From Asset Issuance to BTC Scalability: Evolution and Challenges

01 Ordinals eco-booming: Opening up new possibilities for Bitcoin asset issuance

As a digital gold or currency, the Bitcoin community has been conservative since the hard fork in 2017, with no new narratives in recent years. The Ordinals protocol in early 2023 has moved the gears of Bitcoin’s fate, and the explosion of the Ordinals ecosystem has resulted in Bitcoin’s on-chain transaction fees surpassing Ethereum for the first time in six years, bringing the narrative imagination of the crypto industry back to the Bitcoin blockchain.

Source：https://cryptofees.info/

Before the emergence of the Ordinals protocol, there were several major upgrades to the BTC technical side. In 2017, the activation of SegWit increased the block space to 4 MB, improving transaction throughput. This was followed by the development of the Lightning Network, bringing Bitcoin Layer2 into the spotlight. The Taproot upgrade in 2021 further enhanced Bitcoin’s security, efficiency, and privacy, enabling programmability.

However, these technical improvements did not address the real pain points. It was not until the introduction of the Ordinals protocol that the door to practical applications of BTC was completely opened. In December 2022, Casey introduced the Ordinals protocol, an extension protocol for the Bitcoin network that allows data to be inscribed on Bitcoin Satoshis. The Ordinals protocol achieves scalability by assigning a unique number and adding annotations to each Satoshi.

Inspired by the Ordinals protocol, Domo created the experimental token standard BRC-20 on March 8, 2023, using JSON data ordinals and inscriptions to deploy token contracts, mint tokens, and transfer tokens. Various token information is stored and managed using Satoshis.

While asset issuance has existed in Bitcoin in the past, such as Colored Coins in 2012 and Counterparty in 2014, they failed to address real user needs. The adoption of the fair launch+ protocol control of assets on BRC-20 has sparked genuine user demand, and the explosive growth of BRC-20 has opened up new possibilities for asset issuance on Bitcoin.

To date, the Ordinals ecosystem has generated over 41 million inscriptions, which are digitally inscribed on the world’s oldest and most secure distributed ledger, including images, text, audio, and even applications. Text-based inscriptions (BRC-20) account for the largest proportion. The Ordinals ecosystem has spawned multiple innovative branch protocols such as BRC-20, ATOM, PIPE, and RUNES. The popularity of Ordinals has brought new traffic to the BTC ecosystem and laid the foundation for future developments.

Source：https://dune.com/dgtl_assets/bitcoin-ordinals-analysis

02 Ordinals Bring New Norms to the Blockchain: Block Space Competition, UTXO Proliferation

The surge in popularity of the Ordinals protocol is reflected in high transaction fees for users. Text-based inscriptions occupy less data, and BRC-20 users are willing to pay high transaction fees. Miners are filling blocks with a record number of BRC-20 transactions, which can lead to longer block confirmation times and higher fees.

In 2022, miners earned a total of 5,374 BTC from transaction fees, while the introduction of Ordinals resulted in a cumulative consumption of 2,886 BTC in transaction fees. The emergence of Ordinals has shifted miners’ reliance away from pure block rewards and increased the significance of transaction fees in their overall income, creating a second curve for miners’ revenue.

Source：https://studio.glassnode.com/workbench/btc-transaction-count-momentum

After the rapid growth of Ordinals ecosystem, the broader Bitcoin community engaged in intense debate about its impact on Bitcoin. Opponents argue that Ordinals transactions only increase the Mempool backlog and transaction fees, sacrificing financial transactions and hindering peer-to-peer transactions.

Casey, the founder of the Ordinals protocol, stated in September that 99.9% of the current token protocols on the Bitcoin blockchain are scams and memes. However, they seem unlikely to disappear quickly, just as casinos do not disappear quickly. To address this, a better asset issuance protocol called Runes is being developed to allow gamblers to continue gambling without creating a large number of UTXOs and increasing node burden.

BTCStudy founder Ajian also expressed concerns, stating that from a technical perspective, BRC20 is an outdated technology. While BRC-20 issuance and transfers do not require associations with UTXOs, it limits the number of tokens that can be minted per UTXO. As a result, these tokens are likely to remain in UTXO sets, leading to unnessasary UTXO proliferation and increasing the burden on Bitcoin full nodes, affecting Bitcoin network’s censorship resistance and trustlessness.

Since the launch of BRC20 in April 2023, Bitcoin’s UTXO set has expanded from 5 GB to 8.16 GB. The Bitcoin development community has been debating whether to use technical means to shield Ordinals transactions, as the UTXO inflation caused by these transactions is eroding the Bitcoin network.

Source:https://statoshi.info/d/000000009/unspent-transaction-output

Ordinals ecosystem proponents believe that Ordinals’ popularity brings new traffic and user habits to the Bitcoin ecosystem, and the Bitcoin ecosystem should also adapt to the new on-chain norms brought by Ordinals. The next step in the narrative of the Ordinals ecosystem should focus on addressing UTXO proliferation. Ultimately, a better way of issuing assets is needed to enable the Bitcoin ecosystem to have more native application ecosystems and promote the sustainable development of the Bitcoin ecosystem.

03 Evolution and challenges of BTC scalability from the perspective of asset issuance

BTC ecosystem currently has no shortage of asset issuance protocols, but lacks smart contracts and scalability. Scalability determines the potential development direction and lifecycle of BTC scalability. The complexity of Bitcoin Layer 1 scalability solutions is high, and the community is more accepting of building new Layer 2 solutions on top of Bitcoin Layer 1, which are both compatible and do not affect the Bitcoin system while solving on-chain congestion issues.

After the completion of Segregated Witness (SegWit), the Bitcoin ecosystem has been fully committed to the development of Layer 2 solutions such as the Lightning Network and sidechains. Whether it is the Lightning Network, sidechains, or the RGB protocol, the development of Bitcoin Layer 2 is thriving. Here, we will not discuss the Liquid federated sidechain. From the perspective of better asset issuance, the following protocols - BRC-20, Stacks, BitVM, Lightning Network, RGB, and Taproot Assets - face significant challenges in terms of Turing completeness, decentralization, and scalability.

• Stacks：Stacks, the leading sidechain, currently has 19.3 MTVL on-chain. Stacks has many benefits, especially the ability to directly port existing Ethereum applications. However, sidechain solutions like Stacks and RSK face centralization issues. The Stacks Nakamoto upgrade is scheduled for Q4, and sBTC as a smart contract is set to be launched soon.
• BRC20：As the leading protocol in the inscription ecosystem, BRC-20 is a Bitcoin script. While it is not Turing complete, it has a large user base and a relatively simple protocol. However, it occupies too much on-chain space, and the security of BRC-20 relies heavily on centralization, lacking scalability and Turing incompleteness. Efforts are being made to further develop BRC-20, with projects like Rune, Arc-20, Pipe, and BRC-20Swap addressing related issues;
• Lighting Network: The Lightning Network is the largest and most influential Layer 2 solution in the Bitcoin ecosystem. More and more companies are entering the Lightning Network ecosystem. It enables off-chain payments through specific state channels and settles final transactions on the Bitcoin blockchain. However, the Lightning Network cannot issue tokens and is only suitable for high-frequency payments. It lacks smart contract functionality and has limited Turing completeness. While the Lightning Network has a limited number of users and use cases, protocols built on top of it, such as Taproot Assets and RGB, have more potential for innovation.
• RGB：Inspired by Peter Todd’s concepts of single-use seals and client-side validation, RGB introduces smart contract functionality to the Lightning Network. In April 2023, GRB v.010 was released. The technical complexity has hindered the ecosystem from fully developing, but projects like Infinitas, Bitlight Labs, Diba, Bitswap, and Pandora Prime Inc are gradually exploring the potential for RGB implementation. The CEO of Tether also stated that RGB is the best choice for issuing stablecoins on the Bitcoin blockchain, and Tether is considering the possibility of issuing USDT through RGB.
• Taproot Assets：Taproot Assets, another client-side asset validation protocol, released its mainnet alpha version in October 2023. Its goal is to expand Bitcoin into a scalable multi-asset network. However, Taproot Assets’ asset issuance is distribution-based, with assets being distributed by issuers instead of users actively minting them. Taproot Assets’ application scenarios are more suitable for asset issuance by projects and institutions. Currently, the Nostr Assets Protocol, built on Taproot Assets, brings assets into the Nostr social protocol.
• BitVM：The whitepaper for BitVM was released in October 2023. BitVM executes complex programs off-chain using a similar approach to Rollups and puts the critical evidence on-chain. It also aims to bring Turing-complete smart contracts to Bitcoin. However, BitVM has high computational requirements and is currently only theoretically executable. Further understanding is needed regarding scalability and commercial implementation.

04 Huge growth potential in scalability solutions with asset issuance + application scenarios

With the improvement of various infrastructure in the Bitcoin ecosystem, different scaling solutions are being explored. The next stage of BTC scaling competition revolves around two core issues that need to be addressed:

• From the perspective of asset issuance: Is the technical solution suitable for real-world applications? Is it decentralized? Is it Turing complete? Does it have scalability?
• From the perspective of asset circulation: Can the protocol gain adoption and support from industry infrastructure and users?

From the perspective of asset issuance, BTC still has some catching up to do compared to Ethereum. It lacks well-known projects and user numbers. However, as the blockchain network with the highest market value, BTC has enormous growth potential in Layer2 solutions that combine asset issuance protocols with application scenarios.

Ordinals has opened up the possibility of asset issuance on the Bitcoin blockchain. However, it cannot support on-chain computation like Ethereum. From the perspective of BTC asset issuance, the evolution of technologies such as RGB and Taproot Assets, which rely on client-side validation, have the potential to become the next important narrative in the ecosystem.

In the future era of multi-assets on the Bitcoin network, a diverse range of application scenarios is necessary for the ecosystem to thrive. Stablecoins serve as the foundation for diversified applications, and the Lightning Network is the ideal platform for stablecoin issuance. However, there is currently a lack of sufficient stablecoins. Taproot Assets and RGB have the potential to accelerate development in areas such as high-frequency payments, stablecoins, DeFi, and NFTs, covering more tracks and users, and expanding the diverse application scenarios of the Lightning Network.

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05 Conclusion

Bitcoin ecosystem has recently seen the first wave of Ordinals, which brings new possibilities for asset issuance. However, the Bitcoin ecosystem still requires more complex and sustainable application scenarios for continued empowerment. From the perspective of asset issuance technology evolution, paradigms such as RGB & Taproot Assets, which involve client-side validation, are driving change by promoting less on-chain computation and more on-chain verification. This trend is giving rise to more reasonable ways of asset issuance in the Bitcoin ecosystem.

If you are a developer in the field of RGB & Taproot Assets, who believes in the potential of mass adoption through client-side validation, feel free to contact AC Capital and Infinitas. We also welcome different viewpoints and discussions.

Disclaimer：

1. This article is reprinted from[ AC Capital Research]. All copyrights belong to the original author [轩睿丨0xDragon888]. If there are objections to this reprint, please contact the Gate Learn team（[email protected]）, and they will handle it promptly.
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