RGB, sidechains, and the Lightning Network, which one is the "Holy Grail" of Bitcoin scaling?

Author: Grapefruit, ChainCatcher

Recently, due to the wealth effect of the ordi token, a large number of users have flocked to the Bitcoin network to trade BRC-20 tokens, resulting in severe congestion on the Bitcoin chain and a surge in Gas fees. On May 7, Binance suspended Bitcoin withdrawals twice in one day due to massive withdrawal transactions and skyrocketing fees; on May 8, the Bitcoin network stopped block production for one hour due to congestion, with on-chain transaction Gas fees peaking at $30.

As of May 10, according to BTC.com, the number of unconfirmed Bitcoin transactions reached 300,000. The Mempool website shows that the average Gas fee for on-chain Bitcoin transactions is about 282 satoshis, equivalent to $11.

Resolving congestion on the Bitcoin chain and reducing Gas fees has become a consensus among users participating in on-chain transactions.

Discussions about Bitcoin scaling have also increased, with renewed hopes placed on the RGB protocol, which aims to provide smart contract functionality for Bitcoin, and the Lightning Network, which focuses on reducing Bitcoin transaction fees. Users hope for new developments to quickly resolve Bitcoin's current predicament.

In fact, besides RGB and the Lightning Network, there are also blockchain networks focused on expanding the Bitcoin ecosystem through sidechains. So, what are the differences between Bitcoin's RGB, Lightning Network, and sidechain scaling methods? What are the representative applications? How can users participate?

The Lightning Network Aims to Reduce Bitcoin Transaction Gas Fees and Increase Throughput

The congestion in Bitcoin is due to its mainnet TPS being able to handle only 7 transactions per second, while third-party payment platforms like Alipay can process around 100,000 transactions per second. Additionally, the block size of Bitcoin is 1MB (the number of transactions it can contain), and miners prioritize transactions based on the Gas fees submitted by users. To ensure their transactions are processed quickly, users need to increase their Gas fees to gain priority from miners. This is why, under the BRC-20 craze, the more users there are for on-chain transactions, the higher the Bitcoin Gas fees become.

On-chain data from BitinfoCharts shows that starting in May, the average transaction fee on the Bitcoin chain began to rise significantly, from an initial $2 to now $20, with a peak of $30 at one point.

BTC Chain Gas Fees

Historically, there have been two methods for scaling: one is to increase the block size, known as large blocks, to include more transactions. Bitcoin Cash (BCH) adopted this scaling method, but this approach does not change the block production time and increases the operational pressure on nodes. The other method does not alter Bitcoin's core content but uses off-chain scaling to move small transaction payments or related data off-chain, with the mainnet handling only critical transactions. The Lightning Network adopts this off-chain approach.

The Lightning Network is also known as Bitcoin's Layer 2 solution, primarily applied in Bitcoin payment scenarios. It helps users save costs and improve efficiency. The core idea is to conduct user transactions off-chain, with only the final transaction results confirmed on the Bitcoin mainnet, thereby enhancing the transaction efficiency of the Bitcoin network and allowing users to complete payments at lower costs and faster speeds.

Its working principle is: When one user initiates a transaction to another user, the Lightning Network first opens an off-chain payment channel between the two parties, essentially a shared ledger for recording transactions. Then, both parties lock a certain amount of funds in the channel and sign the transaction using private keys. Small fund transfers between the two parties do not need to occur on-chain but are recorded in their shared ledger. When either party decides they no longer need the channel and closes it, the final settlement balance between them is broadcasted on the Bitcoin mainnet.

For example, if A and B want to conduct a BTC transaction, they first need to establish a channel, locking a certain amount of Bitcoin on the Bitcoin mainnet. The channel opens, allowing them to send BTC instantly with almost zero transfer fees, without broadcasting each transaction to the Bitcoin mainnet. When either party closes the channel, they settle the final asset amounts in their transaction accounts and publish them on the Bitcoin mainnet.

Thus, the channel integrates multiple micropayments into one, broadcasting it to the underlying Bitcoin network, enhancing transaction efficiency.

Image source: YouTube blogger @币圈小林子

Moreover, the Lightning Network is not just a direct link between A and B; it can also connect numerous single channels to form a vast interconnected payment network. This means that if A and C have a channel, and A and D do not, but C and D do, then A can indirectly transact with D through C, with C acting as an intermediary and collecting routing fees.

Structure diagram of the Lightning Network, source from the internet

In the Lightning Network, the network finds the path with the fewest nodes and the lowest transaction fees to complete transactions.

According to 1ML, as of May 10, the Lightning Network has a total of 16,000 nodes, approximately 73,000 payment channels, and about 5,376 BTC in the channels, valued at $140 million.

Lightning Network related data

The application scenarios of the Lightning Network are mainly in the payment field, addressing issues such as high Gas fees for small on-chain Bitcoin transactions and instant settlement, including social platform tipping payments, cross-border remittances, merchant payments, and transfer transactions. The average settlement time on the Lightning Network is less than a minute, often measured in milliseconds. Additionally, data shows that each transaction fee on the Lightning Network is about $0.0001. In summary, the payment experience on the Lightning Network is comparable to centralized electronic payments, especially excelling in cross-border transfers.

Currently, most Lightning Network products on the market are payment infrastructure products aimed at B-end enterprises and developers. For ordinary users, understanding the principles of these products can be quite challenging. In fact, the BTC micropayment technology that users frequently use for instant transfers is mostly based on the Lightning Network, such as the recently popular decentralized social application Damus, which has integrated BTC tipping using the underlying technology of the Lightning Network.

Representative Applications of the Lightning Network

Strike------is a Bitcoin Lightning Network payment platform that provides instant Bitcoin payments. Users can use Strike to pay with BTC, purchase goods and services online, make small payments, tip content creators, and buy and sell BTC. Its predecessor was the Bitcoin ecosystem wallet Zap.

Strike completed a $80 million Series B funding round in September 2022, led by Ten31. Additionally, Strike has partnered with Shopify, NCR, and others to establish a Bitcoin payment system that allows merchants to quickly exchange cryptocurrency payments for dollars.

Taro------is a protocol supported by Bitcoin Taproot that defines standards for issuing and using tokens on the Bitcoin blockchain. It is primarily used for issuing assets on the Bitcoin blockchain, including fungible tokens and NFT assets.

Assets issued through Taro can circulate on the Lightning Network, currently only available for developers. Using Taro, developers will be able to issue assets on the Bitcoin blockchain and then transfer them to the Lightning Network.

However, Taro products are still in the testing phase.

The developer behind Taro, Lightning Labs, is a Bitcoin Lightning Network developer that provides related software support for the Lightning Network, such as Lightning Network node management tools and wallets, including the self-developed testing version software "LND," which allows users to send Bitcoin and Litecoin directly to other users without processing these transactions on the blockchain. In April 2022, Lightning Labs raised $70 million in funding.

Lightspark------is a Lightning Network payment solution provider founded by former PayPal president David Marcus, primarily offering solutions for enterprise users to use Lightning payments, such as providing related APIs and SDK toolkits to support enterprise integration with the Lightning Network. In April of this year, Lightspark announced its Bitcoin Lightning Network product suite.

Last May, Lightspark completed funding led by a16z and Paradigm, and due to its founder being David Marcus, the initiator of Libra, it attracted user attention.

RGB Primarily Supports Smart Contract Functionality on Bitcoin and the Lightning Network

RGB is a scalable and privacy-focused smart contract system developed by the LNP/BP Association, primarily used to support the deployment of smart contracts on Bitcoin and the Lightning Network. It enables developers to create, deploy, and execute smart contracts on Bitcoin or the Lightning Network while maintaining the security of their data.

Compared to Bitcoin, Ethereum's greatest innovation is supporting smart contracts (Smart Contracts). A smart contract is a program running on the blockchain (also known as a programmable contract executed automatically by a piece of code).

The main difference between Ethereum and Bitcoin is that Ethereum can execute complex logical operations through smart contracts. Today, DeFi and other DApp applications on Ethereum are realized through smart contracts. However, since Bitcoin does not support smart contract deployment, the development of its on-chain ecosystem is limited. The recently popular BRC-20 tokens are also realized through the inscriptions of the third-party Ordinals protocol, and the token issuance process is relatively simple, consisting only of deployment, minting, and transfer, without supporting token destruction or issuance.

RGB aims to enable Bitcoin to achieve all possibilities based on smart contracts, similar to Ethereum or other blockchain networks (such as Solana, BNB Chain, etc.), allowing developers to deploy tokens, NFT asset issuance contracts, decentralized finance applications (DEX, lending), DAOs, etc., on Bitcoin. The protocol promises to support complex smart contracts running on Bitcoin and the Lightning Network.

Thus, RGB is not a specific blockchain network nor a token issuance protocol, but rather an infrastructure that provides smart contract support for the Bitcoin network.

As a smart contract system, RGB's proposed solution also differs from previous smart contract solutions like Ethereum.

RGB modularizes the processes of smart contract issuance, data, and state, executing smart contract code maintenance and data storage off-chain, with the mainnet (Bitcoin) serving as the final state commitment layer. This means that RGB uses an off-chain smart contract model, storing all smart contract data off-chain, with the Bitcoin mainnet only serving as the confirmer of the final state, reducing the use of block space and significantly increasing throughput.

Current blockchain networks advocate storing both smart contract code and data on the blockchain, executed by all nodes in the network, which can lead to excessive block capacity and waste of computational resources. RGB, through client-side validation, does not require every node to execute every contract, using flags on unspent transaction outputs (UTXO) to track transaction states, ensuring security based on the mainnet while achieving scalability.

What Can RGB Currently Be Used For?

Developers can use RGB to deploy fungible tokens RGB20 and non-fungible token NFT contracts; it is also compatible with the Lightning Network.

Because RGB supports users in issuing fungible tokens on Bitcoin or the Lightning Network through the deployment of smart contracts, it is also considered an alternative to BRC-20 tokens.

The biggest advantage of RGB20 over BRC-20 tokens is that tokens issued by RGB20 can circulate on the Lightning Network, with low Gas fees and fast settlement. In contrast, BRC-20 is inscribed on satoshis, with all activities occurring on the Bitcoin chain, limiting its extensibility.

What applications does the RGB protocol support, and how can users participate?

Bitcoin NFT Market DIBA------is the first Bitcoin NFT trading market built using the RGB smart contract platform, allowing users to create and trade NFTs on Bitcoin (these assets are often referred to as UDA, unique digital assets). Currently, DIBA is still in the testing phase.

Additionally, users can experience RGB smart contracts and related assets through wallets related to the Bitcoin network.

Iris Wallet---is an application for issuing, sending, and receiving RGB assets, developed by Bitfinex Labs, and users need to download it from the Google Store.

My Citadel------supports RGB asset wallets, and current users need to download the installation package.

Bitmask------can be used to experience the minting, issuance, and applications of RGB assets. BitMask is a Chrome extension wallet created by DIBA, supporting stablecoins and NFTs. Currently, users can experience the issuance and transfer of RGB20 assets through the Bitmask wallet beta version.

BitMask Wallet

From the current user experience, the Bitmask wallet is more user-friendly for beginners. Users can experience the issuance and transfer of RGB20 assets and asset transfers within the Lightning Network through the Bitmask wallet beta version.

Bitcoin Sidechains

A sidechain is essentially a separate public chain with its own customized ledger, consensus mechanism, transaction types, scripts, and contract support, linked to the Bitcoin mainnet through specific cross-chain technologies. In simple terms, it allows BTC to transfer and circulate between the Bitcoin mainnet and the sidechain through cross-chain bridges.

Bitcoin sidechains like Stacks, Rootstock, and OmniLayer transfer BTC between the sidechain and the mainnet through cross-chain bridges.

Overall, sidechains can support smart contracts, build various decentralized applications like DeFi, have strong scalability, and relatively low implementation difficulty compared to other solutions, while the ledger remains relatively secure. However, not everyone can run nodes on sidechains, and the ledger consensus relies on the management of certain central institutions, resulting in a lower degree of decentralization. This may be the main reason why many attempts at sidechain scaling solutions have not achieved widespread application.

Bitcoin Smart Contract Platform Stacks (STX)

Stacks (STX) builds a new blockchain network to enable the deployment of smart contracts and decentralized applications on the Bitcoin network. It has issued a native token STX on this blockchain network to pay for smart contract fees and transaction fees. Developers can build any application based on Stacks.

In 2021, Stacks released version 2, aiming to innovate around the Bitcoin settlement protocol without changing Bitcoin itself, enabling native Bitcoin smart contracts and decentralized applications.

The core mechanisms in Stacks 2.0 are mainly divided into two parts: one is PoX, a consensus mechanism built on the Bitcoin chain, similar to PoS staking, where nodes can earn STX by locking BTC or earn BTC by locking STX, coordinating the benefits between miners and stakers through this dual-token exchange. The second is the native programming language Clarity, which allows smart contracts to operate based on actions on the Bitcoin chain. For example, if A completes a transaction transfer on Bitcoin, Stacks 2.0 can track and detect this transaction as part of a smart contract on Stacks 2.0, using this transaction as a condition for the next step of the smart contract.

Currently, the Stacks ecosystem applications cover DeFi, NFTs, DAOs, and other applications, such as the Hiro Wallet, and already deployed applications: the all-in-one DeFi application project Alex, which integrates DEX and lending functions, the NFT trading market Gamma, and the collateral lending platform Arkadiko.

Bitcoin Asset Issuance Platform OmniLayer

OmniLayer (OMNI) is a blockchain network built on Bitcoin, primarily used for issuing tokens based on the Bitcoin network. The principle of OmniLayer issuing Bitcoin network tokens is based on some information attached to Bitcoin's transaction outputs (UTXO), relying on data from the Bitcoin chain.

The original stablecoin USDT was issued by Tether based on OmniLayer.

Compared to the RGB protocol, the data related to tokens issued by OmniLayer is stored on the Bitcoin mainnet chain, resulting in poorer privacy and scalability.

OmniBolt is the version of OmniLayer compatible with the Lightning Network, supporting the creation and transfer of tokens through the Lightning Network. On May 9, OmniBolt announced that it would support BRC-20 tokens on the Lightning Network.

Bitcoin Federation Sidechain Liquid Network

Liquid Network (Liquid) is more like a federation sidechain for Bitcoin, maintained and governed by a Liquid consortium composed of exchanges, financial institutions, and other Bitcoin-focused companies. It aims to solve the liquidity problem of Bitcoin and provide users with a faster and more convenient Bitcoin trading experience. This network was launched by Bitcoin infrastructure developer Blockstream in 2018.

The main asset used on the Liquid chain is LBTC, which is issued at a 1:1 peg to Bitcoin. According to the official website, the number of LBTC circulating in the Liquid ecosystem has long maintained above 3,000, with 3,280 as of May 10.

Additionally, Liquid supports the deployment of smart contracts, and the ecosystem already includes DEX Sideswap and lending platform Hodl.

EVM-Compatible Bitcoin Sidechain Rootstock

Rootstock (RSK) is an EVM-compatible sidechain on Bitcoin. This means that RSK developers can use Ethereum's Solidity to deploy smart contracts, and users can add the RSK mainnet to Ethereum wallets like Metamask, interacting with RSK ecosystem DApps just like on Ethereum or other EVM-compatible networks like Polygon and BNB Chain.

The RSK platform does not have its own native token; it uses smartBTC (RBTC), where RBTC is issued at a 1:1 ratio from BTC on the mainnet through cross-chain bridges.

Because of this, RSK is not well-known in the crypto community, and users are more familiar with the RIF token.

The RIF token is issued by Rootstock Infrastructure (RIF), a platform built on Rootstock aimed at providing blockchain infrastructure and services for developers, including domain names, storage, authentication, etc., to support the development and deployment of dApps. Although Rootstock does not issue tokens other than RBTC, both Rootstock and RIF are developed by the same company, IOV Labs, leading users to often mistakenly consider RIF as the native token of Rootstock.

In fact, several well-known DeFi applications have already emerged on the RSK chain, such as the platform Sovryn (SOV), which supports trading and lending Bitcoin, and in March of this year, this application announced the launch of the Bitcoin-backed stablecoin Sovryn Dollar (DLLR). Additionally, there are DEX platform RSK Swap and lending application Tropykus, among others.