From Bystander to Navigator: Interpreting the "Bitcoin Ecosystem Report"

Written by: CertiK

Recently, the CertiK team released the "Bitcoin Ecosystem Report," reflecting on the exciting year of 2023 for the Bitcoin ecosystem and forecasting its future development trends.

Since Satoshi Nakamoto published the Bitcoin white paper in 2008, Bitcoin has been a hallmark of Web 3.0 and the blockchain industry. The unique characteristics of decentralization, transparency, security, and immutability pioneered by Bitcoin have sparked a thriving blockchain innovation, laying the foundation for the Web 3.0 world.

However, despite Bitcoin's strong consensus as a store of value, its role is largely limited to sending and receiving Bitcoin due to the lack of smart contract support and high transaction fees on the Bitcoin network, missing out on waves of Web 3.0 ecological innovation and breakthroughs. This has led to ongoing criticism of the ecological prospects of Bitcoin as a flagship Web 3.0 network.

To address this issue and further develop the Bitcoin ecosystem, significant technological upgrades and standardization efforts have made major breakthroughs in recent years, including the recently popular Ordinals protocol and the BRC-20 token standard. In the future, the emergence of various innovations such as scaling solutions and smart contracts will undoubtedly reshape the Bitcoin ecosystem.

This article is a key commentary and interpretation of the CertiK team's "Bitcoin Ecosystem Report." Click here to view the full report.

The Evolution of Bitcoin Network Asset Protocols

A New Dawn: Ordinals Protocol and Inscription

In the past few years, the Bitcoin network has undergone a series of technological upgrades, the most significant being the SegWit soft fork in 2017 and the Taproot upgrade in 2021. These upgrades paved the way for the birth of the Ordinals protocol.

In January 2023, Casey Rodarmor launched the Ordinals protocol, which allows each "satoshi" to be independently and uniquely ordered and identified. Utilizing ordinal theory, each "satoshi" can be assigned a unique number based on its mining time and transaction order, providing the technical foundation for the creation of non-fungible tokens on the Bitcoin network.

Unlike other blockchain ecosystems, the Ordinals protocol stores non-fungible token data in JSON format within the transaction's "witness data," achieving data isolation and security. This action is known as "inscription," and the non-fungible token assets on the Ordinals protocol are referred to as "inscriptions."

Igniting the Ecosystem: BRC-20

Inspired by the Ordinals protocol, an anonymous user @domodata launched the BRC-20 token standard in March 2023. Similar to Ethereum's ERC-20 standard, the BRC-20 standard aims to enable the deployment, minting, and transfer of tokens on the Bitcoin blockchain.

The emergence of the BRC-20 standard marks the beginning of the Bitcoin ecosystem's expansion into diversified applications, giving rise to a number of community-recognized projects, including ORDI, SATS, RATS, etc., providing possibilities for the diversification of Web 3.0 assets. However, with the large-scale deployment and surge in trading volume of BRC-20 tokens, some issues have begun to surface, including congestion on the Bitcoin network, rising transaction fees, and increased security risks.

Atomicals' New Innovation: ARC-20

To address the limitations and security risks presented by the BRC-20 standard, new protocols have begun to emerge, the most prominent being the Atomicals ARC-20 protocol. This protocol is based on proof of work (PoW), using "satoshis" as the basic unit, and registers token information in transaction scripts.

ARC-20 employs a Commit-Reveal mechanism and P2TR (Pay-to-Taproot) technology to enhance transaction validity and security. Additionally, ARC-20 introduces a new issuance mechanism that allows for the creation of rare and hard-to-obtain tokens through PoW, further driving innovation and development in the Bitcoin ecosystem.

New Expansion of Ordinals: Runes Protocol

In September 2023, Ordinals protocol founder Casey Rodarmor proposed the Runes protocol. The Runes protocol utilizes a UTXO-based system to achieve token distribution and transfer through OP_RETURN scripts. Compared to the BRC-20 standard, the Runes protocol features a smaller on-chain footprint and higher efficiency, while supporting a burn mechanism and being compatible with the Lightning Network, providing users with a better experience and scalable application scenarios.

The DeFi Moment of the Bitcoin Ecosystem

With the continuous development and improvement of protocols such as Ordinals, BRC-20, Atomicals ARC-20, and Runes, the application scenarios of the Bitcoin ecosystem have far exceeded the initial simple payments and value storage. As the token protocols on the Bitcoin network evolve and minting volumes surge, the demand in two key areas of DeFi is rapidly growing: trading and lending.

In trading, emerging decentralized trading platforms, including UniSat, have provided users with various trading options within the Bitcoin ecosystem. Many centralized trading platforms not only offer centralized trading methods for Bitcoin ecosystem assets but also provide decentralized services through decentralized wallets for users who prioritize asset ownership.

However, trading of Bitcoin ecosystem assets still faces numerous security challenges. From double-spending attacks to wallet intrusions, these security incidents expose existing vulnerabilities and weaknesses in the Bitcoin ecosystem, necessitating the continuous strengthening of security measures through dynamic monitoring to ensure user safety.

In lending, emerging platforms such as Liquidium and Dova Protocol offer users opportunities to borrow using Bitcoin ecosystem assets. Through Discreet Log Contracts (DLC) and PSBT methods, these platforms can provide transparent, efficient, and diverse lending services.

However, as the lending market continues to develop, more regulatory and security challenges will arise, requiring project teams to further strengthen risk control and security measures.

In addition, a number of DeFi infrastructure innovations have emerged in the Bitcoin ecosystem. The cross-chain protocol Multibit helps users migrate tokens across networks such as Bitcoin, Binance Chain, and Ethereum; while the DeepLake API, adopted by several Bitcoin ecosystem DeFi projects (including Liquidium and BlueWheel), enables developers to create smart contract applications directly on the Bitcoin L1 network without the need for any sidechains, wrappers, or bridges.

Reconstructing the Future: Scaling and Smart Contracts

With the launch of multiple Bitcoin ETFs and the upcoming halving, we can expect the Bitcoin network to see more products and services emerge in the future, developing a mature layered blockchain infrastructure and applications.

In the short term, Ordinals non-fungible tokens and the BRC-20 protocol will remain key driving forces for innovation in the Bitcoin ecosystem. However, the increasing number of unconfirmed transactions on the Bitcoin blockchain has led to a surge in transaction costs and memory usage. This indicates that the next phase of scalability and efficiency solutions for the Bitcoin network—Layer 2 and sidechains—will be the focus of developers and the community.

Layer 2

Layer 2 solutions are protocol layers built on top of the Bitcoin main chain. These solutions achieve fast and efficient transaction processing by creating off-chain transaction channels, interacting with the Bitcoin main chain only when opening or closing channels. This is particularly effective for supporting small, frequent transactions, significantly enhancing the efficiency and experience of the Bitcoin network in daily application interactions.

The Layer 2 project Lightning Network utilizes state channels, allowing users to open transaction channels off the main chain, completing various transactions. Since not every transaction needs to be recorded on the main chain, transaction fees are significantly reduced, and there is no need to be constrained by the Bitcoin main chain's 10-minute block time.

Sidechains

Sidechains are independent blockchains that run in parallel with the Bitcoin main chain and interact with it through specific anchoring mechanisms. This design allows users to transfer assets from the Bitcoin main chain to the sidechain, enabling faster transaction confirmations, lower transaction fees, and support for more complex smart contracts and applications. Since sidechains can independently handle a large number of transactions, they can alleviate the load on the main chain and improve the overall operational efficiency of the ecosystem.

Currently, some well-known sidechain projects within the community include: Stacks, Liquid Network, Rootstock, etc.

Bitcoin Virtual Machine and Smart Contracts

After the Taproot upgrade in 2021, the Bitcoin network now supports Script, a stack-based scripting language. This language is non-Turing complete, meaning it cannot perform complex computational tasks. It is primarily used for simple transaction logic, such as validating digital signatures and conditional transactions.

To address the limitations of Bitcoin scripts and enhance the functionality of the Bitcoin network, the developer community has proposed several innovations aimed at enhancing the execution of smart contracts on the Bitcoin network. The concepts of the Bitcoin virtual machine and Bitcoin smart contracts are emerging as important long-term topics of discussion.

Some popular innovations include:

• sCrypt: An embedded domain-specific language (eDSL) based on TypeScript, used for writing smart contracts on Bitcoin. sCrypt smart contracts can be compiled into Bitcoin scripts. The generated assembly-like scripts can be used as locking scripts when constructing transactions.
• Clarity: A smart contract language specifically designed for the Stacks sidechain, which focuses on mandatory response handling for risks in public contract calls, ensuring strong error management capabilities. Clarity prevents common smart contract attack vectors (including re-entrancy, under/overflow, etc.) and provides built-in functionality for verifying secp256k1 signatures, making it an ideal choice for developers focused on application security and transparency.
• BitVM: The Bitcoin virtual machine aims to provide Turing-complete programming capabilities and smart contract functionality for the Bitcoin network, introducing greater programmability and flexibility while maintaining the security and decentralization of the Bitcoin network. Under BitVM, computations will be performed off-chain and verified on-chain, similar to the Optimistic Rollup mechanism on Ethereum. Currently, BitVM is still in its early stages. However, this innovative concept undoubtedly has the potential to become an important source of long-term growth for the Bitcoin ecosystem.

The King of Consensus, A Promising Future

2023 is a pivotal year for the Bitcoin ecosystem, marking breakthroughs. With significant advancements in protocols such as Ordinals and BRC-20, along with improvements in emerging protocols like Atomicals and Runes, the historical inefficiencies of the Bitcoin network are gradually becoming a thing of the past, evolving into a blockchain ecosystem more aligned with contemporary Web 3.0 trends.

Looking ahead, transformative innovations such as Layer 2 solutions, sidechains, the Bitcoin virtual machine, and Bitcoin smart contracts will greatly enhance the performance of the Bitcoin ecosystem and reduce usage costs.

The Bitcoin virtual machine and smart contract platforms are particularly noteworthy, as their emergence demonstrates the Bitcoin ecosystem's desire for modularity and scalability. We look forward to innovations in smart contracts and advanced programming capabilities reshaping the Bitcoin ecosystem once again.

However, we also recognize that the rapid growth of the Bitcoin ecosystem is bringing new challenges and risks. Issues such as network congestion, security vulnerabilities, and the long-standing scalability debate remain pressing challenges that developers and the community must continuously address.

We call on the Bitcoin community to tackle these challenges through technological improvements and community governance, which is crucial for shaping the future of the Bitcoin ecosystem.