Digital Gold's New Journey: Exploration of Bitcoin Ecosystem Diversification and Protocol Innovation

Author: Ac-Core, YBB Capital

Introduction

The concept of Bitcoin was first proposed by Satoshi Nakamoto on November 1, 2008, and Bitcoin officially came into existence on January 3, 2009. After decades of industry development, Bitcoin has been sprinting down the path of value storage and digital gold, with its value rising from 10,000 Bitcoins for a pizza to a current market capitalization of $664.22B. However, from the perspective of the current BTC ecosystem development, this is just a small attempt. Beyond the value of BTC itself, we still need to explore more patiently for the future. This article will analyze other application ecosystems of BTC.

Overview of BTC

In 2009, a cryptographer named Satoshi Nakamoto published a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System," which described an electronic currency system realized through peer-to-peer technology, allowing online payments to be initiated directly by one party and paid to another without going through any financial institution. Subsequently, Bitcoin gradually spread globally and received widespread attention. It possesses at least three attributes: technical, sociological, and financial.

• Technical Attributes:

From the perspective of Bitcoin's technical logic, the Bitcoin network protocol is a decentralized, peer-to-peer transmission protocol, which can be briefly understood as a large public accounting system that is not manipulated by any third party and is immutable. It relies on blockchain technology to record all transaction behaviors in the global database, ensuring that duplicate or false payment situations do not occur.

• Sociological Attributes:

Compared to today's internet, blockchain itself adopts distributed ledger technology, featuring decentralized, immutable, and unchangeable characteristics through shared digital transaction records over the network. The information liberalization brought by its internet attributes is also influencing everyone. Bitcoin, as a completely decentralized electronic currency, does not rely on any single authority for issuance and can achieve value transfer across borders and currencies without going through the banking system, endowing it with more sociological attributes through information liberalization and cross-border payments.

• Financial Attributes:

From a financial perspective, Bitcoin can be regarded as a digital gold investment or a globally standardized digital asset. Compared to gold, its characteristics of a fixed total supply, portability, low transaction costs, and a younger audience have led more investors and traditional investment institutions to believe in its investment value. Because it relies on global circulation via the internet, it can serve as an efficient, low-cost payment tool and medium of exchange in certain specific scenarios (such as cross-border payments and virtual economic transmission). For example, in January 2015, the Nasdaq ventured into the Bitcoin space, and recently, Grayscale and BlackRock have begun to lay out Bitcoin-related ETFs.

Looking at the current development of the entire blockchain, the prosperity of Bitcoin is relatively sparse compared to Ethereum, with very few ecological projects. The Lightning Network launched in 2019 presented a new development trend. In addition, Stacks launched in 2021, and the recent release of the Taproot Assets mainnet by Lightning Labs, which realized Turing-complete Bitcoin contracts like BitVM, have also become rare highlights in the Bitcoin ecosystem.

New Pattern of the BTC Bitcoin Ecosystem

BitVM:

Image Source: BitVM White Paper

Recently, Robin Linus, the project leader of ZeroSync, published a white paper titled "BitVM: Compute Anything On Bitcoin," which has sparked widespread discussion. BitVM is short for "Bitcoin Virtual Machine." It proposes a Turing-complete Bitcoin contract solution that can be realized without changing the consensus of the Bitcoin network, allowing any computable function to be verified on Bitcoin and enabling developers to run complex contracts on Bitcoin without altering its fundamental rules.

However, we know that Bitcoin's programmability is very limited. The blockchain faces a classic impossible triangle problem: decentralization, security, and scalability. Bitcoin's design only balances decentralization and security, to some extent abandoning scalability. It only provides three forms of input scripts: Pay to Public Key, Pay to Public Key Hash, and Pay to Script Hash.

• Pay to Public Key: This contract is used to send Bitcoin to a Bitcoin address.
• Pay to Public Key Hash: This contract is used to send Bitcoin to a Bitcoin address.
• Pay to Script Hash: An application form of multi-signature.

The reason for Bitcoin's limited programming capability is that it only supports simple logic and limited opcodes in the Script language, making it impossible to develop complex smart contracts on the Bitcoin network. The Turing incompleteness of Bitcoin scripts prevents arbitrary computations or loops, significantly enhancing security. Unlike directly executing computations on Bitcoin, BitVM only verifies computations (similar to many extension solutions that do not disrupt the native Bitcoin system) and primarily achieves this through OP-Rollup, fraud proofs, and Taproot Leaf and Bitcoin Script, as stated in the white paper.

Bitcoin's design initially imposed many restrictions on complex computations and smart contracts, while BitVM uses its unique solution to extend this. The main roles involved include:

• Prover and Verifier: The former creates proofs using information from a certain system input, while the latter verifies the computational results of this proof but cannot know the specific content of the information, ensuring the accuracy of the computational results.
• Off-chain computation and on-chain proof: Without changing Bitcoin's consensus, BitVM undoubtedly needs to transfer a large amount of computation and expansion off-chain to enhance flexibility. The controversial on-chain proof may involve a verification method similar to the fraud proof of data validity used in Optimistic Rollup to ensure security. What makes BitVM special is that it achieves various program instructions similar to binary circuits through Taproot address matrices or Taptrees, combining them for complete contract execution【1】.

However, the controversy lies in:

BitVM writes "simple code" into the Script of the Taproot address and treats it as a UTXO (Unspent Transaction Output) spending condition instruction for execution. The Script is the basic script supported by the Bitcoin network itself. Although it is also a form of Output, the smart contracts mentioned by BitVM are only parsed in a centralized manner after using the custom "script" of Output. The difference lies in one being parsed by the next block under the Bitcoin network, while the other defines who parses it. To achieve the normal operation of smart contracts, BitVM can only utilize Output rather than Script, raising questions about whether there exists a centralized operational method.

Lightning Network Taproot Assets

Taproot Assets:

On October 18, 2023, Lightning Labs released the Alpha version of the Taproot Assets mainnet based on UTXO. With the completion of the mainnet version, the Bitcoin Lightning Network will become a legitimate multi-chain asset network, primarily targeting institutions and asset issuance, allowing for the creation of instant, low-fee, and high-capacity trading application protocols through the Lightning Network.

In the context of El Salvador designating Bitcoin as legal tender in 2021, the Lightning community has experienced explosive growth, with users around the world enjoying instant settlement, low fees, and peer-to-peer Bitcoin transactions without financial intermediaries. Lightning Labs continues to provide services to users, enabling them to add stablecoins to their applications using Bitcoin infrastructure. Additionally, developers are experimenting with programmatic coupon payments using real-world assets such as gold, U.S. Treasury bonds, and corporate bonds. Two key factors exist in Taproot Assets: the Lightning Network and Taproot.

Lightning Network:

Currently, the maximum speed of Bitcoin transactions in the Bitcoin system is set to one confirmation every 10 minutes, with each confirmation capable of processing 2,500 transactions. This number was determined through discussions among the Bitcoin community and developers, with the primary goal of setting a speed limit to protect the decentralization and security of the Bitcoin system, thus sacrificing scalability to some extent.

The Lightning Network was first proposed by Joseph Poon and Thaddeus Dryja in February 2015 and was released in March 2018 as a Layer 2 scaling solution for Bitcoin. It allows participants to create smart contracts off-chain, primarily addressing Bitcoin's scalability and high transaction fee issues, enabling transactions to incur almost no fees.

The core idea of the Lightning Network is very simple: it allows all participants to deposit funds into a shared wallet address (smart contract) off-chain, and then instantly send funds to another participant on the same contract upon payment completion, with only the final transaction result being confirmed on-chain. The Lightning Network is a significant upgrade to the Bitcoin protocol, but it also introduces a new problem: the liquidity issue for the recipient of funds among participants.

Taproot

The core reasons for innovation in Bitcoin can be attributed to the SegWit upgrade in 2017 and the Taproot upgrade in 2021. SegWit introduced a block field to store "proof data," namely the signatures and public keys of Bitcoin transactions, helping to expand Bitcoin's throughput. However, potential vulnerabilities forced developers to limit the size of this data, while the Taproot upgrade brought two significant changes: MAST and Schnorr signatures, addressing these security issues and allowing for the removal of old SegWit restrictions【5】.

Core Features of Taproot Assets:

1. Issuing Stablecoins: The world's leading payment application, PayPal, after becoming a widely used payment channel, issued its own U.S. dollar stablecoin, PYUSD, essentially expanding from a payment channel to a value transfer medium itself. Taproot Assets shares the same goal, aiming to leverage Bitcoin's inherent value to provide users with stablecoins in a borderless financial world, akin to creating a new stablecoin, taUSD, and allowing the transfer of BTC and taUSD into the Lightning Network channel with a single Bitcoin transaction for DeFi operations. This is also the core of Taproot Assets operating within the Lightning Network.

2. Multi-Universe Mode: Universes are repositories that store all the information needed to initialize and synchronize specific Taproot Asset states. Therefore, even if the issuer's server crashes, the legitimacy and validity of the assets can be verified through multiple Universe servers, reducing excessive reliance on third-party off-chain stored data.

3. Asset Issuance and Redemption API: Similar to corporate bonds, these proofs of destruction transactions can be uploaded on-chain, allowing each user to trade various assets on Bitcoin as easily as investing in stocks and bonds in the real world, thus mapping to the issuance of real-world assets and expanding the imagination of the RWA track. Multiple sets of assets can be minted at different times to maintain fungibility, and the asset destruction API facilitates the redemption for asset issuers.

4. Asynchronous Receiving Function: Provides developers with tools to add Uniform Resource Identifiers (URI) to on-chain addresses.

5. Scalability: A new feature build-loadtest command allows developers to stress test the software. Perhaps Lightning is not the ultimate scaling solution for Bitcoin, but its direct integration with the Lightning Network to complete rapid transactions offers vast imaginative space for providing stablecoin support in a borderless financial world.

RGB Protocol

RGB is the LNP/BP Standards Association (Lightning Network Protocol / Bitcoin Protocol), a non-profit organization overseeing the development of various layers of Bitcoin, covering Bitcoin protocol, Lightning Network protocol, and RGB smart contracts. The RGB protocol is designed for scalable and privacy-preserving smart contract systems on Bitcoin and the Lightning Network, aiming to run complex smart contracts on UTXO to introduce them into the Bitcoin ecosystem. The official description states: a scalable and confidential smart contract protocol suite for Bitcoin and the Lightning Network, usable for issuing and transferring assets and broader rights. This protocol is based on the concept of client validation and single-use seals proposed by Peter Todd in 2016, operating as a client validation and smart contract system on Bitcoin's second layer or off-chain. Understanding the RGB protocol requires grasping the following four key concepts:

Single-use Seals:

Simply put, it means adding a single-use seal to the object that needs protection, allowing it to have only two states: open and closed, ensuring that the content is used only once to prevent double spending. Compared to Ethereum accounts, the Bitcoin network only has wallet addresses, where Unspent Transaction Outputs (UTXOs) can serve as seals.

So, before understanding single-use seals, one must understand what UTXO is. It is a ledger model where each transaction generates inputs and outputs, with the output of a transfer transaction being the recipient's Bitcoin address and transfer amount. These outputs are stored in the UTXO set to record unspent transaction outputs, and an input points to a certain output from a previous block, making these transactions traceable. Thus, Bitcoin's transaction outputs can be used as single-use seals.

According to the RGB official documentation, a UTXO can be seen as a seal: when it is created, the seal is locked; when it is spent, the seal is opened. According to Bitcoin's consensus rules, an output can only be spent once. Therefore, if we treat it as a seal, the incentive to ensure the execution of Bitcoin's consensus rules will also guarantee that such a seal can only be opened once【2】.

Client Validation and Deterministic Bitcoin Commitments:

Client validation is a paradigm proposed by Peter Todd in 2016. In Bitcoin's PoW consensus, state validation does not require all parties involved in the decentralized protocol to execute globally but rather requires specific aspects of the transformation to validate. This is achieved by converting it into a short deterministic Bitcoin commitment using cryptographic hash functions, which requires some form of "Proof-of-Publication" and possesses three main characteristics: receipt proof, non-publication proof, and membership proof. In summary, OpenTimeStamps can be seen as the first protocol in this field, while RGB is the second protocol, with other protocols being able to utilize and build upon these themes, forming a series of client validation protocols【3】.

RGB utilizes the Bitcoin blockchain to prevent double spending by committing RGB state transitions, spending the currently held UTXO that is to be transferred in specific Bitcoin transactions. This achieves the goal of committing multiple state transitions to a single Bitcoin transaction, with each state transition being committed to a Bitcoin transaction only once (otherwise, double spending issues would arise).

Compatibility with the Lightning Network:

When a state transition is committed to a Bitcoin transaction on the RGB website, such a transaction does not need to be settled on the blockchain immediately, as it can become part of a Lightning Network payment channel, gaining security from it while leveraging the payment channel of the Lightning Network to facilitate the circulation of many digital assets.

Updates in RGB v0.10:

According to Waterdrip Capital's interpretation, the upgrades mainly focus on enhancing flexibility and security, summarizing as follows:

The concept of RGB was proposed as early as 2016, but after several years of development, it has not gained widespread attention and application. The main reasons may be the relatively limited functionality of early versions and the high learning curve for developers. With the arrival of RGB v0.1, it is worth looking forward to whether RGB can bring us more imaginative space in the future.

Bitcoin Sidechains: Stacks, Liquid, RSK, Drivechain

In 2016, Blockstream proposed pegged sidechains as a possible way to extend Bitcoin. Sidechains often refer to trust-minimized blockchains that allow payments using external crypto assets (native assets from another blockchain). The most meaningful benefits achievable through sidechains include user asset issuance, stateful smart contracts supporting DeFi solutions, commitment chain expansion, faster settlement finality, and higher privacy.

Stacks:

Basic Working Principle:

First, let's introduce Stacks. Although it does not directly refer to itself as a sidechain, whether it can be categorized as such remains controversial. It aims to link itself to the Bitcoin chain through its unique "Proof of Transfer" (PoX) consensus mechanism, achieving high decentralization and scalability without adding extra environmental impact.

Stacks is an open-source Bitcoin Layer 2 blockchain that brings smart contracts and decentralized applications to Bitcoin. Stacks was initially named Blockstack, with foundational work starting as early as 2013. The technical architecture of Stacks includes a core layer and subnets, allowing developers and users to choose between the two. The distinction lies in that the mainnet is highly decentralized but has low throughput, while the subnet has lower decentralization but higher throughput.

The core layer of Stacks interacts with the Bitcoin layer based on the PoX mechanism. PoX is a staking system similar to PoS, a variant of proof of burn (PoB), which grants Stacks miners the right to mine blocks by "burning" a portion of their tokens (native assets or other cryptocurrencies). Through "burning," Stacks miners can mine more blocks and earn BTC rewards by helping to secure the network. Their interaction process is as follows:

In Stacks, proof of transfer requires miners to send Bitcoin to other Stacks network participants (on the Bitcoin network, not to a burn address). Since Stacks can read the state of the Bitcoin network, it can verify these Bitcoin transactions. Subsequently, the Stacks protocol randomly selects the winning miner for that block and rewards them with Stacks' native token, STX.

When Stacks interacts with Bitcoin, there is no need to modify its underlying layer protocol, as Stacks transactions are bundled together, with Bitcoin serving merely as the final settlement layer, which is then sent to Bitcoin for verification and confirmation. The history of Stacks blocks will always be recorded on the Bitcoin blockchain.

Clarity Smart Contracts:

Stacks uses a coding language called "Clarity"【4】 to create smart contracts, specifically designed for Stacks, optimized for predictability and security. Clarity is intentionally designed to be Turing incomplete, thus avoiding "Turing complexity." Its smart contract code is public and can be accessed directly on-chain, allowing developers to test their code before running any smart contracts. This means developers can build decentralized applications that benefit from Bitcoin's security and stability while adding new features and functionalities. With Clarity, what can we innovate on Stacks, and what are its advantages and disadvantages?

What can be done:

1. Build decentralized applications on Bitcoin and migrate the DeFi sector.
2. Create native assets on Stacks.

Advantages:

1. Security: Integrates Bitcoin's strong security attributes, providing robust security and resistance to attacks.
2. Interoperability: First-layer smart contracts can communicate with other blockchains.
3. Scalability: The PoX consensus mechanism utilizes Bitcoin to achieve faster transaction finality and higher scalability.

Disadvantages:

1. Its unique design architecture presents a certain learning cost and barrier for developers. Attracting more developers from the Ethereum ecosystem and MOVE ecosystem to build on it before it fully unleashes its potential is crucial.
2. The uncertainty brought by STX mining and stacking regarding regulation may also impact the development and operation of the Layer 2 network.

Liquid:

Now we turn to Liquid, which is not only a sidechain for Bitcoin but also a settlement network for exchanges, connecting cryptocurrency exchanges and institutions worldwide. Its core functions include: fast settlement, strong privacy, digital asset issuance, and Bitcoin anchoring, enabling faster Bitcoin transactions and digital asset issuance, allowing members to tokenize fiat currencies, securities, and even other cryptocurrencies.

Similar to RSK, Liquid relies on federated multi-signatures to lock Bitcoin issued in the form of native currency on the sidechain, but the actual pegging design still differs significantly. Both sidechains currently have 15 operational functional institutions. Liquid requires 11 signatures to issue Bitcoin, while RSK requires 8. Liquid seems to prioritize security over usability, while RSK prioritizes usability over security.

In summary, Liquid is a sidechain platform designed to provide shared liquidity for exchanges, focusing on protocol simplicity, security, and privacy.

RSK:

RSK is also a sidechain, with its native token being RBTC, aiming to be a cornerstone of financial inclusivity, focusing on decentralized finance (DeFi). RSK is a stateful smart contract platform backed by Bitcoin miners, enhancing the value of the Bitcoin ecosystem by expanding the use of Bitcoin currency. Decentralized applications can be written using the Solidity compiler and Web3 standard libraries, achieving Ethereum compatibility. Additionally, it can expand Bitcoin payments through more on-chain space and off-chain transactions provided by the RIF Lumino payment channel network.

RSK aims to address a broader set of use cases by adopting a stateful VM to improve openness and programmability, migrating Ethereum dApps and tools to RSK, while Liquid focuses on being an extremely efficient tool.

Drivechain

Drivechain is an open-sidechain protocol for Bitcoin that allows for the customization of different types of sidechains based on various needs. BIP-300/301 proposes the idea of "allowing developers to add features and functionalities to the Bitcoin world without actually modifying the Bitcoin core code." By creating a Bitcoin sidechain secured by Bitcoin miners, it implements various scalability use cases on the sidechain while relying on Bitcoin as the security Layer 1. It is worth noting that BIP-300 "Hashrate Escrows" compresses 3-6 months of transaction data into 32 bytes through "Container UTXOs," while BIP-301 "Blind Merged Mining," like RSK, maintains network security through merged mining.

Creating blockchain applications that meet specific application scenario needs through sidechains, Drivechain views sidechains as a second layer to achieve expansion, thus avoiding the 1MB size limit of Bitcoin blocks. Currently, there are seven sidechains based on BIP-300 in progress, continuously attracting more Bitcoin community members and enthusiasts, including (for brevity, only examples are provided; see【6】 for details):

• EVM Sidechain: EthSide
• Digital Assets/Colored Coins/NFT Sidechain: BitAssets
• High Transaction Throughput Sidechain: Thunder Network
• Prediction Market Sidechain: Hivemind
• Privacy Sidechain: zSide
• Distributed DNS Sidechain: BitNames
• Storage Sidechain: Filecoin

Ordinals Protocol and BRC-20:

UniSat Wallet is a popular Chrome extension wallet in the Bitcoin ecosystem, helping users achieve purposes such as storing, minting, and transferring BRC-20 tokens. The Bitcoin ecosystem services it provides include buying and selling BTC, NFTs, domains, etc.

Brief Introduction to the Origin of BRC-20

As explained in the UTXO section above, the calculation method generates numerous inputs and outputs for each transaction (changes in balance increase or decrease because each Bitcoin consists of the smallest unit: one hundred million Satoshis (1 BTC = 10^8), and each of these sats has a unique identifier and cannot be divided). Based on the ordinal of sats in Bitcoin, each sat is given a specific meaning. For example, 50 BTC in the network can be represented as: 4,999,999,999 sats.

Although the Ordinals protocol and the self-proclaimed BRC-20 exhibit characteristics of excessive centralization and lack of verification mechanisms, it is undeniable that the market's enthusiasm has brought more attention to the Bitcoin ecosystem and Layer 2, to some extent redirecting the public's focus back to Bitcoin.

Conclusion

Bitcoin, from its design inception, abandoned the attribute of scalability to significantly enhance the decentralization and security of its network. Regarding related scalability issues, the absolute overwhelming security brought by Bitcoin as the most successful blockchain network has provided immense imaginative space for many geek developers.

Thus, supporters of the Bitcoin ecosystem can be roughly divided into conservative and radical factions. Conservatives believe that Bitcoin must maintain its pure monetary nature, serving only as a store of value, as pure digital gold, without needing other forms of scalability. In contrast, radicals argue that Bitcoin needs to scale to embrace more native applications, maximizing Bitcoin's transactional attributes, which is beneficial for its long-term development. Perhaps we can leave this important question to the future; time will tell us the answer.