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A new journey for digital gold: Bitcoin ecological diversification exploration and protocol innovation

YBB Capital

Read this article in 29 Minutes

This article will analyze other BTC application ecosystems.

Original Title: "New Journey of Digital Gold: Exploration of Bitcoin Ecosystem Diversification and Protocol Innovation"

Original Source: @YBBCapital Researcher Ac-Core

Word count: This article exceeds 10,000. Reading time: 17 minutes.

Foreword

The concept of Bitcoin was first proposed by Satoshi Nakamoto on November 1, 2008, and Bitcoin was officially born on January 3, 2009. After decades of industry development, Bitcoin has been sprinting on the road of value storage and digital gold, and its value has risen from the past exchange of 10,000 Bitcoins for a pizza to today's market value of $664.22B. However, from the current development of the BTC ecosystem, these are just small attempts. In addition to the value of BTC itself, we still need to explore more patiently for the future. This article will analyze the other application ecosystems of BTC.

BTC Overview

In 2009, a cryptographer named Satoshi Nakamoto published a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System". The paper described a digital currency system that uses peer-to-peer technology, allowing for direct online payments between parties without the need for a financial institution. Bitcoin gradually spread globally and received widespread attention, possessing at least three aspects: technological, sociological, and financial.

● Technical Attributes:

From the perspective of the technical logic of Bitcoin, the network protocol of Bitcoin is a decentralized, peer-to-peer transmission protocol. It can be briefly understood as a huge public ledger system that is not manipulated by any third party and cannot be tampered with. It relies on blockchain technology to record all transaction behaviors of the entire network database, thereby ensuring that there will be no duplicate or false payment situations.

● Sociological attribute:

Compared to the current internet, blockchain itself adopts distributed ledger technology, which shares digital transaction records through the network. It has the characteristics of decentralization, tamper-proof, and immutability, which also affects everyone with the information freedom trend brought by the internet. Bitcoin, as a completely decentralized electronic currency, does not rely on any single authority to issue and can achieve value transfer without going through the banking system in cross-border and cross-currency transactions. Its information freedom and cross-border payment endow it with more sociological attributes.

● Financial Attribute:

From a financial perspective, Bitcoin can be regarded as a digital gold investment or a globally standardized digital asset. Compared to gold, its characteristics such as constant total amount, easy to carry, low transaction costs, and younger audience make more and more investors and traditional investment institutions believe in its investment value. Because it relies on global circulation on the Internet, in certain specific scenarios (such as cross-border payments and virtual economic transmission media), it can be used as an efficient and low-cost circulation payment tool and circulation medium. For example, in January 2015, Nasdaq entered the Bitcoin field for the first time on the New York Stock Exchange, and recently, Grayscale Fund, BlackRock, and others have begun to lay out Bitcoin-related ETFs.

Looking at the current development of the entire blockchain industry, compared to Ethereum, Bitcoin's ecosystem projects are few and far between. In 2019, the Lightning Network presented a new development trend. In addition, Stacks launched in 2021, and the recently released Taproot Assets mainnet by Lightning Labs, as well as the BitVM, which implements Turing-complete Bitcoin contracts, have also become bright spots in the relatively small number of projects in the Bitcoin ecosystem.

BTC Bitcoin ecological new pattern BitVM

Source: BitVM Whitepaper

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

However, we are well aware that the programmability of Bitcoin is very limited. There is a classic "impossible triangle" problem in blockchain: decentralization, security, and scalability. Bitcoin's design only considers decentralization and security, to some extent abandoning scalability. This is because it only provides three forms of input scripts: Pay to Public Key, Pay to Public Key Hash, and Pay to Script Hash for multi-signature scripts.

● Pay to Publish Key: This contract is used to send Bitcoin to a Bitcoin address.

● Pay to Publish Key Hash (PPKH): This contract is used to send Bitcoin to a Bitcoin address by paying to the public key hash.

● Multi-signature script (Pay to Script Hash): A form of application for multi-signature.

The reason why Bitcoin has limited programming capabilities is that it only supports simple logic and limited opcodes on the Script script, so it cannot develop complex smart contracts on the Bitcoin network. This is also because the Turing incompleteness of Bitcoin script cannot execute arbitrary calculations or loops, thus greatly ensuring security. Unlike directly executing calculations on Bitcoin, BitVM only verifies calculations (similar to many extension schemes that do not break the native Bitcoin system), and is mainly implemented through OP-Rollup, fraud proof, Taproot Leaf, and Bitcoin Script as stated in the white paper.

Source: BitVM Whitepaper

Bitcoin had many limitations in terms of complex calculations and smart contracts when it was first designed. BitVM uses its unique approach to address these limitations and includes various roles such as:

● Prover and verifier: The former uses the information input into a certain system to create a proof, while the latter verifies the calculation result of this proof, but cannot know the specific content of the information, thereby ensuring the accuracy of the calculation result.

● Off-chain computation and on-chain proof: Without changing the Bitcoin consensus, BitVM undoubtedly needs to move a large amount of computation and extension off-chain to improve flexibility. The controversial on-chain proof, in severe cases, will use a verification method similar to the fraud proof of data validity used by Optimistic Rollup to ensure security between the prover and the verifier. The special feature of BitVM is that it uses Taproot address matrix or Taptree to achieve various program instructions similar to binary circuits, which are combined to complete contract execution [1].

Source: BitVM Whitepaper

However, it is highly controversial:

BitVM is a technology that allows for the insertion of a "simple proxy" into the Script script of a Taproot address, and executes it as a spending condition instruction for a UTXO (as explained below). Script is a basic script supported by the Bitcoin network, and although it is also an Output, the smart contracts mentioned by BitVM are only parsed in a centralized manner after being customized as "scripts" for Output. The difference lies in the fact that one is parsed in the context of the Bitcoin network, while the other is defined by someone else and parsed by them. In order to achieve the normal operation of smart contracts, BitVM can only use Output instead of Script, and whether there is a centralized mode of operation here is worth considering.

闪电网络 Taproot AssetsTaproot Assets:

Lightning Network Taproot Assets:

On October 18, 2023, Lightning Labs released the Alpha version of Taproot Assets based on UTXO. With the completion of the mainnet version, the Bitcoin Lightning Network will become a trustworthy multi-chain asset network, mainly targeting institutions and asset issuance. It can create instant, low-cost, and high-capacity transaction application protocols through the Lightning Network.

Currently, the maximum transaction speed limit in the Bitcoin system is set to confirm every 10 minutes, with a maximum of 2500 transactions processed per confirmation. This quantity was jointly determined by the Bitcoin community and developers, with the main purpose of setting a speed limit to protect the decentralization and security of the Bitcoin system, sacrificing scalability to some extent.

Taproot

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Compatibility of Lightning Network:

When a state transition is promised to be included in a Bitcoin transaction on the RGB website, the transaction does not need to be settled immediately on the blockchain, as it can become part of a Lightning Network payment channel, which provides security and enables the circulation of many digital assets for RGB by borrowing the Lightning Network's payment channels.

According to the interpretation of Waterdrip Capital, the upgrade and changes mainly reflect the improvement of its flexibility and security, and the following summary is listed:

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The concept of RGB was proposed as early as 2016, but after several years of development, it has not received widespread attention and application. The main reason may be that the early versions had relatively limited functionality and high learning thresholds for developers. With the arrival of RGB v0.1, it remains to be seen whether RGB can bring us more imagination in the future, which is worth looking forward to.

Bitcoin's sidechains Stacks, Liquid, RSK, Drivechain

In 2016, Blockstream proposed the possibility of using pegged sidechains as a way to extend Bitcoin. Sidechains often refer to trust-minimized blockchains that allow for payment with foreign encrypted assets (native assets of another blockchain). The most significant benefits that can be achieved through sidechains are the issuance of user assets, stateful smart contracts that support DeFi solutions, commitment chain extensions, faster settlement finality, and higher privacy.

Stacks:

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Basic working principle:

Firstly, let's introduce Stacks. Although it does not directly refer to itself as a sidechain, there is still controversy over whether it can be classified as one. Its unique "Proof of Transfer" (PoX) consensus mechanism aims to link itself with the Bitcoin chain, achieving high decentralization and scalability without increasing additional environmental impact.

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

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

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

Source: Stacks Whitepaper

Clarity Smart Contract:

What can be done:

1. Build decentralized applications on Bitcoin and migrate the DeFi sector;

Advantages

1. Security: Integrated with the powerful security attributes of Bitcoin, it has strong security and anti-attack capabilities;

劣势 (Disadvantage)

1. Its unique design architecture has a certain learning curve and threshold for developers. It is particularly important to attract more developers to build on the Ethereum ecosystem and the MOVE ecosystem before it can fully unleash its potential.

2. The uncertainty brought by its STX mining and Stacking to regulation raises questions about the development and operation of Layer 2 networks, which is also worth considering.

Liquid：

Source: LBTC Official

The topic comes to Liquid, which is not only a Bitcoin sidechain, but also a settlement network for exchanges that connects cryptocurrency exchanges and institutions around the world. Its core functions include: fast settlement, strong privacy, digital asset issuance, and anchoring with Bitcoin, thereby achieving faster Bitcoin transactions and digital asset issuance, allowing members to tokenize fiat currencies, securities, and even other cryptocurrencies.

Liquid is similar to RSK in that both rely on consortium multi-signature to lock Bitcoin issued in native currency form on the sidechain, but there are still significant differences in the actual peg design. There are currently 15 functional institutions operating on the two sidechains, with Liquid requiring 11 signatures to issue Bitcoin and RSK requiring 8. Liquid seems to prioritize security over usability, while RSK prioritizes usability over security.

Overall, Liquid is a sidechain platform designed to provide shared liquidity for exchanges. It focuses on protocol simplicity, security, and privacy.

RSK:

Source: Mt Pelerin Official

RSK is also a sidechain with its native token RBTC, aiming to be the cornerstone of financial inclusion, focusing on decentralized finance (DeFi). RSK is a stateful smart contract platform secured by Bitcoin miners, which enhances 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 library, achieving Ethereum compatibility. In addition, it can also 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 wider range of use cases by adopting a stateful VM to enhance openness and programmability. It is compatible with Ethereum, allowing dApps and tools from Ethereum to be ported to RSK. On the other hand, Liquid focuses on being an extremely efficient tool.

Drivechain

Ordinals Protocol and BRC-20:

UniSat Wallet is a popular Chrome extension wallet in the Bitcoin ecosystem that helps users achieve storage, minting, and transfer of BRC-20 tokens, and provides Bitcoin ecosystem services such as buying and selling BTC, NFTs, domains, etc.

Overview of the Origin of BRC-20

Summary

Bitcoin abandoned scalability at the design stage in order to greatly enhance the decentralization and security of its network. As for related expansion issues, the absolute overwhelming security brought by Bitcoin as the most successful blockchain network has also brought great imagination space for many geek developers.

Therefore, supporters of the Bitcoin ecosystem are roughly divided into two camps: conservatives and radicals. Conservatives believe that Bitcoin must maintain its pure monetary nature, only used as a store of value, and is pure digital gold that does not require other forms of scalability. Radicals believe that Bitcoin needs to be scaled up to embrace more native applications, maximize its transactional properties, and benefit the long-term development of Bitcoin. Perhaps we can leave this important issue to the future, and time will tell us the answer.

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