Building the Future of Bitcoin: How the RGB Protocol Expands the Native BTC Ecosystem

By: Ash, Bitcoin Square; Sawyer, Echo, Bihelix

Introduction

For over a decade, Bitcoin has been at the forefront of the cryptocurrency revolution, pioneering the concepts of decentralized digital currency and blockchain technology. Despite Bitcoin's groundbreaking innovations, its core functionalities have primarily focused on serving as a medium of exchange and a store of value. However, with the introduction of inscriptions through the Bitcoin Ordinals protocol last year and the recent emergence of the Runes protocol, people are beginning to re-examine the various possibilities of Bitcoin beyond just value storage. These new asset issuance protocols have reignited interest in the Bitcoin ecosystem while also highlighting Bitcoin's limitations in scalability and transaction confirmation times. It is against this backdrop that the RGB protocol has emerged, opening up a whole new realm of possibilities for the Bitcoin ecosystem and injecting new momentum.

Overview of RGB Protocol Basics

1. What is the RGB Protocol?

The RGB protocol is a second-layer solution built on the Bitcoin blockchain, designed to support the creation and management of complex assets, smart contracts, and decentralized applications (dApps). By fully leveraging the native power of the Bitcoin network, RGB aims to transform Bitcoin into a comprehensive platform suitable for various use cases, ultimately promoting growth and expansion across the entire ecosystem.

2. Development History of the RGB Protocol

The initial concept of the RGB protocol can be traced back to 2016, proposed by Giacomo Zucco of BHB Network based on Peter Todd's ideas about client-side validation and single-use seals. In 2017, BHB Network implemented RGB in its original MVP (Minimum Viable Product) with support from the Poseidon Group. In 2019, Maxim Orlovsky and Giacomo Zucco co-founded the LNP/BP Standards Association, dedicated to advancing RGB from concept to practical application.

Since 2019, Dr. Maxim Orlovsky has played a central role in the development of the RGB protocol, responsible for designing and implementing the current version of the protocol. In 2021, the LNP/BP Standards Association showcased the integration of RGB with the Turing-complete AluVM, marking a significant advancement. The following year, the association launched the official website for the Contractum language, a functional declarative programming language tailored for building smart contracts utilizing RGB technology on Bitcoin and the Lightning Network. In April 2023, the LNP/BP Standards Association released RGB v0.10, announcing a focus on developing support for the Lightning Network. In the future, RGB assets will be able to transfer quickly and cost-effectively via the Lightning Network, enhancing asset liquidity and usability. Additionally, RGB may enable the Lightning Network to possess comprehensive smart contract capabilities, addressing the limitations of Bitcoin and the Lightning Network in this regard.

3. How the RGB Protocol Works

RGB is a protocol built on the PoW consensus layer of the Bitcoin blockchain. The protocol is a version of a directed acyclic graph (DAG), where participants cannot see the complete state of the network, and each new transaction requires confirmation from at least two previous transactions before being recorded on the network. Client-side validation is supported by the RGB model.

Source: RGB Blackpaper

4. Technical Highlights of the RGB Protocol

The core idea of the RGB protocol is to rely on Bitcoin's proof-of-work and decentralized network to ensure the prevention of double spending and provide censorship resistance. It shifts the verification process of token transfers from global blockchain consensus to off-chain, completed independently by the receiving client's side. Only after verification is successful will it interact with the Bitcoin main chain when necessary, ensuring efficiency and privacy.

• Single-use seals: Ensure that each UTXO can only be used once by encapsulating asset information and contract states within the UTXO. When the UTXO is spent, the ownership of the asset and the contract state change. In simple terms, a single-use seal is an abstract mechanism to prevent double spending;
• Client-side validation: Each client only verifies transactions related to its wallet, eliminating the need for global validation of all transactions, enhancing system scalability, although it may increase verification time when handling assets with long transaction histories;
• Deterministic Bitcoin commitments: RGB uses Taproot-based OP_RETURN commitments to aggregate all state transitions into a single commitment, ensuring that each state transition can only be committed once, preventing double spending, with the final commitment hash embedded in Bitcoin transactions;
• Batch processing: RGB allows multiple state changes to be processed in a single Bitcoin transaction, reducing on-chain fees, suitable for large-scale transfers or merging UTXOs;
• Privacy protection: RGB transfers utilize Bitcoin transactions as containers for asset transfers, creating new UTXOs to receive tokens while old UTXOs are consumed, not directly displaying the transfer path in the Bitcoin transaction graph, enhancing privacy. Off-chain communication ensures the secure transmission and verification of payment information, preventing on-chain information leakage and protecting the activity privacy of RGB users.

Use Cases and Significance of the RGB Protocol

1. Fully Leveraging Bitcoin's Monetary Attributes

Bitcoin (BTC), as a cryptocurrency, relies on the breadth and depth of its application ecosystem for its long-term value. Similar to how the U.S. dollar has become a global hard currency due to its widespread use in most economies and commercial activities, this is supported by the dollar's systemic backing in trade (petrodollar), finance (Wall Street), clearing (SWIFT system), and settlement (Fedwire settlement system). If the Bitcoin blockchain cannot establish a value system based on BTC similar to that of the dollar, relying solely on centralized exchanges to support its financial layer, then its applications will be extremely limited, making it difficult to support large transactions merely as a means of transfer.

The introduction of the RGB protocol helps address the underlying scalability and Turing completeness issues of Bitcoin. Through the RGB protocol, we can establish a value transmission system based on BTC on the Bitcoin native blockchain, thereby introducing a large number of commercial applications with practical use cases. This not only enhances the Bitcoin ecosystem but also enables it to support more complex financial and commercial activities, further increasing the value and application prospects of BTC.

2. Tokenization of Bitcoin Native Assets

One of the main features of the RGB protocol is its ability to facilitate the tokenization of various assets on the Bitcoin blockchain. This means that almost any asset, whether digital or physical, can be represented as a unique token or "RGB asset" on the Bitcoin network, including real estate, artworks, commodities, securities, and even NFTs representing unique digital collectibles. By enabling asset tokenization, the RGB protocol opens up new opportunities for asset management, trading, and investment within the Bitcoin ecosystem. These tokenized assets can be easily transferred on the Bitcoin blockchain, providing greater security, transparency, and liquidity.

3. Smart Contracts and Decentralized Applications

The smart contract functionality of the RGB protocol is particularly important, as it enables the implementation of complex financial products and services on the Bitcoin blockchain. Smart contracts are self-executing programs that automatically execute when predefined conditions are met, eliminating the need for third parties and reducing the risk of fraud or manipulation. With the RGB protocol, developers can build decentralized applications (dApps) that leverage smart contracts to automate various processes. This not only expands Bitcoin's traditional monetary role but also provides opportunities to create an ecosystem of decentralized applications and services on the Bitcoin network.

4. Scalability and Security

While introducing new features to the Bitcoin ecosystem, the RGB protocol also addresses key issues of scalability and security. By utilizing the OP_RETURN field in Bitcoin transactions to store asset metadata, RGB minimizes its impact on the size of the Bitcoin blockchain, helping to maintain its scalability and efficiency. Leveraging the security and decentralized nature of the Bitcoin network, the RGB protocol provides a secure and highly reliable platform for these applications. These decentralized applications not only enhance the functionality of the Bitcoin network but also promote broader adoption and participation, further driving the development of the Bitcoin ecosystem. In summary, the introduction of the RGB protocol marks a transition for the Bitcoin blockchain from a mere store of value and payment means to a new era of a multifunctional and multi-application decentralized platform.

RGB Ecosystem Projects

BiHelix

BiHelix is an optimized node Bitcoin ecosystem infrastructure built on the native Bitcoin blockchain, combining the RGB protocol and the Lightning Network, dedicated to promoting the large-scale application of Bitcoin. Its main work focuses on the following four areas:

1. Node Optimization: BiHelix will develop RGB supernodes capable of linking to the Lightning Network, which will serve as the core product of the ecosystem. Through node optimization, BiHelix aims to enhance the performance and efficiency of the network, enabling it to handle more transactions and more complex applications, thereby providing a stronger infrastructure for the Bitcoin ecosystem.
2. Transformation of AluVM and Building a Decentralized Schema Store: BiHelix will complete the transformation of AluVM. AluVM is a purely functional RISC virtual machine designed for developing advanced smart contracts. Unlike other virtual machines, AluVM is register-based and does not allow random memory access, making it more robust and secure. BiHelix will also build a decentralized Schema Store for storing and managing the structure and specifications of smart contracts, enhancing the flexibility and scalability of smart contracts.
3. Storage Optimization: BiHelix is researching and optimizing a database storage method to replace the existing RGB Stash file storage format. This improvement will enhance the efficiency and reliability of data management, making large-scale data processing and access more efficient and providing a solid foundation for future expansion.
4. Protocol Architecture Optimization: BiHelix is committed to optimizing the entire protocol architecture. First, a node communication protocol (such as the Nostr protocol) will be introduced to improve the communication issues of single-node user historical data, enhancing network interoperability. Second, recursive zero-knowledge proof technology will be adopted to address the issue of excessive data verification, improving the privacy and security of the network. Ultimately, these improvements will significantly enhance the engineering capabilities and application potential of the RGB protocol.

Through these measures, BiHelix not only enhances the infrastructure capabilities of the Bitcoin network but also provides solid technical support for various innovative applications. Ultimately, BiHelix's efforts will propel Bitcoin from a single store of value to a multifunctional, multi-application decentralized platform, achieving a comprehensive upgrade and expansion of the Bitcoin ecosystem. In the near future, we can also expect the launch of BiHelix nodes based on RGB and LN in mainstream wallets.

Conclusion

The RGB protocol has undergone six years of development, and although it has not yet achieved widespread adoption, its potential is immense. The new version v0.10 expands asset issuance and smart contract functionalities, gradually approaching full compatibility with the Lightning Network. Time will tell whether this will become a catalyst for the development of RGB, but it is believed to have the potential to catalyze the evolution of the Bitcoin ecosystem, transforming it from a simple value currency into a comprehensive platform for decentralized applications, tokenized assets, and smart contracts. By unlocking new use cases, RGB, as a key infrastructure, can play a crucial role in shaping the future of Bitcoin and the broader cryptocurrency landscape, heralding innovation in the crypto world.

Who Are We?

Bitcoin Square is a Bitcoin ecosystem and alpha community established in May 2023, dedicated to providing the latest market dynamics, professional market analysis, and a community environment with a research-oriented spirit.