Understanding the Industry Landscape: From Asset Issuance Protocols to Layer 2, and On to the Application Layer Races

From the sudden emergence of the Ordinals protocol in January 2023 to the great Bitcoin ecosystem battle of February 2024, it took just one year. In this year, the Bitcoin ecosystem has expanded from the single point of the Ordinals protocol to encompass a full range of Bitcoin ecosystem components, including various asset issuance protocols at Layer 1, Layer 2 scaling solutions, and various subdivisions in the application layer. The narrative of the Bitcoin ecosystem has become one of the engines of this bull market. When the Ordinals protocol first appeared, I took notice of this new entity and wrote an analysis article in early February 2023. Over the past year, I have been following the development of this track, but the market always has divergences on new entities, and the different voices around me have made me hesitate. I did not invest heavily, missing out on this wave of wealth effects. But it can still be said to be very early; the Bitcoin ecosystem is just getting started, the pattern is not yet set, and there are many opportunities, especially with the bull market’s industry cycle, the Bitcoin ecosystem will welcome more wealth effects. Therefore, we need to closely monitor and study this track to unearth more participation opportunities. This article will provide a comprehensive overview of the Bitcoin ecosystem, from various asset issuance protocols at Layer 1 to Layer 2 scaling solutions, and then to various subdivisions in the application layer, along with detailed analysis of specific projects. Here, there will be a special focus on Bitcoin’s Layer 2 scaling solutions (Layer2), as with the maturity of Layer 1 asset issuance protocols and the market pattern being established, the current market’s hottest and largest development space is Bitcoin Layer2.

Summary

For those who find the main text too lengthy, here is a summary of the current market landscape and future developments:

1. Layer 1 Asset Issuance Protocols

   • The Ordinals protocol has become a foundational protocol, and BRC20 tokens based on the Ordinals protocol have become mainstream assets in the market. Other protocols mainly extend, improve, and supplement the existing ones.

   • Future developments will introduce new types of assets, such as the recently popular BRC420 assets, which focus on the dual characteristics of graphic coins. It’s important to keep an eye on these new asset types, as they represent new opportunities.

2. Layer 2 Scaling Solutions

   • Narrowly, since the Bitcoin network lacks smart contract capabilities and cannot settle transactions, there are currently no true Bitcoin Layer 2 solutions. However, broadly, any scaling chains that can securely bridge Bitcoin assets and promote the prosperity of the Bitcoin ecosystem can be considered Bitcoin Layer 2.

   • The Lightning Network is the most orthodox Bitcoin Layer 2 solution, supported by the Bitcoin developer community. Its development has been slow, but the upcoming launch of Taproot Assets on the mainnet, supporting the issuance and circulation of new assets, will mark a new stage in its development.

   • Merlin Chain is currently the leading Bitcoin Layer 2 solution in terms of Total Value Locked (TVL), driven by the community. It relies on BRC420 assets and Bitmap assets issued on Layer 1, has a strong user base, and fits very well with Bitcoin’s ecosystem characteristics, maintaining its leading position.

   • B² Network, second in TVL among Bitcoin Layer 2 solutions, has the advantage of strong backing from top Asian capital firms. Projects driven by such capital groupings tend to develop strongly, comparable to the development of projects like Solana and Optimism.

   • BEVM stands out as a Bitcoin Layer 2 solution, using Bitcoin’s native technology at its core, making it very native. It has seen rapid development with some applications already on-chain, making it a strong competitor in the Bitcoin Layer 2 space.

   • Other Layer 2 projects each have their unique advantages, solving different problems. Modular blockchain is an important direction, and it remains to be seen which project will ultimately succeed.

   • Overall, Ethereum’s Layer 2 solutions have a rich reserve of technologies and experiences that can be applied to the Bitcoin ecosystem. However, in the long term, only Layer 2 solutions that integrate Bitcoin’s unique features will prevail.

3. Application Layer

   • The Bitcoin application layer mentioned here is a broad concept, not directly developing and deploying applications on the Bitcoin blockchain, but rather introducing Bitcoin assets to promote the development of the Bitcoin ecosystem.

   • In the current wave of the Bitcoin ecosystem, infrastructure products like wallets have emerged as leaders, notably the Unisat wallet, which has quickly gained a top position, and the OKX wallet, which has differentiated itself from other exchanges with the help of the Bitcoin community.

   • The Bitcoin ecosystem narrative has become a hot trend, attracting user traffic, project teams, and eventually capital. With the concerted efforts and interaction of users, technical teams, and capital, more killer applications are expected to emerge, making it a highly anticipated development area.

01 Layer 1 Asset Issuance Agreement

1.1 Ordinals Agreement

Due to the lack of smart contract capabilities on the Bitcoin blockchain, it has not been possible to issue various types of assets like on Ethereum. Although there have been many attempts over the years, no market-accepted method of asset issuance had emerged until the introduction of the Ordinals protocol. In simple terms, the Ordinals protocol is a system for numbering the smallest unit of Bitcoin, “satoshi,” by assigning each satoshi a sequence number and then tracking them in transactions, thereby endowing each satoshi with uniqueness. The Ordinals protocol also supports Inscriptions, which allow any content (images, videos, etc.) to be attached to a single satoshi in a process called “inscription,” turning them into native digital artworks on Bitcoin. The emergence of the Ordinals protocol now is reliant on Bitcoin’s 2017 Segregated Witness (SegWit) upgrade and the 2021 Taproot upgrade. These upgrades, albeit unintentionally, laid the groundwork for the Ordinals protocol on the Bitcoin blockchain. SegWit introduced a block field to save “witness data,” i.e., Bitcoin transaction signatures and public keys, aiding in scaling Bitcoin. However, potential vulnerabilities necessitated limiting the size of this data. When Taproot was introduced, it addressed these security issues and allowed for the removal of old SegWit restrictions, paving the way for storing large blocks of data on-chain. Thus, Bitcoin is not immutable; as its technology evolves, unexpected innovations can emerge, as can vulnerabilities.

1.2 BRC20 protocol

Based on the Ordinals protocol, the inscription process can add information. If the addition is images and videos, it becomes Bitcoin NFT (Non-Fungible Token), and by attaching a ledger according to a unified standard, this satoshi becomes what we call a BRC20 token. BRC-20 tokens are specially processed NFTs (JSON data), mainly recording the token’s operation records on the Bitcoin blockchain. This is akin to writing a sentence on a banknote that is inherently worth 100 units, for example, “This is FishCoin, with a total volume of 100 million, and this note represents 10 of them,” and then agreeing with others to recognize this sentence, thus achieving asset issuance and transfer. BRC20 tokens are akin to Ethereum’s ERC20 tokens, hence the name. The BRC20 protocol is a sub-protocol based on the Ordinals protocol, reflecting the composability of the blockchain world, where different protocols and applications can be combined. A significant reason for the success of the Ordinals protocol is the fair issuance of BRC20 tokens, where anyone can issue them, and the issuance process is fairly minted. This has sparked a market participation frenzy, thereby allowing the Ordinals protocol to gain market recognition more swiftly.

1.3 Other Protocols

After the popularity of the BRC20 protocol, various “competitors” emerged, mainly extending and improving upon the BRC20 protocol. Here are some relatively popular protocols:

• ORC20: ORC20 removes some restrictions of BRC-20 and defines more operations but does not address the centralization issue inherent in BRC-20.
• BRC721: A protocol for placing NFT images on Bitcoin onto IPFS.
• BRC420: Recursive inscription, combining multiple inscriptions recursively to create complex assets like game items, animations, effects, or game modules.
• BRC100: An upgraded version of the BRC20 protocol, bringing more DeFi functionalities to BRC20.
• CBRC-20: A new version that maintains basic functional logic while integrating new features, introducing new fields to significantly reduce the lengthy and repetitive text in deploying/minting/transferring of BRC-20 protocol, thereby lowering costs and simplifying indexing.

These protocols are all sub-protocols based on the Ordinals protocol. The Ordinals meta-protocol itself has also seen many competitors, primarily focusing on extensions and supplements to the Ordinals protocol.

• Atomical: ARC20 uses a colored coin model, utilizing satoshi as the unit of account, meaning each ARC-20 token must be backed by a satoshi, unlike BRC-20 which distinguishes through ordering.
• Stamps: SRC20 allows data embedding in Bitcoin transactions, similar to the BRC-20 standard but adopts a different data embedding method. The most notable difference between SRC-20 tokens and BRC-20 is that SRC-20 token data inscription and storage use unspent transaction outputs (UTXO), not witness data like Satoshi.
• Rune: A “rune” differs fundamentally from an “inscription” in that a “rune” is stored in UTXO, while inscriptions based on Ordinals like BRC-20 are JSON texts in Bitcoin script’s segregated witness data.

02. Layer 2 Scaling Solutions

2.1 What is Bitcoin Layer 2?

Before discussing Bitcoin Layer 2, it is essential to understand what Layer 2 scaling solutions are. Layer 2, or L2 solutions, originally stemmed from the Ethereum ecosystem, which also faced performance challenges. There are two main paths for scaling Ethereum: The first involves scaling at the Ethereum blockchain layer itself, currently employing sharding technology to expand the blockchain’s capacity. Sharding essentially partitions the database to store and query data in segments. This solution is progressing relatively slowly, with Ethereum’s development roadmap spanning a significant timeframe, expecting to achieve its sharding goals in 5 to 10 years. The second path involves scaling above the Ethereum blockchain layer, akin to constructing an overpass above a narrow road. A key feature of Ethereum’s Layer 2 solutions is locking assets in smart contracts on the Ethereum mainnet and conducting transactions and computations off-chain. This approach has seen rapid development.

For Bitcoin, which inherently has weaker scalability compared to Ethereum, the possibilities for on-chain expansion are limited, leaving Layer 2 as the only viable solution for off-chain scaling. However, a challenge arises: Bitcoin lacks smart contract capabilities, so how can a Layer 2 solution be implemented? Technically speaking, projects claiming to be Bitcoin’s Layer 2 solutions are not truly Layer 2 since they cannot fully inherit the security of the Bitcoin blockchain or settle on it. Nevertheless, the inherited security level varies among projects, with some inheriting 60% of Bitcoin’s network security, while others only 30% or even none. Broadly speaking, any chain that can integrate with the Bitcoin ecosystem, facilitating the secondary flourishing of Bitcoin assets, can be categorized under Bitcoin Layer 2. Bitcoin Layer 2 has three core characteristics: (1) using Bitcoin as the native asset, (2) settling on the Bitcoin network, and (3) operating dependent on the Bitcoin network. Thus, we will analyze various Bitcoin Layer 2 solutions from a broad perspective.

2.2 Why Pursue Bitcoin Layer 2?

1. Liquidity: Users desire a functional infrastructure within the Bitcoin ecosystem that enhances the liquidity of native innovative assets like Ordinals, enabling transactions, collateralized loans, etc. This demand has spurred the need for Bitcoin Layer 2 solutions.
2. Technology: Ethereum’s Layer 2 technology reserves are vast, including optimistic rollups, zero-knowledge proofs, and modular blockchain technologies, positioning it at the forefront. Many Bitcoin Layer 2 projects have adopted mature Ethereum Layer 2 technologies, eliminating the need to start from scratch. This adoption has laid the foundation for the rapid emergence of Bitcoin Layer 2.
3. Community: Different ecosystems, akin to different countries, require respect for their unique characteristics. A key aspect of the Bitcoin ecosystem is its fair issuance, bolstered by a strong community presence, which suggests that Ethereum’s approach of primarily engaging with venture capitalists is not suitable for Bitcoin. Leveraging the community’s strength to develop Layer 2 solutions is viable.
4. Advantages: The most significant advantage of Bitcoin Layer 2 is its association with Bitcoin, the highest-valued and most decentralized asset. Previously, Bitcoin holders would store their assets in cold wallets, awaiting price appreciation without earning yields. With Bitcoin Layer 2, introducing staking, DeFi, and other mechanisms can increase the utilization efficiency of high-quality assets like Bitcoin, injecting liquidity into the ecosystem.
5. Applications: Issuing assets on Layer 1 and developing applications on Layer 2 naturally follows once a sufficient number of assets are issued on Bitcoin’s Layer 1. This creates a demand for building products based on these assets on the Layer 2 network, making the development of Bitcoin Layer 2 a logical progression.

2.3 Classification of Bitcoin Layer2

By dividing based on the technological implementation method, Bitcoin Layer 2 can be categorized into three types: (1) State Channels: A channel is established between two points, with funds locked within the channel. Transactions between these two points are completed within the channel, all off-chain, making it very cheap. Only the final settlement results are sent to the blockchain. (2) Sidechains: A separate chain is set up alongside the Bitcoin main chain, with both operating in parallel. If the main chain goes down and the other chain continues to operate, it indicates the presence of a sidechain. (3) Rollups: In simple terms, computations are moved off-chain, and only summary data is sent back to the blockchain. This can be likened to an exam where only the results and key steps are written on the paper, with the calculations done on scratch paper. Thus, only data summaries are transmitted on L1, which is less burdensome and cheaper than storing and computing on L1. Based on technology, it can be further divided into two factions: ZK Rollups and Optimistic Rollups. ZK Rollups ensure security through cryptographic algorithms of zero-knowledge proofs, while Optimistic Rollups rely on a penalty mechanism for security (economic game theory), where validators pay a significant price once they act maliciously. Additionally, there is a special category of projects: Ethereum’s Layer 2 is currently evolving towards modularity, leading to the emergence of modular projects serving Layer 2 in the Bitcoin ecosystem, such as data availability layer projects, shared security projects, etc.

2.4 Analysis of Specific Projects

In this wave of Bitcoin Layer 2 development, many new projects have emerged, and many previously unnoticed old projects have been rediscovered for their value. Different projects have adopted different technologies and operational mechanisms, but the criteria for evaluating these projects can also be approached from three dimensions: security, decentralization, and scalability.

1. Security: Mainly the security of cross-chain assets and the security of second-layer assets.
2. Decentralization: Whether the second-layer network is controlled by a single entity, and whether there is a single point of failure.
3. Scalability: Whether it can accommodate high transaction throughput, reduce the threshold for application development, and whether it is compatible with EVM, etc.

The following project analysis is compiled from multiple information channels, with some content being directly quoted (the sources are not listed here).

State Channels

Project 1: Lightning Network

1. Basic Introduction

The Lightning Network can be regarded as the most orthodox Layer 2 solution for Bitcoin. It fully utilizes BTC’s limited script verification capability without relying on or minimally depending on off-chain local consensus. The core idea of the Lightning Network is not complicated: it moves the transaction process off-chain, with only the final transaction result confirmed on the blockchain, thereby enhancing the transaction efficiency of the current Bitcoin network.

1. Operational Mechanism

The specific operational mechanism of the Lightning Network involves the two parties establishing an off-chain payment channel during the initial transaction, essentially a ledger jointly held by the parties to record transactions. The parties lock a certain amount of funds in the channel and sign transactions with their private keys. The transfer of funds between the parties does not occur on the blockchain but is only recorded in their respective ledgers. When one or both parties decide they no longer need the channel, the balance is broadcasted on the main network for settlement. However, the Lightning Network is more than just a direct connection between two parties; it allows numerous individual channels to be linked together, forming a wide, interconnected payment network.

1. Future Development

The Lightning Network has been in development for many years, proposed in 2016 and launched on the Bitcoin mainnet in 2018. Its development has been slow for two main reasons: a lack of motivation to establish Lightning Network channels and the high volatility of Bitcoin prices, making it unsuitable for everyday payments. Recently, however, the Lightning Network team introduced the Taproot Assets protocol, allowing institutions to issue various assets backed by project operators based on the Bitcoin blockchain. Combined with the Lightning Network, this can further improve liquidity and reduce user barriers, marking a new stage in the development of the Lightning Network. The network is suited for high-frequency consumption scenarios, making the Taproot Assets protocol most suitable for issuing stablecoins like USDT and USDC, directly integrated into the Lightning Network’s use cases. In the longer term, the maturation of payment infrastructure is expected to spur the development of other niche markets, such as wallet applications, NFT markets, social applications, etc. Therefore, the combination of the Lightning Network and asset issuance is highly anticipated for the innovations it may bring.

Project 2:RGB protocol

Basic Introduction

The RGB Protocol is an extension protocol of the Lightning Network, utilizing the Lightning Network to execute smart contracts. RGB addresses scalability issues by executing private smart contracts between two parties (Lightning Network channels). Its development aimed to improve colored coins and tokenize digital assets on the Bitcoin blockchain.

Operation Mechanism

Client Validation: Data is stored on the client side, and through hash calculations, short data submissions are made to the Bitcoin network for data validation.

RGB Smart Contracts: RGB smart contracts consist of three basic components: Genesis, State, and Transition. These define and execute various operations and contract protocols.

Single-Use Seals: By binding assets (tokens being a type of asset) in the output of Bitcoin transactions, each asset transfer operation must open an old seal and create a new one to prevent double-spending.

side chain

Project 1: Stacks

Basic Introduction

Stacks is a project that launched in 2018 and has regained attention in the recent Bitcoin Layer 2 craze, entering the mainstream market’s view. Stacks has its own chain, compiler, and programming language, and operates in sync with Bitcoin to ensure its transactions and integrity. Its cross-chain with BTC—through issuing sBTC on the Stacks network—is essentially a centralized mapping method, which entails a certain risk of centralization.

Economic Model

Stacks has its own token, STX, with a total fixed supply of 1.818 billion. Its economic model incorporates features of both Bitcoin and Ethereum, with three main mechanisms:

1. Mining Rewards: Similar to Bitcoin, where the output is halved every four years.
2. Staking Rewards: Similar to Ethereum’s POS mechanism, it enables smart contracts and decentralized applications based on the Clarity language on the basis of Bitcoin’s security, by locking Bitcoin to mine and enhance its function as a Bitcoin second layer.
3. Burn Mechanism: Similar to Ethereum’s burning mechanism.

Future Development

1. sBTC: Locking BTC on the Bitcoin chain allows for mapping as sBTC on Stacks, unlocking BTC liquidity.
2. Shortening Block Time: Improving performance.
3. EVM Compatibility

Project 2: BEVM

Basic Introduction

BEVM is a BTC Layer 2 compatible with EVM, using BTC as Gas. Its core goal is to expand Bitcoin’s smart contract scenarios. It adopts a decentralized asset management solution driven by a BFT network consensus formed by 1,000 BTC light nodes. This Layer 2’s biggest advantage is its native use of Bitcoin’s original technologies, thus gaining significant miner support.

Operation Mechanism

It is based on setting up custodial wallets on the Bitcoin main chain to natively cross-chain Bitcoin to BEVM. When users cross their BTC from the Bitcoin mainnet to BEVM, their BTC enters a contract address managed by 1,000 nodes, and new BTC is generated in the BEVM (BTC Layer 2 network) at a 1:1 ratio. The combination of Schnorr Signature, Mast, and BTC light nodes forms a decentralized BTC L2 that does not rely on multisig, individuals, but entirely on network consensus.

1. Schnorr Signature can manage BTC with 1,000 Taproot addresses.
2. Mast Contracts (Merkle Abstract Syntax Trees) can automatically execute contract instructions in the BTC network, eliminating the need for human involvement, only requiring Mast instructions for the automated management of BTC cross-chain and spending.
3. 1,000 BTC Light Nodes serve as nodes for the BEVM Layer 2 POS network, maintaining communication between Bitcoin and L2. The cross-entry and exit of BTC at the second layer can be driven by the consensus of the Bitcoin light node network through Mast contracts, achieving completely decentralized BTC cross-chain and management.

Project 3: BounceBit

Basic Introduction

BounceBit is the first native BTC staking chain, allowing users to stake their idle BTC and earn rewards in the process. It is supported by Binance Custody (CEFFU), Breyer Capital, and Mainnet Digital.

Operation Mechanism

BounceBit utilizes a hybrid PoS mechanism at the consensus layer and introduces a dual-token staking model (Bitcoin and BounceBit’s native token) to ensure network security. Its execution layer will achieve EVM compatibility, accelerating the migration of existing DeFi liquidity to the Bitcoin ecosystem. BounceBit also introduces an innovative BTC mirroring mechanism, enabling Bitcoin holders to earn income on-chain through PoS and DeFi, and off-chain through CeFi.

Economic Model

The sources of staking income are threefold: (1) CeFi rewards provided by regulated custody through Mainnet Digital and CEFFU, along with various asset management services; (2) node operation rewards offered through staking and PoS mining; (3) DeFi earnings from the BounceBit ecosystem applications.

Project 4: MAP Protocol

1. Basic Introduction

The MAP Protocol positions itself as a peer-to-peer, full-chain infrastructure based on lightweight clients and ZK (Zero-Knowledge proofs), focusing on peer-to-peer interoperability without relying on third parties. MAP is a chain aimed at providing full-chain interoperability, similar to Layerzero, and has been involved in the Ethereum ecosystem for some time. However, it has not been particularly prominent until it decided to go all-in on the Bitcoin layer 2 ecosystem amidst the wave of development in the Bitcoin ecosystem, thereby gaining significant market attention.

1. Operational Mechanism

The core mechanism involves a relay chain and ZK light clients:

• Relay Chain : The MAP solution involves constructing a MAP relay chain, acting as a chain within a chain, similar to the BOB chain. This relay chain precompiles isomorphic signature algorithms for different chains within contracts, enabling cross-chain communication and frictionless asset transfers. The relay chain deploys smart contracts compatible with the full-chain environment (for chains like BTC without smart contracts, lightweight clients are used for secure asset migration) and follows a set of standards for cross-chain communication. This is complemented by a POS-based interaction validity verification mechanism.

• ZK Light Client : Originating from the concept of Simplified Payment Verification (SPV) defined in the Bitcoin whitepaper, the use of lightweight client nodes significantly enhances the security of cross-chain asset transfers while avoiding the resource consumption and cost of full node verification. The inclusion of ZK technology ensures that operations on layer 2 sidechains and the mainnet’s consensus verification remain consistent. For example, MAP deploys a ZK light client on the BTC chain, allowing the light client to perform operations on the BTC mainnet, such as verifying block headers and transaction-related Merkle proofs, without needing to download the full node’s historical data. This enables secure operations on the second layer, like withdrawal requests, by only verifying specific transaction-related data through the mainnet light client.

1. Future Development

   • For the characteristics of the BTC mainnet, it supports the secure cross-chain of inscribed assets to Layer2 : BTC layer 2 can manage and circulate these BTC-derived assets with lower costs and lower consumption, aiming to extend the value of the BTC mainnet to layer 2. Achieving this goal involves more than just wrapping BTC assets onto a layer 2 chain; it requires managing ledger consistency through indexers, and compatibility and management of the liquidity of different BTC-derived inscribed assets. Developing more functionalities that align with the native characteristics of BTC is key.

   • Becoming an interoperable operation layer (Layer 0) for other BTC layer 2s : Various Layer 2s, including EVM and non-EVM chains, will connect with the BTC main chain. Thus, the core issue is interoperability. A chain within a chain that sufficiently heterogenizes BTC mainnet characteristics and is compatible with other full-chain environments will become crucial. Observing the competition among other layer 2 chains, as they fragment the market, MAP aims to leverage its full-chain interoperability features to integrate and manage liquidity.

Project 5: CKB

Basic Introduction

CKB was launched in November 2019, adopting the PoW consensus mechanism and UTXO model, fully isomorphic with Bitcoin.

Project Features

(1) Security: CKB uses the same PoW consensus mechanism as Bitcoin from the start, ensuring maximum security and decentralization.

(2) Scalability: The UTXO model was generalized into the Cell model, enabling support for smart contracts. CKB’s virtual machine, using the open instruction set RISC-V, allows developers to use any language to develop smart contracts.

(3) User Experience: CKB’s mainnet is fully compatible with BTC addresses and wallets, allowing Bitcoin ecosystem users to seamlessly enter the CKB ecosystem.

(4) Ecosystem: CKB offers the “Axon” framework for “one-click chain launch,” enabling Bitcoin inscription communities to easily launch their own BTC Layer3 on CKB.

Project 6: Liquid Network

Liquid Network can be considered a specialized, centralized version of the Lightning Network tailored for B2B institutions, more aptly described as a sidechain. While it enables the reissuance and circulation of BTC, its centralized nature limits accessibility to all users, resulting in lower market attention. Liquid serves not only as a Bitcoin sidechain but also as a settlement network for cryptocurrency exchanges and institutions, linking them worldwide.

Rollup

Project 1: Merlin Chain

Basic Introduction:

Merlin Chain, released by the BRC420 team, is a Bitcoin ZK Rollup Layer 2 solution (self-proclaimed as a sidechain) with a Total Value Locked (TVL) reaching nearly $2 billion as of February 2024, making it the highest-valued Bitcoin Layer 2 in the market. The team’s previously released assets, Brc420 and Bitmap, have gained significant popularity, amassing a large user base. This includes Blue Box, the top NFT asset in the Bitcoin ecosystem with a market cap of $200 million, and the second-ranked asset protocol BRC420 along with a Bitmap holder community of 33,000. These assets provided Merlin Chain with substantial asset reserves and a user base on its launch day, thus establishing a strong community consensus. Merlin Chain facilitates better circulation, issuance, and leverage for assets like BRC-20, BRC-420, and Bitmap on Layer 2.

Operating Mechanism:

1. Utilizes the MPC solution from Cobo wallet for cross-chain BTC transactions.

2. Implements account abstraction from ParticleNetwork, allowing continued use of Bitcoin wallets and addresses for sidechain interactions without altering user habits.

   Core Features:

3. Serves Bitcoin’s native users, e.g., partnering with Particle for Bitcoin wallet solutions, enabling seamless switching between Layer 1 and Layer 2 for any Bitcoin wallet, such as Unisat or OKX.

4. Focuses on Bitcoin’s native assets like ORDI, SATS, RATS, etc., differentiating from most Bitcoin Layer 2 solutions that primarily support Ethereum or BNB Chain assets.

5. Encourages Bitcoin-native innovation by integrating real Bitcoin users, protocols, developers, project teams, and assets into a single virtual machine, fostering innovation beyond what’s possible with Ethereum-based assets.

   Economic Model:

The project allocates 20% of its shares to the community and has planned seven rounds of token issuance. The issuance strategy emphasizes community, fairness, and fun, allowing users to acquire assets at lower costs.

Project 2: B² Network

Basic Introduction:

B² Network is a zk Rollup on Bitcoin, integrating a “commitment challenge” model.

Operating Mechanism:

1. Network Layers:

   • Rollup Layer uses zkEVM for running smart contract logic, handling transactions, and producing ZK proofs. It supports BTC address account abstraction and synchronizes with BTC L1 data (BTC and BRC20 balances).

   • Data Availability (DA) Layer provides data storage, with nodes performing off-chain zk verification of Rollup transactions before writing Rollup data into BTC’s Ordinals inscriptions.

2. Proof Verification: Introduces more off-chain computation in verification, transforming direct L1 verification of ZK proofs into an Optimistic “fraud proof” challenge. B² decomposes ZK proofs into scripts forming a Mast tree, rewarding BTC transactions for fraud challenges. If no challenge occurs within a locked period, nodes can retrieve their locked BTC, ensuring Rollup transaction validity and enhancing security through indirect L1 verification.

3. Account Abstraction: Allows direct BTC wallet interactions with Rollup without changing user habits.

4. No Escape Hatch: Relies on multi-signature address bridges for L2 BTC withdrawals, avoiding the implementation of an “escape hatch.”

Project 3: Bison Network

Basic Introduction:

Bison Network is a Bitcoin-based ZK-STARK Sovereign Rollup (client-validated).

Operating Mechanism:

Defined as a Sovereign Rollup, where L1 serves merely as a public bulletin for Rollup block data without verifying the correctness of Rollup transactions. Rollup transactions are verified by the Rollup’s own nodes. Bison submits Rollup’s zk proofs into BTC Ordinals, enabling users to download proofs from BTC and verify Rollup transactions with their clients. Full state verification requires syncing a full node.

Project Risks:

The main vulnerability lies in the oracle, where incorrect information could lead to asset loss. Introducing decentralized elements, like Chainlink, could mitigate this risk. Although Bison Rollup introduces a simple “escape hatch” through new third parties, it still lacks BTC L1 verification of Rollup proofs.

Project 4: SatoshiVM

Basic Introduction

SatoshiVM is a ZK Rollup based on BTC that has issued the SAVM token. However, due to uneven distribution of benefits, there has been a dispute between the project team and the IDO platform, causing damage to community confidence and a plunge in the token price.

Operation Mechanism

Its logic is similar to the B² Network, where after generating zk proofs in the Rollup, the prover uploads the proof data to the BTC network. Then, a “fraud proof” challenge containing BTC is sent, and the successful challenger receives a BTC reward. What sets SatoshiVM apart is the addition of two time locks in the “fraud proof” challenge, corresponding to the start and end times of the challenge. This allows for easy identification of whether the ZK proof is correct and valid by comparing how many blocks were waited for BTC transfers.

Project 5: Chainway

Basic Introduction

Chainway is a ZK Sovereign Rollup for BTC, with client-side verification. It uses Bitcoin not only as the data publishing layer but also as the data source for generating ZK proofs.

Operation Mechanism

Chainway’s provers need to scan every BTC block thoroughly, reading the block header, the previous zk proof, and the “mandatory transactions” inscribed in the block to generate a complete ZK proof. Chainway submits a transaction inscribing a ZK proof in each BTC block, thus forming recursive proof. The “mandatory transactions” inscribed in BTC blocks as Ordinals inscriptions are Chainway’s method of sending “censorship-resistant transactions.” If a Chainway rollup node goes down or continuously refuses to accept withdrawal transactions from users, users can directly inscribe their withdrawal requests into a Bitcoin block. Nodes must include these “mandatory transactions” in the rollup block, or they will fail to meet the zk circuit constraints, and proof generation will fail. In the latest tweet, Chainway claims to be inspired by BitVM, having found a method to verify zk proofs on Bitcoin, achieving settlement on BTC L1.

Project 6: TunaChain

Basic Introduction

TunaChain is the first modular Bitcoin Layer2 project, thus gaining market attention and popularity.

Operation Mechanism

1. Modularity: It utilizes Celestia’s Data Availability (DA) layer for a modular architecture.

2. Stablecoin Integration: Toro is TunaChain’s native stablecoin, which can be obtained through over-collateralization of held BTC.

3. Hybrid ZK-OP: It achieves EVM compatibility and ensures transaction speed.

Project 7: BitVM

Basic Introduction

BitVM aims to implement Turing-complete Bitcoin contracts without changing the operational code. Due to its high technical complexity and cost, it has not yet been implemented.

Operation Mechanism

The implementation approach is similar to Rollup logic on Ethereum, running fraud proofs similar to OPR on BTC script. When a dispute arises in a transaction, users can initiate a challenge. If the transaction is indeed problematic, the dishonest party’s assets will be confiscated. The effective challenge time is within 7 days. One of BitVM’s core ideas is to simulate the input-output effects of logic gate circuits using Bitcoin Script, akin to building the Empire State Building with blocks. From a compiler theory perspective, BitVM translates EVM/WASM/Javascript opcodes into Bitcoin Script opcodes, with logic gate circuits serving as an intermediary representation (IR) between “EVM opcodes -> Bitcoin Script opcodes.”

Project Risks

1. Centralization Risk: BitVM’s smart contract layer operates off-chain, and each smart contract does not share state. BTC cross-chain uses traditional Hash locks for asset anchoring, failing to achieve truly decentralized BTC cross-chain and unable to avoid the asset security risks of centralized arbitration nodes.

2. High Technical Complexity

3. High Implementation Costs

Other types

Project 1: Nubit

1. Basic Introduction: Nubit is a Data Availability (DA) protocol designed to expand data availability scenarios for BTC, acting as the Bitcoin ecosystem’s version of Celestia.
2. Operating Mechanism: Nubit organizes a DA chain similar to Celestia by running a POS consensus and periodically uploads its own DA data such as block headers and transaction Merkle tree roots to BTC L1. Nubit itself is maintained by BTC L1 for its DA, while it sells its chain’s storage space as DA to users and other rollup chains (a DA nesting). Nubit does not have smart contract capabilities and relies on rollups to build upon its DA.

Project 2: Babylon

1. Basic Introduction: Babylon is a protocol designed to share BTC’s security with other blockchains, comprising two parts: Bitcoin staking service and Bitcoin timestamping service, akin to the Bitcoin ecosystem’s version of Eigenlayer.
2. Operating Mechanism: Babylon allows for economic security guarantees for Pos chains through BTC staking, operating entirely through cryptographic means without relying on any third-party bridges or custodians. Security sharing is achieved by BTC stakers sending a transaction on BTC with two UTXO outputs for staking, one with a time-lock script for later retrieval by the staker, and the other transferred to a temporary Bitcoin address meeting the “Extractable One-Time Signature (EOTS)” cryptographic standard. Stakers earn rewards by running a POS chain node and signing unique valid blocks with the EOTS private key. Misbehavior, such as signing two blocks at the same height, leads to the exposure of the EOTS private key, allowing anyone to transfer the staked BTC, enforcing honesty. The timestamping service enhances security by uploading checkpoint data of any blockchain to BTC’s op_return.

Project 3: Veda

1. Basic Introduction: The Veda protocol utilizes specific Ordinals inscribed on BTC L1 as transaction requests, executed in an off-chain EVM. Veda extends BTC’s functionality by adding smart contract capabilities without solving the resource competition issue, thereby not expanding BTC’s performance. Veda can be viewed as an Ethereum network with a 10-minute block interval, a TPS of 5, but with tens of thousands of nodes and significant Pow power.
2. Operating Mechanism: Users sign transactions compatible with EVM using their BTC private keys and inscribe them as Ordinals on BTC. Veda’s EVM nodes scan BTC blocks, and once a transaction is confirmed by BTC, the EVM executes the request, leading to state changes. This effectively uses BTC as Veda EVM’s transaction pool. With BTC’s performance significantly lower than ETH’s EVM and limited data insertion into BTC blocks over time, Veda EVM can process all EVM requests uploaded to BTC. BTC serves as the data source for all Veda states, allowing anyone to reconstruct the EVM’s complete state by scanning all BTC blocks with Veda requests, thus offering optimistic trust without complex security assumptions.

03 Application layer

The application layer in the Bitcoin ecosystem refers to applications that integrate Bitcoin assets and foster the development of the Bitcoin ecosystem, similar to the concept of Bitcoin Layer2. Although the Bitcoin ecosystem is still in its early stages, leading applications have emerged in various niches, mainly enabling asset issuance on Layer1. Here’s a summary:

• Wallets:

  • Unisat: A Bitcoin wallet that rose to prominence with the BRC20 protocol wave.

  • OKX Wallet: A Web3 wallet developed by the OKX exchange, known for its smooth user experience and quick adoption of market trends, gaining a significant user base in the Bitcoin ecosystem’s boom.

• Decentralized Exchanges (DEX):

  • Orders Exchange: The first DEX to support BRC20 tokens.

• Stablecoins:

  • Bitstable: Issues stablecoins like DAII through over-collateralization.

• Liquidity Solutions:

  • Dova Protocol

• Project Launch Platforms:

  • Bounce Auction: A BSC veteran project entering the BTC ecosystem.

• Donation Platforms:

  • Turtsat: Aims to be the Bitcoin ecosystem’s Gitcoin.

• Gaming Platforms:

  • Bitcoin Cat: Brings new gameplay to Bitcoin assets (BRC20, Ordinals NFT, etc.) through mapping to Ethereum (and other Layer2 networks), including Play2Earn, staking, farming, SocialFi, and more.

• Metaverse:

  • Bitmap: Based on Ordinals theory and bitmap theory, maps transactions in Bitcoin blocks to virtual land.

• Cross-Chain Bridges:

  • OmniBTC

  • Multibit

  • Chamcha

  • Thorchain

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