and cross-chain bridges

Since the current development of the entire Bitcoin ecosystem is still in its early stages, and application scenarios such as defi are still in their infancy, this article will focus on analyzing the development of the Bitcoin ecosystem from four aspects: asset issuance, on-chain expansion, Layer 2 and infrastructure.

1. Asset issuance agreement

The popularity of the Bitcoin ecosystem starting in 2023 is inseparable from the promotion of the Ordinals protocol and BRC-20, which allows Bitcoin, which was originally only used as a storage and exchange of value, to also be used as a place for asset issuance, greatly broadening the use of Bitcoin. Scenes.

In terms of asset issuance protocols, after Ordinals, various different types of protocols have been born, such as Atomics, Runes, and PIPE, to help users and project parties issue assets in BTC.

1) Ordinals & BRC-20

First let’s take a look at the Ordinals protocol. To put it simply, Ordinals is a protocol that allows people to mint NFTs on Bitcoin similar to those on Ethereum. The Bitcoin Punks and Ordinal punks that initially attracted attention were minted based on this protocol; and later, they have become popular today. The BRC-20 standard also appeared based on the Ordinals protocol, which started the subsequent Summer of Inscriptions.

The birth of the Ordinals protocol dates back to early 2023, when it was launched by Casey Rodarmor. He has been working in technology since 2010 and has worked at Google, Chaincode Labs, Bitcoin core, and now serves as the co-moderator of SF Bitcoin BitDevs (Bitcoin discussion community).

Casey started to be interested in NFT in 2017 and was inspired to use Solidity to develop Ethereum smart contracts. However, he did not like building NFT on Ethereum because he thought it was a “Goldberg machine” (implementing simple things in an overly complicated way). , so we gave up building NFT on Ethereum. In early 2022, he once again came up with the idea of ​​implementing NFT on Bitcoin. In the course of his research on Ordinals, he said he was inspired by Bitcoin’s creator Satoshi Nakamoto’s reference to something called an “atom” in the original Bitcoin codebase, which gives some idea of ​​Casey’s motivations. The hope was that Bitcoin would become interesting again, so Ordinals was born.

So how does the Ordinals protocol implement Ordinal Inscriptions, commonly known as BTC NFT? There are two core elements:

• The first element is to assign a serial number to each Satoshis (Satoshi), which implements the labeling of the smallest unit of Bitcoin, and tracks these Satoshis when transactions are spent, thus making Satoshi non-fungible, which is a very creative way of doing.
• The second element is to support attaching any content to individual Satoshis, including text, pictures, videos, audios, etc., thereby creating unique Bitcoin-native digital items - inscriptions (also commonly known as NFTs).

By numbering Satoshi’s and appending content, Ordinals allow people to own Ethereum-like NFTs on Bitcoin.

Next, let’s delve into the technical details to better understand how Ordinals are implemented. In the first element sequence number allocation, new sequence numbers can only be born in Coinbase Transaction (the first transaction in each block). Through the transfer of UTXO, we can trace it back to the corresponding Coinbase transaction and determine the Satoshi number in this UTXO. However, it should be noted that this numbering system does not come from the Bitcoin chain, but is numbered by the indexer off the chain. So essentially the off-chain community developed a numbering system for Satoshi on the chain.

After the birth of the Ordinals protocol, many interesting NFTs appeared, such as Ordininal punks, TwelveFold, etc. So far, the number of Bitcoin inscriptions has exceeded 54 million. On the basis of the Oridinals protocol, BRC-20 was also born, which opened the summer of BRC-20.

(Source: Dune - Total number of Ordinals inscriptions)

The BRC-20 protocol is based on the Ordinals protocol and writes functions similar to ERC-20 Token into script data to realize the process of Token deployment, minting and trading.

• Deploy tokens: Specify “deploy” in the script data, and indicate the token name, total issuance amount, and quantity limit for each token. After the indexer identifies the token deployment information, it can start recording the minting and transactions of the corresponding token.
• Mint tokens: Specify “mint” in the script data, indicating the name and number of mint tokens. After identification, the indexer adds the balance of the payee’s corresponding token in the ledger.
• Trading tokens: Specify “transfer” in the script data, indicating the name and amount of the token. The indexer deducts the corresponding number of tokens from the sender’s balance on the ledger and adds it to the balance of the payee’s address.

It can be seen from the technical principle of minting that since the balance of BRC-20 tokens is engraved in the script data of Segregated Witness and cannot be recognized and recorded by the Bitcoin network, an indexer is required to record BRC-20 locally. ledger.In essence, Ordinals just uses the Bitcoin network as a storage space, recording metadata and operation instructions on the chain, but the actual calculations and status updates of all operations are processed off-chain.

After the birth of BRC-20, it detonated the entire inscription market. BRC-20 accounts for the vast majority of Ordinals asset types. As of January 2024, BRC-20 assets account for more than 70% of all Ordinals asset types. In addition, from the perspective of market value, the current market value of BRC-20 tokens has reached US$2.6 billion, of which the leading token Ordi has a market value of US$1.1 billion, and the market value of Sats is also around US$1 billion. The emergence of BRC-20 tokens has brought a new boost to the Bitcoin ecosystem and even the Crypto world.

(Source: Dune - Ordinals proportion of different asset types)

There are many reasons hidden behind the popularity of BRC-20. The core can be summarized as the following two aspects:

• Wealth creation effect: The popularity of Web3 protocols and projects is inseparable from the wealth creation effect, and BRC-20, as a new asset class on the BTC chain, has natural appeal and can attract a large number of users’ attention and occupy their minds.
• Fair Launch: The BRC-20 Inscription has the characteristics of a fair launch, and no one is a natural banker. Compared with traditional Web3 projects, Fair Launch allows retail investors to be on the same starting line as VCs in Token investment, making retail investors more willing to participate in Fair Launch projects; even some scientists want to maliciously raise a large number of BRC -20Token also has a casting cost.

In general, although the Ordinals protocol has been subject to considerable controversy from the Bitcoin community since its inception, it is believed that Bitcoin NFT and BRC-20 will cause the block size to increase rapidly, resulting in higher requirements and fewer node operating equipment. , thereby reducing the degree of decentralization; but from a positive perspective, the Ordinals protocol and BRC-20 have demonstrated a new value use case for Bitcoin (in addition to digital gold), bringing new vitality to the ecosystem , attracted many developers to start paying attention to and developing the Bitcoin ecosystem again, and work on expansion, asset issuance and infrastructure.

2）Atomicals & ARC-20

The Atomiclas protocol was released by an anonymous developer in the Bitcoin community in September 2023. Essentially, it hopes to achieve the issuance, minting and trading of assets without the need for an external indexing mechanism, and to build a more native and complete protocol than the Ordinals protocol. Asset Release Agreement.

So what are the differences between the Atomics protocol and the Ordinals protocol? The core technical differences can be summarized in the following two aspects:

• In terms of indexing, the Atomics protocol does not adopt the mechanism of numbering Satoshi off-chain, but chooses to use UXTO as the unit for indexing.
• In terms of appending or “engraving” content, the Atomics protocol does not append the content to the Segwit script data of individual Satoshis, but rather engraves it in UXTO.

In addition, the Atomics protocol also introduces a PoW mechanism to control the difficulty of mining by adjusting the length of the prefix characters. Minters need to use the CPU to calculate the matching hash value, thus achieving a fairer distribution method.

Under the Atomics protocol, 3 asset types are generated: NFT, ARC-20 Tokens and Realm Names. Realm is an innovative domain name system based on the Atomics protocol. Unlike adding suffixes to traditional domain names, Realm uses domain names as prefixes.

Next, we will focus on analyzing ARC-20. Unlike BRC-20, which is based on the Ordinals protocol, ARC-20 is a token standard officially supported by the Atomics protocol. Unlike BRC-20, which writes Tokens into the script data of Segregated Witness, ARC-20 is a mechanism for dyeing coins. The registration information of the tokens is recorded on UXTO, and the transaction is completely processed by the BTC network, so it is different from the BTC network. BRC-20 is different in many aspects, please see the table below for details:

In general, the transactions of the Atomics protocol rely on the BTC network, do not repeatedly create a large number of meaningless transactions, and have less impact on the transaction cost of the network; and do not rely on off-chain ledgers to record transaction information, making it more decentralized; in addition, The transfer process only requires one transaction (while BRC-20 requires two), so the transfer performance of ARC-20 is significantly higher than BRC-20.

However, on the other hand, unlike retail investors participating in fair launch, the ARC-20 mining mechanism will cause the market to pay for miners to a certain extent, so the advantage of inscription fair launch will be weakened. In addition, the difficulty in preventing users from mis-spending ARC-20 tokens is also a challenge that needs to be faced.

3）Runes & Pipe

As mentioned above, the emergence of BRC-20 resulted in the generation of many meaningless UTXOs. Casey, the developer of Ordinals, was also very dissatisfied with this, so he proposed Runes, a token protocol based on the UTXO model, in September 2023.

Overall, the standards of Runes protocol and ARC-20 are relatively similar. Token data is also engraved in UTXO scripts. Token transactions also rely on the BTC network. The difference is that the number of Runes can be defined, unlike ARC-20. The minimum precision is 1.

However, the Rune protocol is currently only in the conceptual stage. One month after the Runes protocol was proposed, Benny, the founder of Trac, launched the Pipe protocol. The principle is basically the same as Rune. In addition, according to founder Benny’s remarks in the official Discord, he also hopes to support more asset types (similar to Ethereum). ERC-721, ERC1155 type assets)

4）BTC Stamps & SRC-20

BTC Stamps is a completely different asset issuance protocol from Ordinals. Since Ordinals data is stored in the script data of Segregated Witness, it may be “pruned” by the full node and will be erased once the network hard forks. To address this risk, Twitter user @mikeinspace created the BTC Stamps protocol, which embeds data in an indivisible way in the blockchain by storing it in BTC’s UTXOs.

This integration ensures that data remains permanently on-chain, protected from deletion or modification, making it more secure and immutable. Once data is embedded as a Bitcoin Stamp, it remains on the blockchain forever. This feature is invaluable for ensuring the security and integrity of your data. It provides a powerful solution for applications that require immutable records, such as legal documents, digital art authentication, and historical archives.

From the specific technical details, the Stamps protocol uses the method of embedding the transaction output into base64 format image data, encoding the binary content of the image into a base64 string, and placing the string in the transaction description key as the suffix of STAMP: , and then broadcast it to the Bitcoin ledger using the Counterparty protocol. This type of transaction embeds the data into multiple transaction outputs and cannot be deleted by the full node, thus achieving storage persistence.

Under the Stamps protocol, the SRC-20 token standard also emerged, benchmarking the BRC-20 token standard.

• In the BRC-20 standard, the protocol stores all transaction data in Segregated Witness data. Since the adoption rate of Segwit is not 100%, there is a risk of being pruned.
• In the SRC-20 standard, data is stored in UTXO, making it a permanent part of the blockchain and cannot be deleted.

Among them, BTC Stamps supports multiple types of assets, including NFT, FT, etc. SRC-20 Token is one of the FT standards. It has the characteristics of more secure data storage and difficulty in tampering. However, the disadvantage is that the cost of casting is very expensive. The initial mint fee of SRC-20 is around 80U, which is the casting cost of BRC-20. several times. However, on May 17 last year, after the SRC-21 standard upgrade, the cost of a single Mint dropped to 30U, which is similar to the cost of ARC-20 Mint. However, after the decrease, the fee is still relatively expensive, which is about 6 times that of the BRC-20 token (the recent Mint fee of BRC-20 is 4-5U).

Although the Mint fee of SRC-20 is more expensive, like ARC-20, SRC-20 only requires one transaction during the Mint process; in contrast, the Mint and transfer of BRC-20 tokens require two transactions. A transaction can be completed. When the network is smooth, the number of transactions has little impact, but once the network is congested, the time cost of initiating two transactions will increase significantly, and users will need to pay more gas to speed up transactions. In addition, it is worth mentioning that SRC-20 Token supports four types of BTC addresses, including Legacy, Taproot, Nested SegWit and Native Segwit addresses, while BRC-20 only supports Taproot addresses.

In general, SRC-20 tokens have obvious advantages over BRC-20 in terms of security and transaction convenience. The non-cuttable feature is in line with the needs of the security-focused Bitcoin community, and it can be split freely. Compared with the limitation of ARC-20, each Satoshi represents 1 token, which is more flexible. On the other hand, transfer costs, file size and type restrictions are the challenges SRC-20 currently faces. We also look forward to the future exploration and further development of SRC-20.

5）ORC-20

The ORC-20 standard aims to improve the usage scenarios of BRC-20 tokens and optimize existing problems of BRC-20. On the one hand, the current BRC-20 tokens can only be sold in the secondary market, and the total amount of tokens cannot be changed. There is no way to activate the entire system like ERC-20, which can be pledged or issued additionally.

On the other hand, BRC-20 tokens rely heavily on external indexers for indexing and accounting. In addition, there may also be a double-spend attack. For example, a certain BRC-20 Token has been minted. According to the BRC-20 token standard, it is invalid to use the mint function to mint additional identical tokens. However, since the transaction is paid in Bitcoin Network fees, so this casting will still be recorded. Therefore, it completely relies on external indexers to determine which inscription is valid or invalid. For example, in April 2023, a hacker carried out a double-spend attack in the early stages of Unisat development. Fortunately, it was repaired in time and the impact was not expanded. .

In order to solve the dilemma of BRC-20, the ORC-20 standard came into being. ORC-20 is compatible with the BRC-20 standard and improves adaptability, scalability and security, as well as eliminating the possibility of double spending.

In terms of technical logic, ORC-20 is the same as the BRC-20 token, which is also a JSON file added to the Bitcoin blockchain. The difference is:

• ORC-20 has no restrictions on names and namespaces, and has flexible keys. Additionally, ORC-20 supports a wider range of JSON-formatted data formats, and all ORC-20 data is case-insensitive.
• BRC-20 has a maximum mint value and an immutable supply after initial deployment, while the ORC-20 protocol allows for changes in the initial value and maximum mint value of the issuance.
• ORC-20 transactions use the UTXO model. The sender needs to specify the amount received by the receiver and the remaining balance to be sent to himself. For example, if he has 3333 ORC-20 tokens and wants to send 2222 tokens to someone, then at the same time Also sends 1111 to itself as new “input”. The process of this entire model is the same as that of Bitcoin UTXO. If the two steps are not completed, the transaction can be canceled midway; since UTXO can only be used once in the UTXO model, double spending is fundamentally prevented.

ORC-20 tokens add ID identification when deployed, and even tokens with the same name can be distinguished by ID.

To put it simply, ORC-20 can be regarded as an upgraded version of BRC-20, which gives BRC-20 Token higher flexibility and richness of economic model. Since ORC-20 is compatible with BRC-20, it is also easy to Wrap BRC-20 Token into ORC-20 Token.

6）Taproot assets

Taproot assets is an asset issuance protocol launched by Lightning Labs, Bitcoin’s second-layer network development team. It is also a protocol directly integrated with the Lightning Network. Its core characteristics and current situation can be summarized into the following three aspects:

• It is completely based on UTXO, which means it can be well integrated with Bitcoin native technologies such as RGB and Lightning.
• Unlike Atomics, Taproot assets, like the Runes protocol, allow users to customize the number of token transactions and can create or transfer multiple tokens in a single transaction.
• Directly integrated with the Lightning Network, users can use Taproot transactions to initiate Lightning channels and deposit Bitcoin and Taproot Assets into Lightning channels in a single Bitcoin transaction, thereby reducing transaction costs.

However, it should be noted that there are currently some disadvantages:

There is a risk of evil: Taproot Assets metadata is not stored on the chain, but relies on off-chain indexers to maintain state, which requires additional trust assumptions. Data is stored locally or in a universe (a collection of servers containing historical data and verification information for a specific asset) to maintain token ownership.

It is not a fair launch: users cannot mint tokens on the Bitcoin network, but the project party issues all tokens and transfers them to the Lightning Network. The issuance and distribution are controlled by the project party, which essentially loses fairness. Launch characteristics.

Elizabeth Stark, co-founder of Lightning Labs, is committed to leading the Bitcoin renaissance through Taproot Assets while promoting the Lightning Network as a multi-asset network. Due to the native integration of Taproot Assets and Lightning, users do not need to cross-chain assets to side chains or other Layer 2, and can directly store Taproot Assets into Lightning channels for transactions, making transactions more convenient.

7) Summary of current situation analysis

In summary, the birth of the Oridinals protocol and the BRC-20 token standard has brought about the craze of inscriptions, and has also made people turn their attention to the asset issuance protocol on Bitcoin again, with the emergence of Atomics, Runes, BTC Stamps, Taproot Diversified asset issuance protocols such as Assets have also produced ARC-20, SRC-20, ORC-20, etc.

In addition to the mainstream asset issuance protocols introduced above, there are many asset protocols that are also being conceived and developed. For example, BRC-100 is a decentralized computing protocol based on Ordinals theory. It is hoped that it can enrich the use scenarios of assets and support the development of similar For applications such as DeFi and GameFi; the BRC-420 standard is similar to ERC-1155 and can combine multiple inscriptions into a complex asset, thus having many application scenarios in games and metaverses (for example, the ERC-1155 protocol is suitable for The game scenario of the combination of NFT and FT.); Even some memecoin communities have begun to launch new asset protocols on BTC (for example, the Dogecoin community launched DRC-20), showing a situation where a hundred flowers are blooming.

Judging from the current status of the project, the current asset issuance protocols can be divided into BRC-20 faction and UTXO faction.The former includes BRC-20 and the upgraded and expanded version of BRC20, ORC-20, which engraves data in the script data of Segregated Witness and relies on off-chain indexers for indexing and accounting; the latter mainly includes ARC-20, SRC- 20. The asset types that Runes and Pipe want to implement and Taproot Assets.

The two factions of BRC-20 and ARC-20 also symbolize the two ideas of the BTC ecological asset protocol:

• One is a very simple solution like BRC-20. Although the function is not complicated, the whole idea and code are very simple and elegant. Just a few lines of innovation meet the smallest unit of demand. It is a very good solution. MVP version.
• The other is a protocol like ARC-20, which solves problems when they arise. During the development process of ARC-20, there were many bugs and areas that needed to be optimized. However, we should solve the problems when we encounter them. We prefer a bottom-up development path.

At present, BRC-20 has occupied the first place in the asset agreement due to its first-mover advantage. In the future, let us wait and see who can occupy the second place in standards such as SRC-20 and ARC-20 and even overtake BRC-20 in corners.

Returning to the essence, on the one hand, the “Inscription” track has brought a new model of fair launch to retail investors and brought huge attention to the Bitcoin ecosystem; on the other hand, according to OKLink data, the income of Bitcoin miners increased in December last year. So far this month, the revenue from handling fees has accounted for more than 10%, which has also brought tangible benefits to miners. It is believed that driven by the Bitcoin ecological community of interests, the inscription ecology and asset issuance protocols on Bitcoin will enter a new period of exploration and development.

2. On-chain expansion

The asset issuance protocol has attracted renewed attention to the Bitcoin ecosystem. Due to the difficulties of Bitcoin’s scalability and transaction confirmation time, if the ecosystem is to develop for a long time, Bitcoin expansion is also an area that needs to be faced directly and attracts much attention.

In terms of improving the scalability of Bitcoin, there are currently two main development routes. One is on-chain expansion, which is optimized on Bitcoin Layer 1; the other is off-chain expansion, which is commonly understood as Layer 2. In this section and the next section, we will talk about the development of the Bitcoin ecosystem from the aspects of on-chain expansion and Layer 2 respectively. In terms of on-chain expansion, on-chain expansion wants to improve TPS through block size and data structure, such as BSV and BCH. However, there is currently no consensus from the mainstream BTC community. In the current on-chain expansion and upgrade plan that has mainstream consensus, The most noteworthy ones are SegWit upgrade and Taproot upgrade.

1) Segwit upgrade

In July 2017, Bitcoin underwent a Segregated Witness (Segwit) upgrade, which greatly improved scalability. It was a soft fork.

The main goal of SegWit is to solve the problems of transaction processing capacity limitations and high transaction fees faced by the Bitcoin network. Before SegWit, the size of Bitcoin transactions was limited to 1MB blocks, which led to transaction congestion and high fees. SegWit separates the transaction’s witness data (including signatures and scripts) by reorganizing the transaction data structure and storing it in a new section called the “witness area” by separating the transaction signature data from the transaction data. , thereby effectively increasing the capacity of the block.

SegWit introduces a new unit of measurement for block sizes called weight units (wu). A block without SegWit has 1 million wu, while a block with SegWit has 4 million wu. This change allows the block size to exceed the 1MB limit, effectively expanding the capacity of the block and thus increasing the size of the Bitcoin network. The throughput enables each block to accommodate more transaction data, and due to the increased block capacity, SegWit enables more transactions to enter each block, reducing transaction congestion and the increase in transaction fees.

In addition, the importance of Segwit upgrade is not limited to this, but also promoted the occurrence of many major events in the future, including the subsequent Taproot upgrade, which was also developed on the basis of Segwit upgrade to a large extent. Another example is the Ordinals protocol that exploded in 2023. And the operations of the BRC-20 token are also performed in isolated data. To a certain extent, the Segwit upgrade has also become the booster and founder of this summer of inscriptions.

2) Taproot upgrade

The Taproot upgrade is another important upgrade for the Bitcoin network, carried out in November 2021, combining three different related proposals, BIP 340, BIP 341, and BIP 342, aiming to improve Bitcoin’s scalability. The goal of the Taproot upgrade is to improve the privacy, security, and functionality of the Bitcoin network. It makes Bitcoin transactions more flexible, secure and has better privacy protection by introducing new smart contract rules and cryptographic signature schemes.

The core advantages of its upgrade can be summarized into the following three aspects:

• Schnorr multi-signature aggregation: Schnorr signatures are proposed in BIP 340, which allow multiple public keys and signatures to be aggregated into a single public key and signature, thereby reducing the size of transaction data. By aggregating signatures, the network can process more transactions, making overall operations faster and cheaper, thus maximizing block space savings.
• Stronger privacy: P2TR in BIP 341 uses a new script type that combines the functions of the previous two scripts, P2PK and P2SH, introducing another privacy element and providing a better transaction authorization mechanism. P2TR also makes all Taproot outputs look similar so there are no further differences between multi-signature and single-signature transactions. In this way, it becomes more difficult to identify the transaction inputs of each participant storing private data.
• Making more complex smart contracts possible: Previously, Bitcoin’s smart contract functionality was limited, but after the upgrade, Taproot allows multiple parties to sign a single transaction using a Merkle tree. Taproot allows developers to Writing more complex smart contracts, including conditional payment, multi-party consensus and other functions, gives Bitcoin more possibilities for its future development.

Overall, through SegWit and Taproot upgrades, the Bitcoin network has been able to improve scalability, transaction efficiency, privacy and functionality, laying a solid foundation for future innovation and development.

3. Off-chain expansion: Layer2

Due to the structural limitations of Bitcoin’s own chain, coupled with the decentralized nature of Bitcoin’s community consensus, on-chain expansion plans are often questioned by the community. Therefore, many builders have begun to try off-chain expansion and build off-chain expansion protocols or so-called off-chain expansion protocols. Layer 2, to build a second layer network on top of the Bitcoin network.

Among them, the current Layer 2 types of Bitcoin can be roughly divided into: state channel, side chain, Rollup, etc. based on data availability and consensus mechanism.

Among them, the status channel allows users to build communication channels off the chain, conduct high-frequency transactions off the chain, and then record the final results on the chain. The scenarios are mainly limited to transaction scenarios. The core difference between Rollup and side chain lies in the inheritance of security. The consensus of Rollup is formed on the main network and cannot operate once the main network fails. The consensus of the side chain is independent, so once the consensus of the side chain fails, it cannot run. run.

In addition, in addition to the Layer 2 mentioned above, there are also expansion protocols like RGB to perform off-chain expansion to improve the scalability of the network.

1) Status channel

A state channel is a temporary communication channel created on the blockchain for efficient interactions and transactions outside the chain. It allows participants to interact multiple times between each other and ultimately record the final results on the blockchain. State channels can increase the speed and throughput of transactions and reduce associated transaction fees.

When it comes to Layer 2 such as state channels, the most important thing to mention is the Lightning Network. The earliest state channel project in the blockchain is the Lightning Network on Bitcoin. The concept of Lightning Network was first proposed in 2015, and then Lightning Labs implemented Lightning Network in 2018.

The Lightning Network is a state channel network built on the Bitcoin blockchain that allows users to conduct fast transactions off-chain by opening payment channels. The successful launch of the Lightning Network marked the first implementation of state channel technology and laid the foundation for subsequent state channel projects and development.

Next, let us focus on the implementation technology of Lightning Network. As a Layer 2 payment protocol built on the Bitcoin blockchain, the Lightning Network aims to achieve fast transactions between participating nodes and is considered an effective solution to the Bitcoin scalability problem. The core of the Lightning Network is that a large number of transactions occur off-chain. Only when all transactions are completed and the final status is confirmed, will they be recorded on the chain.

First, the transaction party uses the Lightning Network to open a payment channel and transfer funds to Bitcoin as a pledge according to the smart contract. Parties can then conduct any number of transactions via the Lightning Network off-chain, updating the temporary allocation of channel funds, without the process needing to be recorded on-chain. When parties complete a transaction, they close the payment channel and the smart contract distributes the committed funds based on the transaction record.

Next to shut down the Lightning Network, a node first broadcasts the current transaction record status to the Bitcoin network, including settlement proposals and allocation of committed funds. If both parties confirm the proposal, the funds are immediately disbursed on-chain and the transaction is completed.

Another situation is a shutdown exception, such as a node exiting the network or broadcasting an incorrect transaction status. In this case, settlement is delayed until the dispute period, and nodes may dispute settlement and fund distribution. At this time, if the questioning node broadcasts an updated timestamp, including some transactions missed in the first proposal, then the subsequent correct results will be recorded, and the commitment of the first evil node will be confiscated. , reward the other party’s node.

It can be seen from the core logic of the Lightning Network that it has the following four advantages:

• Real-time payments eliminate the need to create a transaction for each payment on the blockchain, and payment speeds can reach milliseconds to seconds.
• High scalability. The entire network can handle millions to billions of transactions per second, its payment capabilities far exceed those of traditional payment systems, and operations and payments can be made without relying on intermediaries.
• low cost. By conducting transactions and settlements outside the blockchain, Lightning Network fees are extremely low, making emerging applications such as instant micropayments possible.
• Cross-chain capabilities. Perform off-chain atomic swaps through heterogeneous blockchain consensus rules. As long as the blockchains support the same cryptographic hash function, cross-blockchain transactions can be made without trusting a third-party custodian.

Although the Lightning Network also faces some difficulties, such as users need to learn and understand the use, opening and closing of the Lightning Network, in general, the Lightning Network allows a large number of transactions to be carried out on Bitcoin by establishing a Layer 2 transaction protocol. It is carried out off-chain, which reduces the burden on the Bitcoin main network. Currently, TVL is close to 200 million US dollars.

However, since Layer 2 of the state channel is limited to transactions, it cannot support more types of applications and scenarios like Ethereum’s Layer 2. This has also led many Bitcoin developers to think about Bitcoin Layer 2 solutions with a wider range of scenarios. .

After the birth of the Lightning Network, Elizabeth Stark was committed to developing the Lightning Network into a multi-asset network, and asset protocols such as Taproot Assets also emerged to enrich and broaden the usage scenarios of the Lightning Network; in addition, some subsequent expansion plans were also implemented through and Lightning Network integration for greater scope of use. The Lightning Network is not only a state channel, but also a soil for basic services, giving birth to and stimulating the flowers of a more diverse BTC ecosystem.

2) Side chain

The concept of sidechains was first mentioned by Adam Back, the inventor of Hashcash, and others in the paper “Enabling Blockchain Innovations with Pegged Sidechains” published in 2014. It was mentioned that if Bitcoin wants to provide better services, there are still many ways Room for improvement. Therefore, the technology of sidechain was proposed to allow Bitcoin and other blockchain assets to be transferred between multiple blockchains.

Simply put, a sidechain is an independent blockchain network that runs in parallel with the main chain, with customizable rules and functions, allowing for greater scalability and flexibility. From a security perspective, these side chains need to maintain their own set of security mechanisms and consensus protocols, so their security depends on the design of the side chain. Sidechains typically have greater autonomy and customization, but may have less interoperability with the main chain. In addition, a key element of side chains is the ability to transfer assets from the main chain to the side chain for use, which usually involves operations such as cross-chain transfers and locking assets.

For example, Rootstock uses merged mining to ensure the security of the side chain network, and Stacks uses the Proof of Transfer (PoX) consensus mechanism. The following will use these two cases to help everyone understand the current status of BTC side chain solutions.

First let’s take a look at Rootstock. Rootstock (RSK) is a sidechain solution for Bitcoin that aims to provide more functionality and scalability to the Bitcoin ecosystem. RSK’s goal is to provide a more powerful decentralized application (DApp) development platform and more advanced smart contract functions by introducing smart contract functions into the Bitcoin network. The current TVL has reached US$130 million.

The core design idea of ​​RSK is to connect Bitcoin with the RSK network through side chain technology. A sidechain is an independent blockchain that can interact with the Bitcoin blockchain in both directions. This makes it possible to create and execute smart contracts on the RSK network, while taking advantage of Bitcoin’s security and decentralized properties.

The core advantages of RSK include Ethereum language friendliness and merged mining:

• Ethereum development language friendly:One of the main advantages of RSK compared to other smart contract platforms such as Ethereum is its compatibility with Bitcoin. RSK’s Virtual Machine is an improved version of the Ethereum Virtual Machine (EVM) that enables developers to use Ethereum smart contract development tools and languages ​​to build and deploy smart contracts. This provides developers with a familiar development environment and the ability to take advantage of Bitcoin’s strong security.
• Merged mining promotes miner participation:RSK also introduces a consensus algorithm called “merged mining” that is integrated with Bitcoin’s mining process. This means that Bitcoin miners can mine RSK while mining Bitcoin, providing security for the RSK network. This merged mining mechanism is designed to increase the security of the RSK network and provide an incentive mechanism for Bitcoin miners to participate in the operation of the RSK network. And since both blockchains use the same consensus, Bitcoin and RSK consume the same mining power, so miners can contribute hash rate to mine blocks on RSK. Ultimately, merged mining can increase miner profitability without requiring additional resources.

RSK attempts to solve the problems of long transaction confirmation time and network congestion of Bitcoin layer 1 by placing smart contracts on the side chain. It provides developers with a powerful platform to build decentralized applications and adds to the Bitcoin ecosystem. More features and extensibility to drive greater adoption and innovation.

RSK creates a new block approximately every 30 seconds, which is significantly faster than Bitcoin’s 10-minute block time. In terms of TPS, RSK is 10-20, which is significantly faster than the Bitcoin network, but compared to the high performance of Ethereum Layer 2. It seems insufficient, and there are still some challenges in supporting high-concurrency applications.

Next let’s take a look at Stacks, which is a Bitcoin-based side chain with its own consensus mechanism and smart contract functionality. The Stacks blockchain enables security and decentralization by interacting with the Bitcoin blockchain, and is incentivized with the Stacks coin (STX).

Stacks was originally called Blockstack and the project started in 2013. The Stacks testnet was launched in 2018, and its mainnet was released in October 2018. In January 2020, with the release of the Stacks 2.0 mainnet, the network received a major update. This update natively connects and anchors Stacks to Bitcoin, allowing developers to build decentralized applications.

Among them, Stacks deserves attention for its consensus mechanism - Proof of Transfer (PoX). Proof-of-transfer is a variant of Proof-of-Burn (PoB). Proof-of-burn was originally proposed as the consensus mechanism of the Stacks blockchain. In a “proof-of-burn” mechanism, miners participating in the consensus algorithm prove that they have paid for a new block by sending Bitcoin to a burn address. In Proof of Transfer, this mechanism has all the changes: the cryptocurrency used is not destroyed, but distributed to a group of participants who help secure the new chain.

Therefore, in Stacks’ consensus mechanism, miners who want to mine Stacks’ token STX and participate in the consensus need to send a Bitcoin transaction to a predefined random Bitcoin address in order to generate a block in the Stacks blockchain. Which miner can generate a block is ultimately determined by sorting. However, the probability of being selected increases with the number of Bitcoins miners transfer to the list of Bitcoin addresses, and the Stacks protocol rewards them with STX.

In a sense, Stacks’ consensus mechanism is modeled after Bitcoin’s proof-of-work mechanism. But instead of expending energy mining to produce new blocks, Stacks miners use Bitcoin to maintain the Stacks blockchain. Proof-of-transfer is also a very sustainable solution for Bitcoin’s programmability and scalability. Since Clarity, the development language of Stacks, is relatively niche, the number of active developers has not been particularly high, and ecological construction has been relatively slow. The current TVL is only US$50 million. Although the official claim is that it is Layer 2, it is currently more of a side chain.

It will become a true Layer 2 only after its Nakamoto upgrade planned for the second quarter of this year. Nakamoto Release is an upcoming hard fork on the Stacks network that increases transaction throughput and 100% Bitcoin transaction confirmation finality.

One of the most significant changes in the Nakamoto upgrade is to speed up the block confirmation time, shortening the transaction confirmation time from Bitcoin’s 10 minutes to a few seconds. By increasing the block production rate and producing a new block approximately every 5 seconds, transactions It may be confirmed within a minute, which is very beneficial to the development of Defi projects.

In terms of security, the Nakamoto upgrade will bring the security of Stacks transactions in line with the security of the Bitcoin network. The integrity of the network has also been improved and its ability to handle Bitcoin reorganizations has been enhanced. Even in the event of a Bitcoin reorganization, most Stacks transactions will remain valid, ensuring the reliability of the network.

In addition to the Nakamoto upgrade, Stacks will also launch sBTC. sBTC is a decentralized programmable 1:1 Bitcoin-backed asset that enables the deployment and transfer of BTC between Bitcoin and Stacks (L2). sBTC enables smart contracts to write transactions to the Bitcoin blockchain, while in terms of security, transfers are secured by the entire Bitcoin hashing power.

In addition to Rootstock and Stacks, there are different sidechain solutions such as Liquid Network that use different consensus mechanisms to improve the scalability of the Bitcoin network.

3）Rollup

Rollup is a two-layer solution built on the main chain that improves throughput by moving most of the calculations and data storage from the main chain to the Rollup layer. In terms of security, Rollup relies on the security of the main chain. Usually the transaction data on the chain will be submitted to the main chain in batches for verification. Moreover, Rollup often does not need to transfer assets directly. The assets still remain on the main chain, and only the verification results are submitted to the main chain.

Although Rollup is often regarded as the most orthodox Layer 2, it has a wider range of usage scenarios than state channels, and it inherits the security of Bitcoin more than side chains. However, its current development is in a very early stage. Here is a brief introduction to Merlin. Chain, B² Network and BitVM.

Merlin Chain is Layer 2 launched by Bitmap.Game and BRC-420 development team Bitmap Tech, which uses ZK-Rollup to improve the scalability of Bitcoin. It is worth mentioning that Bitmap is a fully on-chain, decentralized and fairly launched Metaverse project. The number of users holding its asset Bitmap has reached 33,000, surpassing Sandbox and becoming the largest holder of the Metaverse project. s project.

Merlin Chain has just recently launched its test network, which can freely cross-chain assets between Layer1 and Layer2, and supports Unisat, the native Bitcoin wallet. In the future, it will also support native Bitcoin asset types such as BRC-20, Bitmap, BRC-420, Atomics, SRC20 and Pipe.

In terms of implementation, the sequencer on Merlin Chain batches transactions, generates compressed transaction data, ZK state roots and proofs. The compressed transaction data and ZK proof are uploaded to Taproot of the BTC network through the decentralized Oracle, thus ensuring the security of the network. In terms of Oracle’s decentralization, each node needs to pledge BTC as a penalty. Users can challenge ZK-Rollup based on compressed data, ZK state root and ZK proof. If the challenge is successful, the BTC of the pledged node will be confiscated, thereby preventing Oracle does evil. The network is currently still in the test network stage, and it is said that it will be launched on the main network within two weeks. We are looking forward to its performance after the main network is launched.

In addition to Merlin Chain, Bitcoin Layer 2 Rollup solutions include B² Network, which hopes to increase transaction speed and expand application diversity without sacrificing security. Its core features can be summarized as the following two aspects:

• Rollup scheme:B² Network provides an off-chain trading platform that supports Turing-complete smart contracts, which improves transaction efficiency and reduces costs. At the same time, unlike side chains and expansion solutions, Rollup better inherits the security of the Bitcoin blockchain.
• Combining ZKP and fraud proofs:Enhanced transaction privacy and security are ensured by combining zero-knowledge proof (ZKP) technology and a fraud-proof challenge response protocol with Bitcoin’s Taproot.

Regarding how B² Network implements the BTC Layer2 Rollup solution, we look at its core Rollup Layer and DA Layer (data availability layer). In terms of the Rollup layer, B² Network uses ZK-Rollup as the Rollup layer, which is responsible for the execution of user transactions in the Layer 2 network and the output of relevant certificates. In terms of the DA layer, it includes three parts: decentralized storage, B² nodes and Bitcoin network. This layer is responsible for permanently storing a copy of the rollup data, verifying the rollup zk proof, and ultimately finalizing it via Bitcoin.

In addition, BitVM also implements Rollup by processing complex calculations such as Turing-complete smart contracts off-chain to reduce congestion on the Bitcoin blockchain. In October 2023, Robin Linus released the BitVM white paper, hoping to improve Bitcoin’s scalability and privacy by developing a zero-knowledge proof (ZKP) solution. BitVM uses Bitcoin’s existing scripting language to develop a method of representing NAND logic gates on Bitcoin, thereby enabling Turing-complete smart contracts.

Among them, there are two main roles in BitVM: prover and verifier. The prover is responsible for initiating a computation or assertion, essentially presenting a program and asserting its expected results. The role of the verifier is to verify this claim, ensuring that the calculation results are accurate and trustworthy.

In the event of a dispute, such as a validator challenging the accuracy of a prover’s statement, the BitVM system uses a challenge-response protocol based on fraud proofs. If the prover’s claims are untrue, the verifier can send a proof of fraud to the Bitcoin blockchain’s immutable ledger, which will prove the fraud and maintain the overall trustworthiness of the system.

However, BitVM is still in the white paper and construction stage, and it is still some time away from actual use. In general, the entire BTC Rollup track is currently in a very early stage. The future performance of these networks, whether it is support for Dapps or performance such as TPS, still needs to wait for market testing after the network is officially launched. .

4) Others

In addition to the state channel, side chain and rollup mentioned above, there are also some off-chain expansion solutions that use client verification, the most representative of which is the RGB protocol.

RGB is a private and scalable client-verified smart contract system developed by the LNP/BP Standards Association on Bitcoin and the Lightning Network. Originally proposed by Giacomo Zucco and Peter Todd in 2016, the name RGB was chosen because the original intention of the project was to become a “better version of colored coins”.

RGB solves the scalability and transparency issues of the Bitcoin main chain through the use of smart contracts, in which an agreement is reached in advance between two users and is automatically completed once the conditions of the agreement are met. And because RGB is integrated with Lightning, there is no need for KYC, thus maintaining anonymity and privacy since there is actually no need to interact with the Bitcoin main chain at all.

RGB Protocol hopes that Bitcoin will open up a new scalable world, including the issuance of NFTs, Tokens, fungible assets, implementation of DEX functions and smart contracts, etc. Bitcoin Layer 1 serves as the basic layer for final settlement, and Layer 2 such as Lightning Network and RGB are used for faster anonymous transactions.

RGB has two core features, client verification mode and one-time sealing:

• Client authentication mode:RGB operates in client verification mode and implements smart contracts. In RGB, data is stored outside the chain, and smart contracts are only responsible for verifying the validity of the data and executing related logic. Bitcoin transactions or Lightning channels only serve as an anchor point for validating data, while the actual data and logic are verified by the client. This design allows RGB to build smart contract systems on top of Bitcoin or the Lightning Network protocol without modifying it.
• Disposable seal:RGB tokens need to be associated with a specific UTXO. When spending UTXO, the Bitcoin transaction will include a message commitment, indicating that the message contains the input of RGB, the destination UTXO, the ID and amount of the asset, etc. Although the transfer of RGB Token must require a Bitcoin transaction, the UTXO output by RGB transfer and the UTXO output by Bitcoin do not need to be the same, which means that the Token on RGB can be output to another party that has nothing to do with this UTXO transaction. A UTXO without leaving a trace on Bitcoin, once you send the asset via RGB you cannot see where it went, and even if you receive the asset its history is difficult to decipher, thus providing users for greater privacy protection.

As can be seen from the one-time seal above, each contract state in RGB is associated with a specific UTXO, and access and use of that UTXO is restricted through Bitcoin scripts. This design ensures the uniqueness of the contract state, because each UTXO can only be associated with one contract state and cannot be used again after use, and different smart contracts will not directly intersect in history. Anyone can verify the validity and uniqueness of the contract state by inspecting Bitcoin transactions and related scripts.

By leveraging Bitcoin’s scripting capabilities, RGB establishes a secure model where ownership and access rights are defined and enforced by scripts. This enables RGB to build a smart contract system based on the security of Bitcoin and ensure the uniqueness and security of the contract state.

Therefore, RGB smart contracts provide a more layered, scalable, private and secure approach. As an innovative attempt in the Bitcoin ecosystem, it is committed to supporting the construction of more diverse and complex applications and functions without sacrificing the security and decentralization features of Bitcoin.

5) Summary of current situation analysis

Since the birth of Bitcoin, many developers have been committed to expanding Bitcoin and building Layer 2, hoping to build more applications on it. The popularity of Inscription has made everyone turn their attention to the Bitcoin Layer 2 field again.

In terms of state channels, Lightning Network is the earliest example and one of the earliest layer2 solutions, which reduces the load and transaction delay of the Bitcoin network by establishing a two-way payment channel. Currently, the Lightning Network has achieved widespread adoption and development, with its node number and channel capacity continuing to grow. This provides Bitcoin with faster transaction speeds and the ability to make low-cost micropayments. Judging from the current TVL performance, the Lightning Network is still the Layer 2 with the highest TVL, close to 200 million US dollars, far ahead of other solutions.

In terms of side chains, both Rootstock and Stacks use different methods to improve the scalability of the Bitcoin ecosystem. Among them, the RSK method encourages Bitcoin miners to participate in the operation of the RSK network by merging mining, providing developers with a way to build a A platform for centralized applications. Stacks provides additional functionality and scalability to the Bitcoin network through the consensus and smart contract functions of transfer proof. Currently, it still faces some challenges in terms of ecological construction and developer activity. In addition, Stacks is expected to become a true Bitcoin Layer 2 solution after the future Nakamoto upgrade is implemented.

In terms of Layer 2 Rollup, it is still developing relatively slowly. The main idea is to decentralize the calculation execution process off-chain, and then prove the correctness of the smart contract operation on the chain through different methods. Currently, Merlin Chain and B² Network have launched test networks, and their performance remains to be seen. BitVM is still in the white paper stage, and its future development has a long way to go.

In addition, there are also expansion protocols such as RGB, which operate in client verification mode to implement smart contracts. RGB will be stored off-chain, and the smart contract is only responsible for verifying the validity of the data and executing related logic. Bitcoin transactions or Lightning channels only serve as an anchor point for validating data, while the actual data and logic are verified by the client.

In general, current Bitcoin developers are working hard and trying in different directions such as state channels, side chains, expansion protocols and Layer2 Rollup. The emergence of these expansion solutions has brought more functions to the Bitcoin network. and scalability, injecting more possibilities into the development of the Bitcoin ecosystem and even the cryptocurrency industry.

4. Infrastructure

In addition to asset issuance protocols and expansion plans, more and more projects are beginning to emerge. Among them, the field of infrastructure is particularly worthy of attention, such as wallets that support inscriptions, decentralized indexers, cross-chain bridges, launchpad, etc. A hundred flowers bloom in development. Since most projects are still in a very early stage, here we focus on some key projects in different fields of infrastructure.

1) Wallet

In the outbreak of the BRC-20 protocol, wallets play a very important role. There are more and more inscription wallets on the market, including Unisat, Xverse and the recent inscription wallets launched by OKX and Binance. This section will focus on Unisat, the core promoter of the Inscription track, to help everyone better understand the field of Inscription wallet.

UniSat Wallet is an open source wallet and indexer for storing and trading Ordinals NFT and BRC-20 tokens.

When it comes to the popularity of Ordinals and BRC-20, Unisat is an unavoidable topic. When the Ordinals NFT was first launched, it did not arouse people’s enthusiastic pursuit. Instead, it aroused a lot of doubts. They believed that Bitcoin can just do the payment function of digital gold, and there is no need to build an ecology. The market is in a very early stage. Ordinals The purchase of NFT can only be done through over-the-counter transactions, which brings serious decentralization and trust issues.

Later, after Domo launched the BRC-20 token standard in March 2023, many people also believed that there was a huge difference between adding a piece of JSON code and smart contracts. The market was still in a stage of doubts and wait-and-see.

The Unisat team chose to bet on Ordinals and the BRC-20 track, becoming one of the first wallets to support Ordinals NFT and BRC-20 Token, and also the official wallet of the Ordinal protocol, allowing users who can only trade over the counter to trade like Trading Ordinals NFT and BRC-20 tokens is relatively smooth like other tokens.

With the popularity of the first inscription Ordi, a large number of users began to pour into the BTC ecosystem. Unisat, as the leading supporter of the BRC-20 ecosystem, has also received widespread attention. Its main functions and features include the following aspects:

• Store and trade Ordinal NFTs, store, mint and transfer BRC-20
• The index code is open source and supports more exchanges and projects to enter the BRC-20 index track.
• Users can register instantly without running a full node

In addition, Unisat is very fast for the assets of the entire Bitcoin asset protocol. In addition to BRC-20 tokens, Unisat will also soon support other asset types, such as the ARC-20 tokens of the Atomics protocol. It can be seen that Unisat It is developing in the direction of a comprehensive trading platform for the BTC ecological asset protocol.

(Source: Unisat official website supports the asset types of Ordinals and Atomocials protocols)

In general, Unisat, as the earliest wallet and indexer to support BRC-20, has lowered the threshold for users to participate in inscriptions and attracted more users to enter the BTC ecosystem. To a certain extent, the rapid development of Unisat and BRC-20 is mutual promotion and mutual achievement.

2) Decentralized index

Since the current BRC-20 token requires an off-chain third-party server for accounting and indexing, there is a problem of centralization of the off-chain indexer, which may face potential risks. Once the indexer is attacked, the user’s accounting will be compromised. It will face the dilemma of loss and it is difficult to protect assets. Therefore, some project parties are committed to developing the decentralization of indexing services.

Among them, Trac Core is a decentralized indexer and provides oracle services, developed by founder Benny. Pipe, the asset issuance protocol mentioned above, was also launched by Benny to provide better services for different aspects of the BTC ecosystem.

The core of Trac Core is to solve the problems of indexing and oracles, and to serve as a comprehensive tool to provide services for the Bitcoin ecosystem, including filtering, organizing and simplifying the access process to Bitcoin data. As mentioned above, the current BRC-20 token requires an off-chain third-party server for accounting and indexing. There is a problem of centralization of the off-chain indexer, which may face potential risks. Once the indexer is attacked , then the user’s accounting will face the dilemma of loss, and the assets will be difficult to protect. Therefore, Trac Core hopes to introduce more nodes to implement a decentralized indexer.

In addition, Trac Core will also establish a channel to obtain external data from off-chain to function as a Bitcoin oracle, thereby providing more comprehensive services.

In addition to Trac Core and Pipe, Trac’s founder Benny also developed Tap Protocol, with the goal of enriching the Ordinals ecosystem and enabling tokens to perform more Defi gameplay, including lending, staking, leasing and other functions, thereby giving Ordinals assets Possibility of “OrdFi”. At present, the three projects of the Trac ecosystem, Trac Core, Tap Protocol and Pipe, are still in a very early stage, and the future development requires continuous attention.

In addition, projects such as Unisat and Atomic.finance are also exploring and developing decentralized indexing. We look forward to further breakthroughs in the decentralized indexing direction of BRC-20 in the future to provide users with more complete and secure services.

3) Cross-chain bridge

In the Bitcoin infrastructure, asset cross-chain is also a very important part. Projects including Mubi, Polyhedra and other projects have begun to work in this direction. Here, through the analysis of Polyhedra Network, we will help everyone understand the situation of BTC cross-chain bridge.

Polyhedra Network is an infrastructure for cross-chain interoperability that allows multiple blockchain networks to access, share and verify data in a secure and efficient manner. This interoperability enhances the overall functionality and efficiency of the blockchain ecosystem through seamless communication, data transfer, and collaboration between systems.

In December 2023, Polyhedra Network officially announced that its zkBridge supports the Bitcoin message transmission protocol, enabling the Bitcoin network to interact with other blockchain Layer1/Layer2 to improve Bitcoin’s interoperability.

When Bitcoin acts as a message sending chain, zkBridge enables update contracts on the receiving chain (i.e., light client contracts) to directly verify Bitcoin’s consensus and every transaction on Bitcoin by verifying Merkle proofs. This compatibility ensures that zkBridge can fully protect the security of consensus proofs and transaction Merkle proofs on Bitcoin. zkBridge allows Layer1 and Layer2 networks to access Bitcoin’s current and historical data.

When Bitcoin is used as a message receiving chain, in order to ensure the correctness of written information, zkBridge adopts a mechanism similar to Proof of Stake (PoS), inviting verifiers of the sending chain to pledge native tokens, and then these pledgers are authorized to use the Bitcoin network data input. At the same time, the verifier uses the MPC protocol. If a malicious entity controls the members of the MPC protocol and tamper with the message, the user can initiate a zkBridge request to send the malicious message to Ethereum. The penalty contract on Ethereum will evaluate the validity of the message. If the message is malicious, it will The pledged tokens of the evil MPC members will be confiscated and used to compensate users for their losses.

In general, the cross-chain bridge protocol can well tap the potential of idle Bitcoin, and also strengthens the secure communication between Bitcoin and the POS chain, making the assets on the Bitcoin chain more cross-chain and scenario-based. possibility.

4) Pledge Agreement

Since its birth, Bitcoin has been limited to the scope of transactions as digital gold. Therefore, how to mine idle Bitcoins to bring more asset interest and empowerment is a question that many Bitcoin developers are thinking about and exploring. In terms of Bitcoin staking protocols, projects such as Babylon and Stroom are currently experimenting. This section focuses on how Babylon implements Bitcoin staking and incentives.

The Babylon project was launched by a team of consensus protocol researchers and experienced engineers from Stanford University such as David Tse and Fisher Yu, hoping to extend Bitcoin to protect the entire decentralized world.

Unlike other projects, Babylon is not building a new layer or a new ecosystem on Bitcoin, but hopes to extend the security of Bitcoin to other blockchains, including Cosmos, BSC, and Polkadot. , Polygon and other PoS chains to share security.

Its core function is the Bitcoin pledge protocol, which allows Bitcoin holders to mortgage their BTC on the PoS chain and obtain income to protect the security of the PoS chain, applications and application chains. Unlike existing approaches, Babylon does not choose to bridge to a PoS chain, but instead opts for remote staking, an innovative protocol that eliminates the need for bridging, wrapping, or escrow of collateralized Bitcoins. On the one hand, it allows Bitcoin holders to participate in staking and obtain monetary incentives from idle BTC. On the other hand, it also enhances the security of PoS chains and application chains. This makes Bitcoin not only limited to value storage and exchange scenarios, but also extends Bitcoin’s security capabilities to more blockchains.

In addition, it also places event timestamps of other blockchains on Bitcoin through the Bitcoin timestamp protocol, so that these events can enjoy Bitcoin timestamps like Bitcoin transactions, thereby achieving rapid pledge unbundling, Reduce security costs, cross-chain security and other functions.

Overall, the development of Bitcoin staking protocols like Babylon has brought new usage scenarios to idle Bitcoin, transforming Bitcoin from a static asset into a dynamic contributor to network security. This shift could lead to wider adoption and create a stronger, more interconnected blockchain network.

Challenges and limitations of Bitcoin ecological development

1. BRC-20 needs to solve the problem of decentralized indexing

Although the popularity of BRC-20 has brought traffic and attention to the Bitcoin ecosystem, it has also prompted the emergence of many different types of asset protocols, such as ARC-20, Trac, SRC-20, ORC-20, Taproot Assets, etc. The standard wants to solve the problems of BRC-20 from different angles and has produced many new asset standards.

However, among all Bitcoin asset types, BRC-20 still maintains a far leading position. According to data from CoinGecko, the current market value of BRC-20 Token has exceeded US$2.3 billion, which is close to the market value of RWA (US$2.4 billion) and even higher than Perpetuals (US$1.7 billion). It can be seen that it currently occupies a leading position in the Web3 industry. Very important location.

In BRC-20, a dilemma currently attracting much attention is the problem of index decentralization. Since the BRC-20 token itself cannot be recognized and recorded by the Bitcoin network, a third-party indexer is required to record the BRC-20 ledger locally, and the current third-party indexer, whether it is Unisat or OKX, is still The centralized indexing method requires a large amount of local accounting and indexing. There may be risks of information mismatch between indexers and irreparable risks after the indexer is attacked.

Therefore, some developers have also begun to develop and explore decentralized indexers. For example, Trac Core is working towards decentralized indexers. In addition, projects such as Best In Slots and Unisat have begun to explore and try in this aspect. , but currently no mature, feasible and recognized solution has emerged, and it is in the overall exploration stage.

2. The current capacity expansion is still in a very early stage and cannot carry large-scale applications.

Bitcoin existed as a decentralized currency for peer-to-peer payments when it was first born. Therefore, it has some technical limitations, including limitations in transaction throughput, delays in block confirmation time, and energy consumption issues.

If you want to build more and more complex applications on the Bitcoin network, you need to face two problems:

• Improve TPS to make the network faster
• Support smart contracts, allowing more applications to be built in the Bitcoin ecosystem

Among the current expansion plans, Lightning Network, RGB, Rootstock, Stack, and BitVM are all trying to expand from different angles, but their scale and adoption rate are still limited. Take the Lightning Network ($200 million), which has the highest TVL in the current expansion plan, as an example. The biggest problem of the Lightning Network is the limitation of scenarios. It can only conduct transactions and cannot implement more scenarios; while the expansion protocol RGB and the side chain Rootstock , Stacks is still in its early stages, and is relatively weak in terms of expansion effect and smart contract functions. Compared with Ethereum’s layer 2, there is still a big gap, and it is currently unable to carry large-scale applications.

3. The Bitcoin ecosystem needs to find its own native scenarios, and it is difficult to break through by simply copying existing applications.

After Inscription became popular, builders have been paying attention to what the next popular application of Bitcoin will be. Since Bitcoin is not Turing-complete by nature, if you just copy the applications of Ethereum and apply them to the Bitcoin network, it will be difficult to make new breakthroughs. More opportunities still need to be triggered by combining the characteristics of Bitcoin itself, rather than using Ethereum. The old road of Fangfang.

The core feature of Bitcoin is its asset attribute. As the earliest and most reputable cryptocurrency, Bitcoin’s market value is close to 800 billion, accounting for about half of the entire cryptocurrency market value.

Starting from the three core characteristics of Bitcoin, asset security, asset issuance and asset income, there is a lot of room for exploration.

• The first is the security of assets.The core lies in the user’s ownership of Bitcoin. In Ethereum’s pledge, once the user pledges ETH, this ownership is transferred to the protocol and does not belong to him/her. BTC believers and large investors are very concerned about the ownership of BTC, so if interest-generating operations can be performed without changing ownership, it may be a new way out; in addition, the security of cross-chain and expansion protocols for assets is also One of the most core factors for BTC holders to consider whether to interact.
• In terms of asset issuance,The birth of the inscription to some extent means that users yearn for fair launches, which is a symbol of anti-elitism and VC. Every user is in a more equal position to gain alpha. Therefore, if you want to make new breakthroughs in asset issuance, you may need to explore what advantages it can give the public in addition to fairness to attract more people to participate.
• In terms of asset income,How to provide users with more income scenarios for BTC and BRC-20 Token, including lending, mortgages, derivatives, liquidity mining, etc., is also a path worth exploring.

Summarize

It has been 15 years since the birth of Bitcoin. In 2008, Satoshi Nakamoto proposed the white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” which laid the foundation for the development of Bitcoin. In 2009, the Bitcoin network was officially launched and became the world’s largest currency. The first cryptocurrency, as the first decentralized digital currency, Bitcoin has led the development wave of cryptocurrency since its advent in 2009.

From the perspective of impact, Bitcoin not only changed the landscape of the financial industry, but also had a broad and far-reaching impact on the entire world.

• First, it provides a convenient way for cross-border transfers and payments without the intervention of third-party institutions. This provides opportunities for financial inclusion globally and improves access to financial services.
• Secondly, the decentralized nature of Bitcoin allows individuals to fully control their own funds, enhancing personal financial security and privacy protection.
• In addition, Bitcoin has inspired the development of blockchain technology, opening the way for decentralized applications and digital asset innovation.

In terms of financial inclusion, some countries have begun to accept and use cryptocurrencies as legal tender. El Salvador became the first country in the world to adopt Bitcoin as legal tender in 2021, and the Central African Republic also accepted Bitcoin as legal tender in 2022. Additionally, other countries are exploring similar initiatives to consider incorporating cryptocurrencies into their legal tender systems. In areas where financial infrastructure is imperfect or financial services are difficult to reach, Bitcoin provides people with a fast, low-cost way to make cross-border payments and transfers. It provides opportunities for financial inclusion to those who do not have bank accounts or lack access to traditional financial services. In addition, the U.S. Bitcoin Spot ETF passed on January 10, 2024 also symbolizes a huge step forward for Bitcoin in the traditional financial world.

In terms of the development of blockchain technology, after Bitcoin, more blockchain technologies that support smart contracts such as Ethereum, Solana, and Polygon were born, making blockchain not only a scenario for value storage and transactions, but Expanding to DeFi, NFT, Gamefi, Socialfi, DePIN and other aspects, it has also attracted more diverse users and builders to join.

With the development of the blockchain industry, people are paying more attention to chains that support smart contracts such as Ethereum, while attention to Bitcoin remains more at the “digital gold” stage. The popularity of the BRC-20 inscription has brought the public’s attention back to Bitcoin, thinking about whether the Bitcoin ecosystem can continue to create different application scenarios. As a result, many new asset protocols were born, including BRC-20, ARC-20, SRC-20, ORC-20, etc., as well as some interesting explorations, such as BRC420 and Bitmap, etc., hoping to achieve better results from different angles. Asset issuance. Unfortunately, after BRC-20, other asset protocols and projects have not stirred up as much excitement as BRC-20 for the time being.

But for Builder, the current BTC ecosystem is still in a very early stage. The project team is basically composed of independent developers and small teams. For teams that really want to do things and innovate, there are many opportunities and room for exploration in the BTC ecosystem. .

In terms of expansion, Bitcoin has experienced multiple technical upgrades and improvements in the past 15 years, including the shortening of transaction confirmation time, discussion of expansion plans, and enhancement of privacy protection. The current exploration in the direction of expansion includes state channels: Lightning Network, expansion protocol RGB, side chain Rootstock and Stacks, and Layer2 Rollup BitVM, but the overall expansion road to carrying diverse applications is still at a very early stage. There are still many ways to explore and try out how to scale non-Turing-complete Bitcoin.

In general, the popularity of Inscription has made users and builders turn their attention to the Bitcoin ecosystem again, whether it is the yearning for the fair launch of assets, or the desire for Bitcoin, the most orthodox and decentralized public chain. Belief, more and more developers are beginning to build in the Bitcoin ecosystem. For the future ecological development of Bitcoin, Bitcoin needs to go out of the old path that is different from Ethereum, and find native application scenarios around the asset attributes of Bitcoin, which may usher in the second spring of the Bitcoin ecosystem.

Finally, I am very grateful to Constancie, Joven, Lorenzo, Rex, KC, Kevin, Justin, Howe, Wingo, Steven and other partners for their help, as well as everyone who was very willing to share during the communication process. I sincerely hope that the builders in this track They are getting better and better!

Disclaimer：

1. This article is reprinted from [Ryze Labs], Forward the Original Title‘Panoramic analysis of BTC ecology: Reshape history or start the next bull market?’,All copyrights belong to the original author [Fred]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.

This article is reproduced from [Ryze Labs]，Original title “Panoramic analysis of BTC ecology: Reshape history or start the next bull market?”，Copyright belongs to the original author[Fred], if you have any objection to the reprint, please contactGate Learn Team, the team will handle it as soon as possible according to relevant procedures.

Disclaimer: The views and opinions expressed in this article represent only the author’s personal views and do not constitute any investment advice.

Other language versions of the article are translated by the Gate Learn team and are not mentioned inGate.ioThe translated article may not be reproduced, distributed or plagiarized.