Panoramic Analysis of The BTC Ecosystem: Reshaping history or starting the next bull market?

Introduction: The Historical Development of the BTC Ecosystem

Recently, the popularity of Bitcoin’s inscriptions has ignited a frenzy among crypto users. Originally considered “digital gold,” Bitcoin, which was primarily seen as a store of value, has once again garnered attention due to the emergence of the Ordinals protocol and BRC-20. This has prompted people to focus on the development and possibilities of the Bitcoin ecosystem.

As the earliest blockchain, Bitcoin was created in 2008 by an anonymous entity named Satoshi Nakamoto, marking the birth of a decentralized digital currency that challenges traditional financial systems.

Bitcoin, born as an innovative solution in response to the inherent flaws of centralized financial systems, introduced the concept of a peer-to-peer electronic cash system, eliminating the need for intermediaries and enabling trustless and decentralized transactions. The fundamental technology of Bitcoin, the blockchain, revolutionized the way transaction records are stored, verified, and secured. The Bitcoin whitepaper, released in 2008, laid the foundation for a decentralized, transparent, and tamper-resistant financial system.

After its inception, Bitcoin went through a gradual and stable growth phase. Early adopters primarily consisted of technology enthusiasts and cryptography supporters who engaged in mining and trading Bitcoin. The first recorded real-world transaction occurred in 2010 when programmer Laszlo purchased two pizzas in Florida for 10,000 Bitcoins, marking a historic moment for the adoption of cryptocurrencies.

As Bitcoin gained increasing attention, its related ecosystem infrastructure began to take shape. Exchanges, wallets, and mining pools emerged in large numbers to meet the demands of this new type of digital asset. With the development of blockchain technology and the market, the ecosystem expanded to involve more stakeholders, including developers, entrepreneurial teams, financial institutions, and regulatory bodies, leading to the diversification of the Bitcoin ecosystem.

The market, which had been dormant for a long time in 2023, experienced a renaissance due to the popularity of the Ordinals protocol and BRC-20 tokens, bringing about a summer of inscriptions. This also refocused people’s attention on Bitcoin, the oldest and most established public blockchain. What will be the future development of the Bitcoin ecosystem? Will the Bitcoin ecosystem become the engine for the next bull market? This research report will delve into the historical development of the Bitcoin ecosystem, focusing on the three core aspects within the ecosystem: asset issuance protocols, scalability solutions, and infrastructure. It will analyze their current status, advantages, and challenges to explore the future of the Bitcoin ecosystem in depth.

Why the Bitcoin Ecosystem is Needed

1. Characteristics and Development History of Bitcoin

To understand the necessity of the Bitcoin ecosystem, we must first delve into Bitcoin’s fundamental characteristics and evolutionary journey.

Bitcoin stands apart from traditional financial models, exhibiting three key features:

• Decentralized Distributed Ledger: At the heart of Bitcoin’s network is blockchain technology, a decentralized ledger that records every transaction. This blockchain comprises blocks linked in a chain, each block referencing the previous one, ensuring transaction transparency and immutability.
• Proof-of-Work (PoW) System: Bitcoin’s network relies on a Proof-of-Work mechanism to validate transactions. Network nodes solve complex mathematical problems to confirm transactions and add them to the blockchain, thus bolstering network security and decentralization.
• Mining and Bitcoin Issuance: Bitcoin is generated through mining, where miners solve mathematical puzzles to validate transactions and create new blocks, earning Bitcoin as a reward.

In stark contrast to familiar account models like PayPal, Alipay, and WeChat Pay, Bitcoin uses the Unspent Transaction Output (UTXO) model rather than adjusting account balances directly.

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:

• Generation of New UTXOs with Each Transaction: Bitcoin transactions consume existing UTXOs and create new ones, setting the stage for future transactions.
• Transaction Verification via UTXOs: The network verifies transactions by confirming the existence and non-use of referenced UTXOs.
• UTXOs as Inputs and Outputs: Each UTXO has a specific value and owner’s address. In transactions, some UTXOs serve as inputs, while others are created as outputs for future use.

The UTXO model enhances security and privacy, as each UTXO is distinct in ownership and value, allowing for precise transaction tracking. Additionally, its design enables parallel processing of transactions, as each UTXO operates independently, avoiding resource conflicts.

Despite these strengths, Bitcoin’s block size limitations and the non-Turing complete nature of its scripting language have confined it to being mainly “digital gold,” restricting a wider array of applications.

Bitcoin’s journey has seen significant developments. Colored coins appeared in 2012, enabling the representation of other assets on the Bitcoin blockchain through metadata. The 2017 block size debate led to forks such as BCH and BSV. Post-forks, BTC focused on scalability improvements, like the 2017 SegWit upgrade which introduced extended blocks and block weight, increasing block capacity. The 2021 Taproot upgrade enhanced transaction privacy and efficiency. These upgrades paved the way for scaling protocols and asset issuance protocols, including the notable Ordinals protocol and BRC-20 tokens.

It’s clear that while Bitcoin was initially envisioned as a peer-to-peer electronic cash system, many developers are striving to transcend its “digital gold” status. Their efforts are focused on amplifying Bitcoin’s ecosystem.

1. Comparison between the Bitcoin Ecosystem and Ethereum Smart Contracts
   In Bitcoin’s developmental journey, Vitalik Buterin proposed a distinct blockchain, Ethereum, in 2013. Co-founded by Buterin, Gavin Wood, Joseph Lubin, and others, Ethereum introduced a programmable blockchain, enabling developers to create diverse applications beyond mere currency transactions. This functionality positioned Ethereum as a smart contract platform, facilitating automated contract execution on the blockchain without third-party trust.

Ethereum’s standout feature is smart contracts, allowing developers to craft various applications. Consequently, Ethereum has emerged as a crypto space leader, fostering an expansive ecosystem with Layer 2 solutions, applications, and assets like ERC20 and ERC721 tokens.

Despite Ethereum’s capabilities in smart contract and DApp development, there’s a persistent pull towards Bitcoin for scaling and application development. The key reasons are:

• 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 crypto market value.
• Bitcoin’s High Decentralization: Bitcoin is highly decentralized, with its anonymous creator, Satoshi Nakamoto, and a community-driven development approach. In contrast, Ethereum has visible leadership in Vitalik Buterin and the Ethereum Foundation.
• Fair Launch Demand Among Retail Investors: Web3’s growth hinges on new asset issuance. Traditional token issuances, whether fungible or non-fungible, usually involve project teams as issuers, making retail investor returns dependent on these teams and venture capitalists. The Bitcoin ecosystem, however, has seen the rise of fair launch platforms like Ordinals, granting retail investors more influence and attracting capital to Bitcoin.

Despite its lower transaction speed and block time compared to Ethereum, Bitcoin continues to attract developers interested in implementing smart contracts and developing applications on it.

In essence, just as Bitcoin’s ascent was anchored in a value consensus—its widespread acceptance as a valuable digital asset and medium of exchange—crypto innovations are intrinsically linked to asset properties. The Bitcoin ecosystem’s current buzz mainly stems from the Ordinals protocol and assets like BRC-20 tokens, revitalizing overall interest in Bitcoin.

This cycle differs from previous bull markets, with retail investors gaining more clout. Traditionally, VCs and project teams have steered the crypto market, but as retail interest in crypto assets grows, these investors seek a larger role in project development and decision-making. Their involvement has partly fueled the Bitcoin ecosystem’s revival in this cycle.

Therefore, despite Ethereum’s adaptability with smart contracts and decentralized applications, the Bitcoin ecosystem, with its status as digital gold, a stable value store, market leadership, and consensus, maintains an unmatched significance in the cryptocurrency domain. This enduring relevance continues to draw attention and efforts towards developing the Bitcoin ecosystem, exploring its potential and possibilities further.

Analysis of the Current Development Status of Bitcoin Ecosystem Projects

In evolving the Bitcoin ecosystem, two primary challenges are evident:

• Bitcoin Network’s Low Scalability: Enhanced scalability is crucial for building applications on Bitcoin.
• Limited Bitcoin Ecosystem Applications: Popular applications/projects are needed to attract more developers and spur innovation.

To tackle these challenges, the focus is on three domains:

• Protocols for asset issuance
• Scalability solutions, including on-chain and Layer 2
• Infrastructure projects like wallets and cross-chain bridges

Given the Bitcoin ecosystem’s early developmental stage, with applications like DeFi still emerging, this analysis will center on four aspects: asset issuance, on-chain scalability, Layer 2 solutions, and infrastructure.

1. Asset Issuance Protocols

The Bitcoin ecosystem’s growth since 2023 owes much to protocols like Ordinals and BRC-20, transforming Bitcoin from a mere value storage medium to an asset issuance platform, thus broadening its utility.

Post-Ordinals, various asset issuance protocols emerged, including Atomicals, Runes, PIPE, etc. These aid users and teams in launching assets on the Bitcoin network.

1) Ordinals & BRC-20

First, let’s take a look at the Ordinals protocol. Simply put, Ordinals is a protocol that allows people to mint NFTs similar to those on Ethereum on the Bitcoin network. The initial attention was drawn to Bitcoin Punks and Ordinal punks, which were minted based on this protocol. Later on, the popular BRC-20 standard also emerged based on the Ordinals protocol, ushering in the “Summer of Inscriptions.”

The birth of the Ordinals protocol can be traced back to early 2023 and was introduced by Casey Rodarmor. Casey has been working in the tech industry since 2010 and has worked at Google, Chaincode Labs, and Bitcoin Core. He currently serves as the co-host of SF Bitcoin BitDevs, a Bitcoin discussion community.

Casey became interested in NFTs in 2017 and was inspired to develop Ethereum smart contracts using Solidity. However, he disliked building NFTs on Ethereum, considering it to be overly complicated for simple tasks. In early 2022, he came up with the idea of implementing NFTs on Bitcoin. During his research on Ordinals, he mentioned being inspired by something called “atomics” referenced by Bitcoin’s creator, Satoshi Nakamoto, in the original Bitcoin codebase. This indicates that Casey’s motivation was to make Bitcoin interesting again, leading to the birth of Ordinals.

So how does the Ordinals protocol achieve what people commonly refer to as BTC NFTs or Ordinal Inscriptions? There are two key elements:

• The first element is assigning serial numbers to each Satoshi, the smallest unit of Bitcoin. This allows tracking of Satoshis when they are spent, effectively making Satoshis non-fungible. It’s an imaginative approach.
• The second element is the ability to attach arbitrary content to individual Satoshis, including text, images, videos, audio, etc., thereby creating unique Bitcoin-native digital items called inscriptions (also known as NFTs).

By numbering Satoshis and attaching content, Ordinals enables Bitcoin to have NFT-like functionality similar to Ethereum.

Now let’s dive into the technical details to better understand how Ordinals is implemented. In the allocation of serial numbers, new serial numbers can only be generated in the Coinbase Transaction (the first transaction in each block). By tracing UTXO transfers, we can determine the serial number of the Satoshis in the corresponding Coinbase transaction. However, it’s important to note that this numbering system is not derived from the Bitcoin blockchain itself but is assigned by an off-chain indexer. Essentially, it’s the off-chain community that has established a numbering system for Satoshis on the Bitcoin blockchain.

After the introduction of the Ordinals protocol, many interesting NFTs emerged, such as Oridinal punks and TwelveFold, and as of now, Bitcoin inscriptions have exceeded 54 million. Building upon the Ordinals protocol, the BRC-20 standard was developed, paving the way for the subsequent BRC-20 summer.

The BRC-20 protocol is based on the Ordinals protocol and incorporates functionalities similar to ERC-20 tokens into script data, enabling token deployment, minting, and trading processes.

• Token Deployment: In the script data, indicate “deploy” and specify the token’s name, total supply, and quantity limit per token. Once the indexer identifies the token deployment information, it can start recording the corresponding token’s minting and transactions.
• Token Minting: In the script data, indicate “mint” and specify the name and quantity of the minted tokens. After identification by the indexer, the recipient’s token balance is increased in the ledger.
• Token Transfer: In the script data, indicate “transfer” and specify the token’s name and quantity. The indexer decreases the sender’s balance by the corresponding token quantity and increases the balance of the recipient’s address.

From the technical principles of minting, it can be observed that since the balances of BRC-20 tokens are embedded in the script data of segregated witnesses, they cannot be recognized and recorded by the Bitcoin network. Therefore, an indexer is needed to locally record the BRC-20 ledger. Essentially, Ordinals treats the Bitcoin network as storage space, where on-chain metadata and operation instructions are recorded, while the actual computations and state updates of operations are processed off-chain.

After the birth of the BRC-20 protocol, it ignited the entire inscription market, with BRC-20 occupying the majority of Ordinals asset types. As of January 2024, BRC-20 assets accounted for over 70% of all Ordinals asset types. Furthermore, in terms of market capitalization, BRC-20 tokens currently have a market value of $2.6 billion, with the leading token Ordi valued at $1.1 billion, and Sats at around $1 billion. The emergence of BRC-20 tokens has brought new vitality to the Bitcoin ecosystem. And even the crypto world.

The popularity of BRC-20 is driven by several factors, which can be summarized into two main aspects:

• Wealth Effect: The success of Web3 protocols and projects is often attributed to the wealth effect, and BRC-20, as a new asset class on the Bitcoin network, naturally possesses an attractive quality that captures the attention and interest of a significant number of users.
• Fair Launch: BRC-20 inscriptions are characterized by fair launches, where no one has a natural advantage. Unlike traditional Web3 projects, fair launches enable individual investors to participate on an equal footing with venture capitalists in token investments. This encourages retail investors to engage with projects that implement a fair launch approach. Even in cases where malicious actors attempt to accumulate large quantities of BRC-20 tokens, there are associated costs involved in the minting process.

Overall, although the Ordinals protocol has faced some controversy within the Bitcoin community since its inception, with concerns about the potential increase in block size due to Bitcoin NFTs and BRC-20, resulting in higher requirements and fewer nodes, thereby reducing decentralization, there are positive perspectives as well. The Ordinals protocol and BRC-20 have showcased a new use case for Bitcoin beyond being digital gold. They have injected new vitality into the ecosystem, attracting developers to refocus on and contribute to the Bitcoin ecosystem by exploring scalability, asset issuance, and infrastructure development.

2）Atomicals & ARC-20

Launched in September 2023 by an anonymous Bitcoin community developer, the Atomicals protocol aims for a more intrinsic asset issuance process. It facilitates asset issuance, minting, and trading without external indexing, offering a native alternative to the Ordinals protocol.

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:

• Indexing: Atomicals does not assign numbers to Satoshis off-chain, unlike Ordinals. It uses Unspent Transaction Outputs (UXTOs) for indexing.
• Content Attachments or ‘Inscriptions’: Atomicals inscribes content directly into the UXTOs, differing from Ordinals, which attaches content to the script data of individual Satoshis’ segregated witnesses.

A unique feature of Atomicals is its Proof-of-Work (PoW) mechanism, which adjusts the length of prefix characters to regulate mining difficulty. This approach requires CPU-based calculations for matching hash values, promoting a fairer distribution method.

Atomicals generate three asset types: NFTs, ARC-20 Tokens, and Realm Names. Realm Names represent a novel domain name system, using domain names as prefixes instead of suffixes, unlike traditional domain naming.

Focusing on ARC-20, the official token standard of Atomicals differs significantly from BRC-20. ARC-20, unlike BRC-20 (which is based on Ordinals), employs a colored coins mechanism. Token registration information is recorded on UXTOs, and transactions are processed entirely by the Bitcoin network, marking a distinct approach from BRC-20.

In summary, Atomicals relies on Bitcoin for transactions, reducing unnecessary transactions and their impact on network costs. It also forgoes off-chain ledgers for transaction recording, enhancing decentralization. Furthermore, ARC-20 transfers require only a single transaction, boosting transfer performance compared to BRC-20.

However, ARC-20’s mining mechanism might indirectly lead to market costs covering miner efforts, differing from the fair inscription model that favors retail investor participation. Additionally, ARC-20 tokens face the challenge of preventing accidental spending by users.

3）Runes & Pipe

As mentioned above, the emergence of BRC-20 led to 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, distinct from Ordinals, emerged to address the risk of Ordinals data being pruned or lost during network hard forks, as it’s stored in segregated witness script data. Twitter user @mikeinspace developed this protocol, embedding data in BTC’s UTXOs for permanent, tamper-proof blockchain storage. This method suits applications requiring immutable records, like legal documents or digital art authentication.

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 Will also send 1111 to itself as new “input”. The entire model process is the same as the Bitcoin UTXO process. 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 Atomicals, 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 wrongdoing: 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 the Current Situation Analysis

In summary, the rise of the Ordinals protocol and the BRC-20 token standard has significantly stirred the Bitcoin community, inciting a surge in tokenization and asset issuance activities. This enthusiasm has led to the creation of various asset issuance protocols like Atomicals, Runes, BTC Stamps, and Taproot assets, along with standards such as ARC-20, SRC-20, and ORC-20.

Beyond these mainstream protocols, there is an array of emerging asset protocols in development. BRC-100, inspired by Ordinals, is a decentralized computing protocol designed to broaden asset use cases and support applications in DeFi and GameFi. BRC-420, akin to ERC-1155, allows for the amalgamation of multiple inscriptions into complex assets, finding utility in gaming and metaverse scenarios. Even meme coin communities are venturing into this space, with the Dogecoin community introducing DRC-20, contributing to a diverse array of possibilities.

The current project landscape reveals a bifurcation in asset issuance protocols: the BRC-20 camp and the UTXO camp. BRC-20 and its evolved counterpart, ORC-20, inscribe data in segregated witness script data and rely on off-chain indexers. The UTXO camp, encompassing ARC-20, SRC-20, Runes, Pipe’s targeted assets, and Taproot assets, represents a different approach.

The BRC-20 and ARC-20 camps epitomize two distinct methodologies in Bitcoin ecosystem asset protocols:

• 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.

BRC-20, benefiting from its first-mover advantage, currently holds a leading position among asset protocols. The future may see standards like SRC-20, ARC-20, or others challenging and potentially surpassing BRC-20’s dominance.

In essence, the “inscription” trend has not only introduced a new fair launch model for retail investors but also captivated attention within the Bitcoin ecosystem. Furthermore, as per OKLink’s data, the share of mining revenue from transaction fees surpassed 10% since last December, yielding substantial benefits to miners. Driven by the collective interests of the Bitcoin ecosystem, the inscription ecosystem and asset issuance protocols on Bitcoin are set to enter a new phase of exploration and development.

1. On-chain scalability

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 scalability, which is optimized on Bitcoin Layer 1; the other is off-chain scalability, 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 scalability and Layer 2 respectively. In terms of on-chain scalability, on-chain scalability 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 scalability 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 BRC-20 tokens are also carried out 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 Multisignature Aggregation (BIP 340): Schnorr signatures aggregate multiple public keys and signatures into a single key and signature, reducing transaction data size. This aggregation maximizes block space savings, making transactions faster and cheaper, thus maximizing block space savings.
• Stronger privacy (BIP 341) : 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 (BIP 342): 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.

1. Off-chain Scaling Solutions: 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.

Furthermore, 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 channels

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 to update the temporary allocation of channel funds, a process that does not need 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 the occurrence of closure exceptions, such as a node exiting the network or the transaction state being incorrect in a broadcast. In this case, settlement will be delayed until the dispute period, and nodes may raise objections to settlement and fund allocation. At this time, if the node questioning the transaction broadcasts an updated timestamp, including some transactions that were missing in the initial proposal, then it will be recorded according to the correct results afterwards, and the collateral of the first malicious node will be confiscated and rewarded to the other 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) Sidechains

The concept of sidechains was first mentioned in the paper “Enabling Blockchain Innovations with Pegged Sidechains” published in 2014 by Adam Back, the inventor of Hashcash, and others. It was stated in the paper that if Bitcoin were to provide better services, there would be a lot of room for improvement. Therefore, the technology of sidechains was proposed to enable the transfer of Bitcoin and other blockchain assets 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 Language Compatibility: 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 for Miner Participation: RSK has also introduced 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 Nakamoto’s upgrade was the acceleration of block confirmation time, reducing transaction confirmation time from 10 minutes in Bitcoin to a few seconds. This was achieved by increasing block productivity and producing a new block approximately every 5 seconds. Transactions can now be confirmed within a minute, which is highly beneficial for 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 a Layer2 solution developed by the Bitmap Tech team, consisting of Bitmap.Game and BRC-420. It aims to enhance the scalability of Bitcoin through ZK-Rollup. It is worth mentioning that Bitmap, as a fully on-chain, decentralized, and fair-launch metaverse project, has a user base of 33,000 holding its asset Bitmap. This surpasses Sandbox and makes it the project with the highest number of holders in the metaverse projects.

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 performs batch processing of transactions, generates compressed transaction data, ZK state roots, and proofs. The compressed transaction data and ZK proofs are uploaded to the Taproot on the BTC network through a decentralized Oracle, ensuring the security of the network. Regarding the decentralization of the Oracle, each node needs to stake BTC as a penalty. Users can challenge the ZK-Rollup based on the compressed data, ZK state roots, and ZK proofs. If the challenge is successful, the staked BTC of the malicious node will be confiscated, thus preventing Oracle misconduct. Currently, the network is still in the testing phase, and it is expected to go live on the mainnet within two weeks. We look forward to its performance after the mainnet launch.

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 solution: 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: Ensures enhanced privacy and security of transactions 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

Beyond the state channels, sidechains, and Rollups, other off-chain scaling solutions like client-side validation are making significant strides, with the RGB protocol being a prominent example.

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-side Validation: 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.
• One-Time Sealing: 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.

RGB utilizes Bitcoin’s script functionality to create a secure model where ownership and access rights are defined and executed by scripts. This allows RGB to construct a smart contract system founded on Bitcoin’s security while ensuring the distinctiveness and safety of contract states.

RGB smart contracts thus offer a layered, scalable, private, and secure solution, representing an innovative venture within the Bitcoin ecosystem. RGB aspires to support the development of more varied and complex applications and functionalities, upholding Bitcoin’s core attributes of security and decentralization.

5) Summary of the Current Situation

Since Bitcoin’s inception, the pursuit of scaling and the development of Layer 2 solutions have been a focus for many developers, particularly with the recent surge in NFT popularity drawing renewed attention to Bitcoin’s Layer 2 space.

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 sidechains, 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 scaling 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, the current Bitcoin developers are working and experimenting in different directions such as state channels, sidechains, scalability protocols, and Layer2 Rollup. The emergence of these scalability solutions has brought more functionality and scalability to the Bitcoin network, 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 explosion of Ordinals and BRC-20, Unisat is an unavoidable topic. Initially, when Ordinals NFT was launched, it didn’t generate a frenzy of excitement. Instead, it raised many doubts. People believed that Bitcoin’s payment functionality as digital gold was sufficient, and there was no need for an ecosystem. During the very early stages of the market, purchasing Ordinals NFT could only be done through off-exchange transactions, which brought about 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

Moreover, Unisat is rapidly broadening its asset support within the Bitcoin asset protocol. Beyond BRC-20 tokens, it swiftly began supporting ARC-20 tokens from the Atomicals protocol, indicating its ambition to be a comprehensive trading platform for BTC ecosystem asset protocols.

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

In general, as one of the early wallets and indexers to back BRC-20, Unisat has played a crucial role in lowering the barrier to entry for users interested in inscriptions, thereby attracting more participants to the BTC ecosystem. The synergy between Unisat’s development and the growth of BRC-20 has been mutually reinforcing, contributing significantly to their joint success.

2) Decentralized Indexers

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.

Overall, cross-chain bridge protocols can effectively tap into the potential of idle Bitcoin and enhance secure communication between Bitcoin and POS chains, enabling more possibilities for cross-chain transactions and scenarios on the Bitcoin network.

4) Staking Protocol

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 staking 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.

Moreover, Babylon uses a Bitcoin timestamping protocol, placing timestamps of events from other blockchains onto Bitcoin, facilitating fast staking and unbonding, reducing security costs, and improving cross-chain security.

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 in the Development of the Bitcoin Ecosystem

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, one of the current challenges that has attracted much attention is the decentralization problem of indexing. Since BRC-20 tokens cannot be recognized and recorded by the Bitcoin network itself, third-party indexers are needed to locally record the BRC-20 ledger. However, the current third-party indexers, whether it is Unisat or OKX, still use centralized indexing methods, requiring a large amount of accounting and indexing to be done locally. There may be risks of mismatched information between indexers and irreparable damage to indexers after being 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.

1. Currently, scaling is still in its early stages and cannot support large-scale applications. Bitcoin was originally created as a decentralized peer-to-peer payment currency, so it has some limitations in terms of technology, including limitations on transaction throughput, delays in block confirmation times, and energy consumption issues.

To build more complex applications on the Bitcoin network, two problems need to be addressed:

• Improving TPS (transactions per second) to make the network faster.
• Supporting smart contracts to enable more applications to be built in the Bitcoin ecosystem.

Currently proposed scaling solutions such as Lightning Network, RGB, Rootstock, Stacks, and BitVM are attempting to address scalability from different perspectives, but their scale and adoption rates are still limited. For example, Lightning Network, which currently has the highest Total Value Locked (200 million USD) among scaling solutions, has limitations in terms of use cases as it can only facilitate transactional activities and cannot support a wide range of scenarios. The scaling protocol RGB, as well as sidechains like Rootstock and Stacks, are still in the early stages and have relatively weaker scalability and smart contract capabilities compared to Ethereum’s layer 2 solutions. They still have a significant gap to bridge before being able to support large-scale applications.

1. The Bitcoin ecosystem needs to find its own native use cases instead of simply copying existing applications. After the popularity of decentralized finance (DeFi), builders have been wondering what the next popular application on Bitcoin will be. Since Bitcoin is inherently not Turing complete, it is difficult to achieve breakthroughs by directly importing Ethereum applications to the Bitcoin network. More opportunities arise when we combine Bitcoin’s unique characteristics and trigger innovation, rather than following the same path as Ethereum.

The most core characteristic of Bitcoin is its asset nature. As the first and most reputable cryptocurrency, Bitcoin’s market value has reached nearly 800 billion, accounting for about half of the total cryptocurrency market value.

Starting from the three core characteristics of Bitcoin - asset security, asset issuance, and asset returns - there are many areas to explore.

• Firstly, in terms of asset security, the key lies in the ownership of Bitcoin by users. In Ethereum’s staking, once users stake their ETH, the ownership is transferred to the protocol and no longer belongs to the user. However, BTC believers and large holders place great importance on the ownership of BTC. Therefore, if operations can generate returns without changing ownership, it may be a new way forward. Additionally, the security of asset cross-chain and scalability protocols is also one of the most critical factors for BTC holders to consider when interacting.
• In terms of asset issuance, the birth of NFTs, to some extent, signifies users’ longing for fair launches, representing anti-elitism and VC. Each user stands in a more equal position to obtain alpha. Therefore, if there are new breakthroughs in asset issuance, it may be necessary to explore what advantages can be offered to the public besides fairness in order to attract more people to participate.
• In terms of asset returns, it is worth exploring various scenarios to provide users with more income opportunities for their BTC and BRC-20 Tokens, including lending, collateralization, derivatives, liquidity mining, and more.

Conclusion

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.

In terms of impact, Bitcoin has not only changed the landscape of the financial industry but also had extensive and profound effects on the entire world:

• Firstly, it provides a convenient way for cross-border transfers and payments without the need for intervention from third-party institutions. This offers opportunities for financial inclusivity on a global scale and improves the accessibility of financial services.
• Secondly, Bitcoin’s decentralized nature allows individuals to have complete control over their funds, enhancing personal financial security and privacy protection.
• Additionally, Bitcoin has sparked the development of blockchain technology, paving the way for decentralized applications and innovative digital assets.

In terms of financial inclusivity, some countries have started accepting and using 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 followed suit in 2022. Furthermore, other countries are exploring similar initiatives to consider incorporating cryptocurrencies into their legal currency systems. In regions with inadequate financial infrastructure or limited access to financial services, Bitcoin provides a fast and low-cost means of cross-border payments and transfers. It offers financial inclusivity opportunities for those without bank accounts or unable to access traditional financial services. Moreover, the approval of the Bitcoin spot exchange-traded fund (ETF) in the United States on January 10, 2024, represents a significant milestone for Bitcoin in the traditional financial world.

In terms of the development of blockchain technology, after Bitcoin, there have been more blockchain technologies supporting smart contracts, such as Ethereum, Solana, and Polygon. This expansion has extended the use of blockchain beyond value storage and transactions and into various aspects like DeFi, NFTs, Gamefi, Socialfi, and DePIN. It has also attracted a more diverse range of users and builders.

With the development of the blockchain industry, more attention has been focused on Ethereum-like chains that support smart contracts, while Bitcoin has mostly been seen as “digital gold.” However, the explosion of BRC-20 scripts has brought people’s attention back to Bitcoin, prompting them to consider whether the Bitcoin ecosystem can continue to give rise to different application scenarios. This has led to the creation of many new asset protocols, including BRC-20, ARC-20, SRC-20, ORC-20, and some interesting explorations such as BRC420 and Bitmap. The hope is to better facilitate asset issuance from different perspectives. Unfortunately, after BRC-20, other asset protocols and projects have not been able to generate the same level of excitement.

For builders, the BTC ecosystem is still in its very early stages. The majority of project teams consist of independent developers and small teams. There are many opportunities and spaces for exploration for teams that truly want to make a difference and innovate within the BTC ecosystem.

In terms of scalability, Bitcoin has undergone multiple technological upgrades and improvements over the past 15 years, including reducing transaction confirmation times, discussing scalability solutions, and enhancing privacy protection. Current explorations in the scalability direction include state channels like the Lightning Network, scalability protocol RGB, sidechains like Rootstock and Stacks, and Layer2 Rollup BitVM. However, the overall journey toward supporting diverse applications is still in the very early stages. There is still much exploration and experimentation to be done in terms of scaling Bitcoin, which is not Turing complete.

In conclusion, the explosion of BRC-20 scripts has redirected the attention of users and builders back to the Bitcoin ecosystem. Whether it is the desire for fair asset launches or the belief in Bitcoin as the most orthodox and decentralized public chain, more and more developers are starting to build within the Bitcoin ecosystem. For the future ecological development of Bitcoin, it needs to diverge from the path taken by Ethereum and focus on the asset attributes of Bitcoin to discover native application scenarios. This may lead to a revitalization of the Bitcoin ecosystem.

Lastly, I would like to express sincere thanks to partners such as Constance, Joven, Lorenzo, Rex, KC, Kevin, Justin, Howe, Wingo, and Steven for their assistance, as well as everyone who has been generous in sharing during the exchange process. I genuinely hope that all the builders in this track will continue to thrive!

Author: Fred

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