LK Venture Research Report | Bitcoin "Satoshi" Era Arrives: Ordinals Protocol and Lightning Network May Activate Bitcoin Ecosystem Explosion

Original source: LK Venture

Original author: Gavin

Only in fertile land can good crops be cultivated. Bitcoin has been successfully running for 14 years. According to market capitalization, it is now the 10th largest asset in the world, after Nvidia.

LK Venture believes that Bitcoin has changed many people. It allows us to look at the world from a new perspective and let us think about "what is value?" Even if there are still people who question Bitcoin, it cannot cover up the fact that Bitcoin has become a mature and widely recognized asset.

Top Assets by Market Cap, data source: Global ranking, https://companiesmarketcap.com/

While Bitcoin is changing us, it is also changing. Innovations around Bitcoin are constantly emerging: Bitcoin Layer2 solution, Ordinals protocol, BRC-20, Nostr protocol, etc. These innovations can provide Bitcoin with faster and more convenient trading methods, and also provide Bitcoin with greater possibilities and imagination space.

Some people will question these innovations, but hasn't Bitcoin grown in doubt? Let's put aside our prejudices for the time being and first understand these new concepts around Bitcoin, which is also the original intention of this article. Let me repeat the first sentence of the opening, an investment concept worth thinking about: Only on fertile land can good crops be cultivated.

Note: Regarding innovation in the field of Bitcoin, we are well aware that the relevant content and views still need to be further improved. We warmly welcome everyone to provide opinions and suggestions, and sincerely invite all friends to participate in the discussion.

1. Ordinals Protocol-The Bitcoin "Satoshi" Era Has Officially Arrived

Since Ethereum was designed from the beginning to support smart contracts and decentralized applications, it has a natural advantage in the field of NFT. Based on Ethereum's ERC-721 standard, developers can easily create, issue and trade NFT.

At this point, you might be wondering, why can't Bitcoin, which has the strongest consensus, issue NFTs? Bitcoin was originally intended to be a digital currency for peer-to-peer transactions, so its network focuses more on security, stability, and simplicity, which results in relatively limited functionality in smart contracts and dApp development.

This does not mean that the Bitcoin network cannot support NFTs, or even issue "Tokens". This also brings us to the point of our discussion - Ordinals, a protocol created by Casey Rodarmor, a former Bitcoin developer.

1. The beginning of Ordinals: Bitcoin NFT

In January 2023, Casey Rodarmor, a Bitcoin core contributor, released the Ordinals protocol. The emergence of the Ordinals protocol has reignited discussions about Bitcoin NFTs. How does the Ordinals protocol make NFTs possible on Bitcoin?

The total amount of Bitcoin is 21 million, and its smallest unit is sats, 1 BTC = 100 million sats.

The Ordinals protocol proposes an innovative design based on "satoshis", which allows various information to be embedded in "satoshis" - such as pictures, texts, videos, etc. ("inscription", also called inscriptions), and the uploaded inscriptions are connected to specific "satoshis" ("ordinal"). This process is called inscribe, which is similar to the minting of Ethereum NFT. The final result is a satoshi carrying an inscription, which is the so-called Bitcoin NFT.

When each satoshi has a unique mark and number, the corresponding content is also unique, which transforms the satoshi from a unit of account to an NFT unit.

The number of Ordinals inscriptions has exceeded 1.6 million, data source: Dune Analytics

As of April 23, 2023, the number of Ordinals inscriptions has exceeded 1.6 million, which also means that NFTs in the Bitcoin ecosystem are unlikely to disappear.

What value does Ordinals NFT bring?

· Permanent on-chain. Bitcoin Ordinals NFT is completely written on the Bitcoin chain, just like a tattoo, and has become a part of Bitcoin forever. It is a very meaningful thing to keep the things you like permanently on the Bitcoin chain;

· Will not return to zero. Ordinals NFT will not return to zero, and its basic value is one sats (satoshi);

· Historical value. The total amount of Bitcoin is limited, and the total number of inscriptions that can be engraved is also limited. Over time, early inscriptions become more valuable due to their historical status. In the field of NFT, uniqueness and scarcity will give works higher value, and earlier Bitcoin NFT inscriptions may become more and more valuable.

Part of the infrastructure of the Ordinals ecosystem, source: LK Venture

Although the Ordinals protocol has only been around for three months, it has spawned many ecological projects built around its infrastructure, including wallets, trading markets, and tools. Head trading platforms such as OKX and Binance have also begun to join the ranks of supporting the Ordinals ecosystem.

Some interesting Ordinals NFTs

1) TwelveFold

TwelveFold is a Bitcoin NFT project launched by Yuga Labs, a series of 300 unique generative artworks.

2) Bitcoin Punks

Bitcoin Punks is the first project to successfully upload the original Ethereum CryptoPunks to the Bitcoin blockchain using Ordinals, and all assets have been minted by collectors for free.

3) Taproot Wizards

Why is Taproot Wizards receiving so much attention? It is said to be the largest block in Bitcoin history, with a capacity of an astonishing 4MB, 4 times higher than the usual 1MB limit.

4) Pixel pepes

"Pepe the Frog" is the most popular meme on the Internet. Pixel Pepes was airdropped from the Ordinals Wallet and is made up of the most active KOLs and ecosystem developers in the ecosystem.

2. Ordinals Exploration: BRC-20

LK Venture believes that the composability of the digital world has brought many interesting experiments to the industry. Two months after the release of the Ordinals protocol, Twitter user @domodata proposed a Bitcoin token standard, the BRC-20 standard, based on the Ordinals protocol.

brc-20's Mint and Transfer Functions, Source: https://domo-2.gitbook.io/brc-20-experiment/

BRC-20 uses Ordinalinscriptions of JSON data to deploy token contracts, mint tokens, and transfer tokens. You can think of the BRC-20 standard as an application-type NFT of Ordinals, which is equivalent to a check. BRC-20 has no smart contract.

@domodata deployed the first BRC-20 Token "Ordi", source: https://domo-2.gitbook.io/brc-20-experiment/

Within 24 hours of the release of brc-20, more than 30,000 Ordinalinscriptions were minted. @domodata also deployed the first BRC-20 Token - ordi, with a total of 21 million, and everyone can mint for free. In less than 2 days, ordi was minted completely.

Part of brc-20 Token, source: https://brc-20.io/

Although @domodata has repeatedly stated that brc-20 and ordi are just experiments and have no value, some people are still trading ordi and minting more BRC-20 tokens. There are currently 3,466 BRC-20 tokens with a total market value of nearly $20 million.

The arrival of the era of "satoshi" pricing

Is it really necessary to issue coins on Bitcoin ordinals? BRC-20 does not have smart contracts. Inscriptions can be used as ledgers, but it is difficult for an unalterable ledger to produce an efficient and stable system. Moreover, "writing" on the Bitcoin chain takes up very valuable resources - this includes not only paying a certain number of satoshis as mining fees, but also the time cost of waiting for transaction confirmation.

BRC-20 is built on top of Ordinals. Creating instability on top of instability will become very fragile. Since BRC-20 does not use Bitcoin UTXO, it is easy to cause problems in transactions. Recently, after Unisat launched the BRC-20 trading market, it was attacked by related transactions and suspended the market.

BRC-20 is still an experiment, why do some people participate in it? In addition to the very FOMO speculative attribute, if you deploy and mint some tokens, you will find that the brc-20 token release seems to have achieved the original idea of the encryption industry-everyone can simply release tokens, and the greatest value lies in it being on Bitcoin. It occupies a part of Satoshi, and these brc20 tokens are like the incarnation of Bitcoin, and Bitcoin gives it value.

Unisat's brc-20 Token trading market, source: Unisat

More importantly, In LK Venture's view, we have seen the arrival of the era of "satoshi" pricing. All NFTs on the Ordinals NFT trading platform have begun to be priced in Bitcoin. After Unisat launched BRC20-related tokens, it was directly priced in sats (satoshis). From the small to the big, the era of "satoshi" pricing has officially arrived.

Summary

Regardless of whether the Ordinals protocol and brc-20 can succeed, its emergence has allowed us to see new possibilities for Bitcoin, which has made the Bitcoin ecosystem more diverse and vibrant. Most importantly, they have transformed the smallest unit of Bitcoin, sats (satoshis), from a concept into a practical unit.

2. Lightning Network - Let Bitcoin "Satoshi" flow

Bitcoin has been plagued by problems such as slow transaction speed, high handling fees, and difficulty in expansion. These problems also constrain Bitcoin's performance and wide application scenarios.

How to solve these problems? Many developers have tried to build the so-called second-layer network (Layer 2) based on Bitcoin. Bitcoin's second-layer network (Layer 2) is a technical solution built on the Bitcoin main chain (Layer 1). By running protocols or platforms on the base layer, the second-layer network can fully utilize the security and decentralization characteristics of the Bitcoin main chain while providing a more efficient transaction experience.

There are many second-layer solutions for Bitcoin. Among the second-layer solutions for Bitcoin, the lightning network and side chains (such as the liquid network) are mainstream, and the lightning network is currently the most widely used. Next, let's talk about the lightning network.

What is the lightning network?

Lightning Network is one of Bitcoin's Layer2 solutions, mainly used in Bitcoin payment scenarios, it can help users save costs and improve efficiency.

For the same point-to-point payment, why does Lightning Network complete payment at a lower cost and faster speed? Because Lightning Network puts the transaction link off-chain, only the final transaction result is confirmed on the Bitcoin main chain.

Advantages of Lightning Network

· Small transactions are more convenient

Through Lightning Network, users can use the smallest unit of Bitcoin, "Satoshi", to make payments, which also meets the needs of daily sporadic consumption.

· Reduce transaction costs

Currently, the Bitcoin transaction fee is about $2. At the peak of the market in 2021, the fee exceeded $60. If the Lightning Network is used, the fee for $100 is about 1 cent, which is very cost-effective for daily small payments.

· Speed up transaction processing

Currently, the Bitcoin network can process a maximum of 7 transactions per second. Network congestion may cause transaction confirmation delays and affect user payment experience. Theoretically, the Lightning Network can process millions of transactions per second.

· Development of Lightning Network

The technology of Lightning Network is gradually maturing, and payment and social giants are also promoting the popularization of Lightning Network. As of April 25, 2023, the Lightning Network has a total of 16,000 nodes, nearly 75,000 payment channels, and channel funds of about 5,379 bitcoins (about 152 million US dollars).

Real-Time Lightning Network Statistics, source: 1ML

Let's take a look at the current use scenarios of the Lightning Network:

· Social platform payment and reward

Many people use the Lightning Network because of the Nostr protocol and the Damus application built on the protocol, because it supports the payment and reward functions of the Lightning Network.

· Cross-border remittances

In January 2023, digital payment platform Strike announced a partnership with Send Globally to enable Lightning Network remittances between users in the United States and the Philippines. With Send Globally, US dollars can be converted into Bitcoin, sent to third-party partners in the recipient's country through the Lightning Network, and then converted into local currency and directly remitted to the recipient's account.

· Merchant Payments

Strike has partnered with Shopify, Blackhawk Network, and NCR to build a Bitcoin payment system that allows merchants to quickly receive U.S. dollars after customers pay with cryptocurrency. Merchants that currently support this payment system include McDonald's, CVS, Walgreens, Whole Foods, and Walmart.

The Lightning Network has been working hard to realize the original intention of Bitcoin - to become a peer-to-peer electronic cash system. In addition to large transactions, "Satoshis" in small transactions can also flow very conveniently through the Lightning Network.

Although the Lightning Network faces many challenges on the road to popularization, as the technology gradually matures and the use scenarios continue to enrich, the Lightning Network will definitely become a powerful assistant for Bitcoin.

Conclusion

LK Venture believes that no matter you are a developer or a speculator, as long as you participate in Bitcoin, you will promote the prosperity of the Bitcoin community and Bitcoin itself.

Whether it is the Ordinals protocol, the BRC-20 experiment, or the second-layer solutions such as the Lightning Network, these have expanded the application scope of the Bitcoin network, and can use "satoshis" and "satoshis" for pricing, reducing the psychological pressure and usage threshold for entrants. There is nothing wrong with the open development and multi-faceted attempts of the Bitcoin network. With the increase of wealth effect and the number of users, the competition between ecological products will gradually promote the overall improvement.

At this stage, many projects around Bitcoin are still in a state of chaos, with uneven quality. The only thing you need to pay attention to is: be sure to protect your Bitcoin.

About LK Venture

LK Venture is a crypto investment and research institution focusing on the Web3 field under Linekong Interactive (08267.HK). Formerly known as Consensus Lab, it focuses on investing in cutting-edge infrastructure, trading platforms, technical protocols and financial instruments in the market. It has invested in more than 100 projects from North America, Asia, Europe and other countries and regions, including FTX, Polkadot, Filecoin, Casperlabs, Coin98, etc.

References:

1. What Are Bitcoin Ordinals? https://trustmachines.co/learn/what-are-bitcoin-ordinals-inscriptions/

2. Ordinal Theory Overview https://docs.ordinals.com/overview.html

3. brc-20 experiment. https://domo-2.gitbook.io/brc-20-experiment/

4. Insights From the 4 th Largest Lightning Network Nodehttps://river.com/learn/files/river-lightning-report.pdf

Disclaimer

The information and materials introduced in this article are all from public channels. The company does not make any guarantee on their accuracy and completeness. The description or prediction of future situations are forward-looking statements. Any suggestions and opinions are for reference only and do not constitute investment advice or suggestion to anyone. The strategies that the company may adopt may be the same, opposite or have nothing to do with the strategies that readers speculate based on this article.

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