Foreword

Since the birth of Bitcoin in 2009, the exploration of asset issuance and expansion plans has always been a field that few people dare to challenge. There are three reasons for this: first, the "BTC OG" insisted on regarding Bitcoin as "digital gold" in the past, which is a pure value storage method and excludes any expansion plans that may have security risks; second, since Bitcoin was originally conceived for an electronic payment system, security and stability are the cornerstone of the entire system operation. Therefore, Satoshi Nakamoto adopted the most minimalist design method, and the Bitcoin script language only gave Bitcoin the most basic payment function. The non-Turing complete feature makes it impossible to execute any calculation or loop. By sacrificing scalability, the security and stability of the Bitcoin network are ensured; third, Vitalik's vision of the EVM (Ethereum Virtual Machine) makes Turing complete public chains a reality, and a more friendly development environment attracts a large number of developers to stay, which has also created a flourishing situation in the blockchain ecosystem except for Bitcoin.

However, to this day, with the continued popularity of inscriptions and the maturity of modular concepts, Layer2 projects that build new scaling solutions on Bitcoin (similar to Ethereum Rollup, but with various construction methods) have recently exploded. The purpose of this article is to analyze two issues: what are the implementation methods for BTC scaling, and whether this type of BTC L2 is a flash in the pan or a resurgence of the oldest public chain?

Pandora's Box Key

As mentioned in the preface, BTC originally abandoned scalability in its design, and the introduction of numerous expansion plans today actually stems from the limitations of BTC itself (expensive transaction fees, slow speed, inability to handle complex smart contracts, etc.) that brought about two important upgrades.

SegWit (Segregated Witness)

SegWit is a Bitcoin scaling improvement proposal, also known as BIP141, that was jointly proposed by Eric Lombrozo, the CTO of Ciphrex, Bitcoin enthusiast Johnson Lau, and BlockStream co-founder Pieter Wuille in December 2015. The upgrade was implemented in 2017 as a soft fork in the Bitcoin network. Its main purpose was to address the issue of transaction congestion on the network at the time, with block size playing a crucial role in determining the number of transactions that can be confirmed in each block. The main idea behind SegWit is to reorganize block data by separating signature and transaction data, thereby increasing the number of transactions that can be confirmed in each block.

One of the most significant advantages brought by the SegWit upgrade is the increase in block capacity. By removing signature data from transaction inputs, the effective block size has increased from 1 MB to approximately 4 MB, allowing more transactions to be stored in a single block. On the other hand, it fixes Bitcoin's transaction malleability (also paving the way for the implementation of the Lightning Network) by separating signatures from transaction data, preventing tampering with signatures and effectively preventing the possibility of invalid transactions being permanently stored on the blockchain.

Taproot

The Taproot proposal was initially proposed by Bitcoin Core developer Greg Maxwell in January 2018. In October 2020, Pieter Wuille initiated a code pull request to merge Taproot into the Bitcoin Core codebase. To fully deploy the upgrade, node operators must adopt the new consensus rules of Taproot. The proposal ultimately received support from 90% of miners and was officially activated on November 14, 2021, in block 709,632. Taproot is a significant upgrade since SegWit, aimed at improving privacy, simplifying transaction verification, increasing efficiency, and enhancing the processing capabilities of more complex smart contracts. The upgrade consists of three different BIP proposals: BIP340, BIP341, and BIP342.

BIP340: Introduces Schnorr signatures, a cryptographic signature scheme proposed by Claus Schnorr in 2008, aimed at optimizing the verification process of the Bitcoin network. Prior to the Taproot upgrade, Bitcoin used the Elliptic Curve Digital Signature Algorithm (ECDSA). Although Bitcoin's creator, Satoshi Nakamoto, believed that ECDSA was more popular, Schnorr signatures have been upgraded in terms of signature aggregation, batch verification, and privacy, effectively improving efficiency and privacy.

BIP341: Introduces the Taproot protocol, which enhances the privacy and flexibility of Bitcoin transactions. Taproot hides multi-signature (multisig) and smart contract transactions under a single public key hash, making multi-party transactions and complex smart contracts appear as single-party transactions on the blockchain, thereby improving transaction privacy.

BIP342: Introducing Tapscript, an upgraded version of the original Bitcoin script (the programming language that determines how Bitcoin transactions can be locked and unlocked), which can also be referred to as a language, but is actually a collection of opcodes with commands that power the implementation of two other BIPs. Tapscript also removes the 10,000-byte script size limit, providing a better environment for creating smart contracts on the Bitcoin network. (This upgrade also laid the foundation for the later emergence of Ordinals, as the Ordinals protocol uses Taproot's script-path spend scripts to implement additional data.)

Based on the upgrade of SegWit and Taproot, it has also promoted the rapid development and emergence of two scaling solutions, the Lightning Network and the Inscription ecosystem (BRC-20, ARC-20, etc.). On the other hand, in order to make up for the shortcomings of not being able to implement complex smart contracts, various execution layers with different implementation methods have begun to emerge in the BTC ecosystem.

Expansion Plan Overview:

Unlike the uniformity of Ethereum Layer2 (although Vitalik has not explicitly defined which solution is Layer2, but generally refers to Rollup, and the implementation methods are quite similar, usually only with significant differences in the validation of data validity), BTC Layer2 does not have a unified definition and solution. If all scaling solutions can be called Layer2 as a standard, then from the current implementation methods that are needed, they can be roughly divided into the following five categories. (Some project introductions in the classification are excerpted from our past articles "Overview of the Bitcoin Ecosystem" and "New Journey of Digital Gold: Exploration and Protocol Innovation of the Bitcoin Ecosystem". For details, please read the full text.)

One, Sidechains:

○     Overview: The first complete Bitcoin sidechain technical paper was written by a researcher at Blockstream and published in 2014, but the proposal was later abandoned. It wasn't until 2016 that Blockstream again proposed hooked sidechains as a possible way to extend Bitcoin, with sidechains often referring to trust-minimized blockchains that are connected to the main chain through bidirectional cross-chain bridges. This allows 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, support for stateful smart contracts for DeFi solutions, commitment chain extensions, faster settlement finality, and higher privacy.

○     Verification: Sidechains typically adopt their own consensus mechanism and have an independent set of verification nodes. Assets transferred from the main chain to the sidechain need to be locked, while those returned from the sidechain to the main chain need to be unlocked. During this process, verification nodes are responsible for ensuring the legitimacy of the transfer.

○     Defect: Insufficient nodes may lead to centralization and failure to inherit the security of the main chain.

Stacks

Stacks, although it does not directly refer to itself as a sidechain, is still controversially 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.

Stacks is an open-source Bitcoin layer 2 blockchain that brings smart contracts and decentralized applications to Bitcoin. Stacks, originally named Blockstack, began its foundational work as early as 2013. The technical architecture of Stacks includes a core layer and subnets, and developers and users can choose between the two, with the mainnet being highly decentralized but with low throughput, while the subnets have lower decentralization but higher throughput.

Liquid

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

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

Drivechain is a Bitcoin open sidechain protocol that allows for customization of different types of sidechains based on different needs. BIP-300/301 proposes the concept of "adding features and functions to the Bitcoin world without actually modifying the Bitcoin core code." By creating a Bitcoin Sidechain secured by Bitcoin miners, various scalability use cases can be implemented on the Sidechain under the premise of Layer1 security guaranteed by Bitcoin. It should be noted that BIP-300 "Hashrate Escrows" compresses 3-6 months of transaction data into 32 bytes through "Container UTXOs", and BIP-301 "Blind Merged Mining" maintains network security through joint mining, similar to RSK.

BEVM (Emerging Project)

BEVM is a decentralized Bitcoin L2 that is compatible with EVM and uses BTC as Gas. It allows all DApps that can run in the Ethereum ecosystem to run on the Bitcoin L2.

Taproot Assets

In simple terms, it is like the literal meaning, adding a one-time seal to the object that needs protection to ensure that it has only two states: open and closed. This ensures that the content is only used once to prevent double spending. Compared to Ethereum accounts, only wallet addresses exist in the Bitcoin network, where Unspent Transaction Outputs (UTXOs) can serve as seals.

Therefore, to understand one-time sealing, you need to understand what UTXO is. It is a ledger model that generates inputs and outputs in each transaction. The output of a transfer transaction is the recipient's Bitcoin address and the transfer amount, and these outputs are stored in the UTXO set to record unspent transaction outputs. At the same time, an input points to an output of a previous block, so these transactions can be traced. Therefore, Bitcoin transaction outputs can be used as one-time sealing strips.

2. Client-side validation and deterministic Bitcoin commitments:

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:

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.

Four, Inscription:

○     Overview: In January 2023, Bitcoin developer Casey Rodarmor released the Ordinals protocol, which is an asset issuance protocol based on Bitcoin and consists of two core components: Ordinals ordinal theory and Inscription engraving. Casey, the author of the Ordinals protocol, carries content on UTXOs through engraving, assigning unique identifiers to 21 quadrillion Satoshi, the smallest unit of Bitcoin. Engraving is the process of associating content with unspent transaction outputs (UTXOs). The asset issuance process of the Ordinals protocol is like writing information into witness data and recording token information in JSON format in the form of BRC20.

○     Verification: The inscription requires the indexer to extract JSON information from the inscription and record the balance information in the off-chain database. Verifying the inscription involves extracting JSON data and ensuring that it complies with the rules specified in its documentation.

○     Defect: The indexer has various centralization issues (even leading to errors in exchange balances), occupies mainnet space, and is too fragmented.

1.BRC-20 Token

2.BRC-100

3.Ordinals NFT

Software engineer Casey Rodarmor has launched the Ordinals NFT protocol on the Bitcoin blockchain, which has officially gone live. Now, users can create and own their own NFTs on the smallest unit of Bitcoin, Satoshi (SAT), using a random but logical sorting system that makes each satoshi unique. According to reports, there are three main differences between Ordinals NFT and Ethereum NFT:

○     All relevant data is stored on the Bitcoin network and does not rely on external storage such as IPFS or AWS S3.

○     The cost of its coinage is directly proportional to the trading volume.

4.BRC-420

Atomicals Protocol (ARC-20):

Atomicals, also known as the Atomic Protocol, covers multiple asset types, including homogenized tokens under the ARC20 standard, NFTs, Realms, and Collection Containers. As a blockchain asset issuance protocol based on the UTXO type, Atomicals offers two minting methods: decentralized minting and direct minting. Decentralized minting introduces Bitwork Mining, a minting method based on the PoW (Proof of Work) model. The protocol uses the smallest unit of Bitcoin, Satoshi, as the minimum unit of issuance, and the current minimum divisible unit of ATOM is 546, which can be sold or transferred in increments of 546 ATOM.

Recently, founder Arthur shared his views on Meta-Protocols in an interview on December 13th. He believes that Meta-Protocols are a new way for developers to create their own data structures and rules without being limited to using existing strict structures. Protocols representing Meta-Protocols, such as Atomicals Protocol, are emerging, providing developers with the opportunity to create new structures using smart contracts. This trend allows creators to focus more on the Atomicals Virtual Machine (AVM). The launch of this virtual machine allows developers to build smart contract programs on the Bitcoin network, providing them with an unprecedented way to create. This means that creators can focus more on implementing smart contracts in the Bitcoin ecosystem, promoting the process of digital innovation.

Asset type: Atomicals

○     ARC20: A token format standard similar to BRC20 on Ordinals;

○     Collection Containers: This is a data type used to define NFT Collections, mainly used to store readable NFTs and related metadata. As of December 20th, 23, TOOTHY, which currently has the highest market value, has a total market value of 46.12 BTC and a 7-day trading volume of 25.74 BTC.

Five, Rollup:

○     Overview: Rollup is a Layer 2 scalability solution used to improve the performance and throughput of blockchain networks, especially for smart contract platforms like Ethereum. Rollup migrates most transaction data and computation off-chain, and only records transaction summaries or aggregates on-chain, thereby reducing the burden on the main chain and improving overall performance. The core idea of Rollup is to combine on-chain security with off-chain efficiency.

○     Verification: The underlying blockchain only needs to calculate the proof submitted to the smart contract to verify the activities in the Layer 2 network (if it is OptimisticRollup, verification is only required when there is a fork), and stores the unexecuted original transaction data as Calldata. However, because the Bitcoin network itself cannot verify the data availability (DA), the current DA verification methods are completed through some special ways, such as engraving the DA in plaintext on the main network and verifying it with their own solutions, or using BitVM to replicate various program instructions similar to binary circuits through Taproot address matrix or Taptree, replicating the verification process similar to Rollup on the Ethereum main network. Therefore, the architecture of such projects is always diverse.

○     Defect: Currently, there is no project that can perfectly reproduce the verification method of Rollup on Ethereum. Either it is in the theoretical stage or it has made trade-offs among the impossible triangle. The projects in the market are also mixed.

BitVM (Emerging Project & New Idea)

BitVM originated from a white paper titled "BitVM: Compute Anything On Bitcoin" by Robin Linus, the project leader of ZeroSync. BitVM is short for "Bitcoin Virtual Machine". It proposes a Bitcoin contract solution that can achieve Turing completeness 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.

BitVM's system is similar to the Optimistic Rollup and MATT proposals. It is based on fraud proof and query response protocols and does not require changing Bitcoin's consensus rules. It is mainly based on hash locks, time locks, and large Merkle trees. The core idea of this approach is that the prover claims to be able to calculate specific outputs through a given function for specific inputs. If the prover's claim is incorrect, the verifier can provide a concise fraud proof and punish the prover (similar to Optimistic Rollups). In this system, the prover promises the correctness of the program bit by bit, while the verifier refutes the prover's incorrect claims through a series of carefully designed challenges. Both parties will sign a series of challenge and response transactions in advance to resolve potential disputes. The implementation of the protocol starts with the prover and verifier compiling the program into a huge binary circuit. The prover submits this circuit in a Taproot address, which contains the leaf scripts of each logic gate in the circuit. They sign a series of transactions in advance for use in the challenge-response game. The key part of this system is the bit value commitment, which allows the prover to determine whether a specific bit value is "0" or "1" and can force the prover to make a decision within a specific time frame through a time lock.

BitVM proves that any circuit can be expressed by utilizing simple NAND gates to implement the commitment of logic gates. By writing gate commitments to express any circuit and combining the execution of each step in the same main root address. To refute incorrect claims, verifiers can use a series of transactions they have pre-signed to challenge the statements of the prover. The prover can set input values by revealing the corresponding bit commitments, and in the case of non-cooperation, the verifier can force the prover to reveal their inputs on the chain.

BitVM is currently the closest solution to replicating ETH Rollup. It can indeed construct a Turing-complete virtual machine through the infinite stacking of binary circuits (Taproot addresses), but the implementation process is too difficult, which can be imagined as the process of implementing a large computer program on an ordinary calculator. Although it is currently just a beautiful idea, it can still provide some ideas for the latter.

ARC-20 AVM (Emerging Project)

Conclusion

Reference:

4. Is RGB Protocol or Smart Contract the Ultimate Form?: https://www.techflowpost.com/article/detail_15076.html

8.Haotian：https://twitter.com/tmel0211/status/1749322402079887551

9. What is Taproot and how will it benefit Bitcoin?: https://academy.binance.com/zh/articles/what-is-taproot-and-how-it-will-benefit-bitcoin

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