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Panoramic analysis of the BTC ecosystem: Reshaping history or opening the next bull market?

24-02-07 16:00

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Original Title: "BTC Ecological Panorama Analysis: Reshaping History or Starting the Next Bull Market?"

Original Author: Fred

1. Introduction: Historical Development of BTC Ecosystem

Recently, the popularity of Bitcoin's inscription has caused a frenzy among Crypto users. Originally considered as "digital gold", Bitcoin, which was once more of a value store, has once again attracted attention to the development and possibilities of the Bitcoin ecosystem due to the emergence of the Ordinals protocol and BRC-20.

As the earliest blockchain, Bitcoin was born in 2008, created by an anonymous entity named Satoshi Nakamoto, marking the birth of a decentralized digital currency and challenging traditional financial systems.

Bitcoin, as an innovative solution in response to the inherent flaws of centralized financial systems, introduced the concept of a peer-to-peer electronic cash system that eliminates the need for intermediaries, thus achieving decentralization and trustlessness. The underlying technology of Bitcoin, blockchain, completely revolutionizes the way transactions are recorded, verified, and secured. The Bitcoin whitepaper, released in 2008, laid the foundation for a decentralized, transparent, and immutable financial system.

After its birth, Bitcoin experienced a gradual and stable growth stage. Early adopters were mainly technology enthusiasts and cryptography supporters who began mining and trading Bitcoin. The first recorded actual transaction occurred in 2010 when programmer Laszlo purchased two pizzas in Florida for 10,000 Bitcoins, marking a historic moment in the adoption of cryptocurrency.

With the increasing attention on Bitcoin, related ecological infrastructure is beginning to take shape. Exchanges, wallets, and mining pools are emerging in large numbers to meet the needs of this new type of digital asset. As blockchain technology and the market continue to develop, the ecosystem is expanding to more stakeholders, including developers, entrepreneurial teams, financial institutions, and regulatory agencies, driving the diversification of the Bitcoin ecosystem.

In 2023, the market that has been dormant for a long time has been revitalized by the popularity of the Ordinals protocol and BRC-20 Token, bringing about the summer of Inscriptions and rekindling people's attention to Bitcoin, the oldest public chain. What will be the future development of the Bitcoin ecosystem? Will the Bitcoin ecosystem become the engine of the next bull market? This research report will delve into the historical development of the Bitcoin ecosystem and the two core sub-track assets in the ecosystem: the asset issuance protocol and the scaling solution, analyzing their current status, advantages, and challenges to explore the future of the Bitcoin ecosystem.

二、为什么需要比特币生态

2. Why do we need the Bitcoin ecosystem?

1. Characteristics and Development History of Bitcoin

Before discussing why we need the Bitcoin ecosystem, let's first take a look at the basic characteristics and development history of Bitcoin.

Bitcoin is different from traditional financial accounting methods and has three core features:

· Decentralized Distributed Ledger: The core of the Bitcoin network is blockchain technology. This is a decentralized distributed ledger that records all transactions on the Bitcoin network. The blockchain is composed of blocks, each containing the hash value of the previous block, forming a chain structure that ensures the transparency and immutability of transactions.

· Record keeping through Proof of Work (PoW): The Bitcoin network uses a Proof of Work mechanism to verify transactions and keep records. This mechanism requires network nodes to solve mathematical problems to verify transactions and record them on the blockchain. This ensures the security and decentralization of the network.

· Mining and Bitcoin issuance: The issuance of Bitcoin is completed through mining. Miners solve mathematical problems to verify transactions and create new blocks. As a reward, miners receive a certain amount of Bitcoin.

It can be seen that, unlike common account models such as Paypal, Alipay, and WeChat Pay, Bitcoin does not transfer funds by directly increasing or decreasing the account balance. Instead, it uses the UTXO (Unspent Transaction Output) model.

Here we will briefly introduce the UTXO model, which will help everyone understand the technical solutions of the ecological projects later. UTXO is a way to track the ownership and transaction history of Bitcoin. Each unspent output (UTXO) represents a transaction output in the Bitcoin network. These unspent outputs have not been used in previous transactions and can be used to construct new transactions. Its characteristics can be summarized in the following three aspects:

· Each transaction generates a new UTXO: When a Bitcoin transaction occurs, it consumes previous UTXOs and generates new UTXOs, which will serve as inputs for future transactions.

· Transaction verification relies on UTXO: When verifying a transaction, the Bitcoin network checks whether the UTXO referenced by the transaction input exists and has not been used to ensure the validity of the transaction.

· UTXO as transaction inputs and outputs: Each UTXO has a value and an owner's address. When a new transaction is made, some UTXOs will be used as transaction inputs, while others will be created as transaction outputs, which may be used in the next transaction.

The UTXO model can provide higher security and privacy because each UTXO has its own owner and value, and transactions can be tracked more finely. In addition, the design of the UTXO model allows for parallel processing of transactions, as each UTXO can be used independently without resource contention.

However, due to the limitation of block size and the non-Turing complete development language, Bitcoin largely serves as a "digital gold" and cannot support more projects.

1）Ordinals & BRC-20

The BRC-20 protocol is based on the Ordinals protocol, which writes ERC-20 Token-like functionality into script data, thereby realizing the process of token deployment, minting, and trading.

· Token deployment: Indicate "deploy" in the script data, and specify the token name, total issuance, and quantity limit per sheet. Once the indexer recognizes the information of token deployment, it can start recording the corresponding token's minting and trading.

· Token minting: Indicate "mint" in the script data, and specify the name and quantity of the minted token. After recognition by the indexer, the balance of the corresponding token for the recipient is added to the ledger.

· Transaction Token: Indicate "transfer" in the script data, and specify the name and quantity of the token. The indexer deducts the corresponding amount of tokens from the sender's balance on the ledger and adds it to the balance of the recipient's address.

From the technical principles of casting, it can be seen that because the balance of BRC-20 tokens is engraved in the script data of segregated witness, it cannot be recognized and recorded by the Bitcoin network, so an indexer is needed to locally record the ledger of BRC-20. Essentially, Ordinals simply treats the Bitcoin network as storage space, recording metadata and operation instructions on the chain, but all actual operations and state updates are processed off-chain.

After the birth of BRC-20, the entire inscription market was ignited. BRC-20 occupies the vast majority of Ordinals asset types. As of January 2024, BRC-20 assets account for more than 70% of all Ordinals asset types. In addition, from the perspective of market value, the current market value of BRC-20 tokens has reached 2.6 billion US dollars, of which the leading token Ordi has a market value of 1.1 billion US dollars, and the market value of Sats is also around 1 billion US dollars. The emergence of BRC-20 tokens has brought new vitality to the Bitcoin ecosystem and even the Crypto world.

（Source：Dune - Ordinals Distribution of Different Asset Types）

The popularity of BRC-20 is driven by various factors, which can be summarized into two main aspects:

· Wealth effect: The explosive popularity of Web3 protocols and projects is inseparable from the wealth effect, and as a new asset class on the BTC chain, BRC-20 has a natural appeal that can attract a large number of users' attention and capture their minds.

· Fair Launch: BRC-20 Inscription has the feature of fair launch, where no one is a natural banker. Compared to traditional Web3 projects, Fair Launch allows retail investors to be on the same starting line as VCs in token investment, making them more willing to participate in Fair Launch projects. Even if some scientists want to maliciously mint a large amount of BRC-20 tokens, there is a minting cost.

Overall, although the Ordinals protocol has been controversial in the Bitcoin community since its inception, with concerns that Bitcoin NFTs and BRC-20 will rapidly increase block size, leading to higher requirements and fewer nodes for node operation equipment, thereby reducing decentralization; from a positive perspective, the Ordinals protocol and BRC-20 have shown a new use case for Bitcoin (besides digital gold), bringing new vitality to the ecosystem and attracting many developers to re-focus on and develop the Bitcoin ecosystem, working on scalability, asset issuance, and infrastructure.

2）Atomicals & ARC-20

The Atomiclas protocol was released and launched in September 2023 by an anonymous developer from the Bitcoin community. Essentially, it aims to achieve asset issuance, minting, and trading without the need for external indexing mechanisms, and to build a more native and comprehensive asset issuance protocol than the Ordinals protocol.

So what are the differences between the Atomicals protocol and the Ordinals protocol? The core technical differences can be summarized in the following two aspects:

· In terms of indexing, the Atomicals protocol does not adopt the mechanism of assigning numbers to Satoshi off-chain, but chooses to index based on UXTO units.

· In terms of content attachment or "engraving", the Atomicals protocol does not attach content to the script data of individual Satoshis in the segregated witness, but rather engraves it in the UXTO.

In addition, the Atomicals protocol also introduces a PoW mechanism, which controls the difficulty of mining by adjusting the length of the prefix characters. The forgers need to use CPU to calculate the matching hash value, thus achieving a more fair distribution method.

Under the Atomicals protocol, there are three types of assets: NFTs, ARC-20 Tokens, and Realm Names. Realm is an innovative domain name system on the Atomicals protocol, which differs from traditional domain names by using the domain name as a prefix instead of adding a suffix.

Next, we will focus on analyzing ARC-20, which is different from BRC-20 as it is based on the Ordinals protocol. ARC-20 is the official token standard supported by the Atomicals protocol. Unlike BRC-20, which writes tokens into segregated witness script data, ARC-20 uses a colored coin mechanism where the registration information of the token is recorded on the UXTO. Transactions are fully processed by the BTC network, which is why there are many differences between ARC-20 and BRC-20. For more details, please refer to the table below:

Overall, the Atomicals protocol's transactions rely on the BTC network and do not create a large number of meaningless transactions, resulting in minimal impact on transaction costs. Additionally, it does not rely on off-chain ledgers to record transaction information, making it more decentralized. Furthermore, the transfer process only requires one transaction (while BRC-20 requires two), making ARC-20's transfer performance significantly higher than BRC-20.

However, on the other hand, unlike the fair launch where retail investors participate, the mining mechanism of ARC-20 will cause the market to pay for the miners to some extent, so the advantage of fair launch in the inscription will be weakened. In addition, preventing users from accidentally spending ARC-20 tokens is also a challenge that needs to be faced.

3）Runes & Pipe

As mentioned earlier, the emergence of BRC-20 has led to the creation of many meaningless UTXOs. Casey, the developer of Ordinals, was also very dissatisfied with this and proposed the Runes token protocol based on the UTXO model in September 2023.

Overall, the Runes protocol is similar to the ARC-20 standard in that it engraves token data in UTXO scripts and token transactions rely on the BTC network. The difference is that the quantity of Runes can be defined, unlike ARC-20 where the minimum precision is 1.

However, the Rune protocol is currently only in the conceptual stage. One month after the proposal of the Runes protocol, Benny, the founder of Trac, launched the Pipe protocol, which is based on similar principles as Rune. In addition, according to Benny's comments on the official Discord, he hopes to support more asset types (similar to ERC-721 and ERC1155 types of assets on Ethereum).

4）BTC Stamps & SRC-20

BTC Stamps is an asset issuance protocol that is completely different from Ordinals. Due to the fact that Ordinals data is stored in the script data of segregated witness, it may be "pruned" by full nodes and erased in the event of a network hard fork. To address this risk, Twitter user @mikeinspace created the BTC Stamps protocol, which embeds data in an indivisible manner in the UTXO of BTC stored on the blockchain.

This integration ensures that data is permanently stored on the chain, free from the effects of deletion or modification, making it more secure and tamper-proof. Once data is embedded as a Bitcoin Stamp, it is forever stored on the blockchain. This feature is invaluable for ensuring the security and integrity of data. It provides a powerful solution for applications that require immutable records, such as legal documents, digital art authentication, and historical archives.

From a specific technical perspective, the Stamps protocol uses the method of embedding image data in base64 format into transaction outputs. The binary content of the image is encoded as a base64 string and placed as a suffix of STAMP: in the transaction description key. Then, the Counterparty protocol is used to broadcast it to the Bitcoin ledger. This type of transaction splits the data and embeds it into multiple transaction outputs, making it impossible for full nodes to delete, thus achieving permanent storage.

Under the Stamps protocol, the SRC-20 token standard has also emerged, which is comparable to the BRC-20 token standard.

· In the BRC-20 standard, the protocol stores all transaction data in segregated witness data. However, there is a risk of pruning due to the adoption rate of Segwit not being 100%.

· In the SRC-20 standard, data is stored in UTXO, making it a permanent part of the blockchain and cannot be deleted.

Among them, BTC Stamps supports multiple types of assets, including NFT, FT, and so on. SRC-20 Token is the FT standard among them, with the characteristics of safer data storage and difficult tampering. However, the disadvantage is that the cost of casting is very expensive. Initially, the Mint fee of SRC-20 was around 80U, which is several times the casting cost of BRC-20. However, after the upgrade of the SRC-21 standard on May 17th last year, the cost of a single Mint dropped to 30U, which is similar to the Mint cost of ARC-20. However, the cost is still relatively expensive after the decrease, about 6 times that of BRC-20 token (the recent Mint fee of BRC-20 is 4-5U).

5）ORC-20

6）Taproot assets

Elizabeth Stark, co-founder of Lightning Labs, is committed to leading the Bitcoin renaissance through Taproot Assets, while promoting the Lightning Network as a multi-asset network. Due to the native integration of Taproot Assets with Lightning, users do not need to cross-chain assets to sidechains or other Layer2 solutions, but can directly deposit Taproot Assets into Lightning channels for trading, making transactions more convenient.

7) Summary of Current Situation Analysis

Generally speaking, the birth of the Oridinals protocol and the BRC-20 token standard has brought about a craze for inscriptions and refocused people's attention on asset issuance protocols on Bitcoin. This has led to the emergence of diverse asset issuance protocols such as Atomicals, Runes, BTC Stamps, Taproot Assets, and others, as well as the creation of ARC-20, SRC-20, ORC-20, and more.

除了上述介绍的主流的资产发行协议之外，还有许多资产协议也在构想和发展中，例如 BRC-100 是基于 Ordinals 理论的去中心化计算协议，希望能丰富资产的使用场景，支持开发类似于 DeFi、GameFi 这样的应用；BRC-420 标准类似于 ERC-1155，可以将多个铭文组合成一个复杂资产，从而在游戏、元宇宙方面有比较多的应用场景（例如 ERC-1155 协议适用于 NFT 和 FT 的组合的游戏场景。）；甚至像一些 memecoin 社区也开始在 BTC 上推出新的资产协议（例如 Dogecoin 社区推出了 DRC-20），呈现百花齐放的局面。

From the current project status, the current asset issuance protocols can be divided into BRC-20 and UTXO. The former includes BRC-20 and the upgraded and expanded version ORC-20, which engraves data in the script data of segregated witness and relies on off-chain indexers for indexing and accounting. The latter mainly includes ARC-20, SRC-20, Runes, Pipe, and Taproot Assets.

BRC-20 and ARC-20 represent two different approaches to the BTC ecosystem asset protocol.

· One is a solution that is extremely concise, like BRC-20. Although the functionality is not complex, the entire approach and code are very concise and elegant. A few lines of innovation can satisfy the minimum unit of requirements, making it a very good MVP version.

· Another type is protocols like ARC-20, which solve problems as they arise. During the development of ARC-20, many bugs and areas for optimization were identified, but the approach was more bottom-up, addressing issues as they arose.

Currently, due to its first-mover advantage, BRC-20 has already taken the position of the first dragon in asset agreements. In the future, we will have to wait and see who will take the position of the second dragon or even overtake BRC-20 among standards such as SRC-20 and ARC-20.

Returning to the essence, on the one hand, the "Inscription" track has brought a new model of Fair Launch to retail investors, bringing huge attention to the Bitcoin ecosystem; on the other hand, according to OKLink's data, Bitcoin miners' income from transaction fees has accounted for more than 10% since December last year, bringing tangible benefits to miners. It is believed that driven by the Bitcoin ecosystem community, the inscription ecology and asset issuance protocols on Bitcoin will enter a new era of exploration and development.

2、On-chain Scaling

The asset issuance agreement has aroused people's renewed attention to the Bitcoin ecosystem. However, due to the scalability and transaction confirmation time issues of Bitcoin, in order for the ecosystem to develop sustainably, Bitcoin's scalability is also an area that needs to be faced and paid attention to.

In terms of improving the scalability of Bitcoin, there are currently two main development paths. One is on-chain scaling, optimizing on Bitcoin Layer1; the other is off-chain scaling, commonly known as Layer2. In this section and the next, we will discuss the development of the Bitcoin ecosystem from the perspectives of on-chain scaling and Layer2. In terms of on-chain scaling, it aims to improve TPS through block size and data structure, such as BSV and BCH. However, it has not yet gained consensus from the mainstream BTC community. Among the currently mainstream consensus on-chain scaling upgrade plans, the most noteworthy are the SegWit upgrade and the Taproot upgrade.

1) Segwit Upgrade

In July 2017, Bitcoin underwent a Segregated Witness (Segwit) upgrade, which significantly improved its scalability. This was a soft fork.

The main goal of SegWit is to solve the problem of limited transaction processing capacity and high transaction fees faced by the Bitcoin network. Prior to SegWit, the size of Bitcoin transactions was limited to 1MB blocks, which led to transaction congestion and high fees. SegWit reorganizes the transaction data structure by separating the witness data (including signatures and scripts) from the transaction data and storing it in a new section called the "witness area". By separating the transaction signature data from the transaction data, the capacity of the block is effectively increased.

SegWit introduced a new block size measurement unit called weight unit (wu). Blocks without SegWit have 1 million wu, while blocks with SegWit have 4 million wu. This change allows block size to exceed the 1MB limit, effectively increasing the block capacity and increasing the throughput of the Bitcoin network. Each block can accommodate more transaction data, and with the increased block capacity, SegWit allows more transactions to enter each block, reducing transaction congestion and the rise of transaction fees.

In addition, the importance of the Segwit upgrade is not limited to this, it also promotes many significant events that followed, including the Taproot upgrade, which was largely developed based on the Segwit upgrade. For example, the Ordinals protocol that exploded in 2023 and the operation of the BRC-20 token are also conducted in segregated data. To some extent, the Segwit upgrade has become a booster and foundation for this summer of inscriptions.

2) Taproot Upgrade

Taproot upgrade is another important upgrade to the Bitcoin network, which took place in November 2021. It combines three different related proposals, BIP 340, BIP 341, and BIP 342, with the aim of improving the scalability of Bitcoin. The goal of the Taproot upgrade is to improve the privacy, security, and functionality of the Bitcoin network. It makes Bitcoin transactions more flexible, secure, and private by introducing new smart contract rules and cryptographic signature schemes.

Its core advantages of upgrading can be summarized in the following three aspects:

· Schnorr Multi-Signature Aggregation: BIP 340 proposes Schnorr signatures, which allow multiple public keys and signatures to be aggregated into a single public key and signature, reducing the size of transaction data. By aggregating signatures, the network can process more transactions, making overall operations faster, cheaper, and maximizing block space savings.

· Stronger privacy: P2TR in BIP 341 uses a new script type that combines the functionality of the previous two scripts, P2PK and P2SH, introduces another privacy element, and provides a better transaction authorization mechanism. P2TR also makes all Taproot outputs look similar, eliminating further distinctions between multi-signature and single-signature transactions. This makes it more difficult to identify each participant who stores private data in the transaction input.

· Enables more complex smart contracts: Previously, the smart contract functionality of Bitcoin was limited, but with the upgrade of Taproot, multiple parties can sign a single transaction using Merkle trees. Taproot introduces a new script type called "Tapscript", which allows developers to write more complex smart contracts, including conditional payments, multi-party consensus, and other functions, providing more possibilities for the future development of Bitcoin.

Overall, through the SegWit and Taproot upgrades, the Bitcoin network has been able to improve scalability, transaction efficiency, privacy, and functionality, laying a solid foundation for future innovation and development.

3、Off-chain scaling: Layer2

Due to the structural limitations of the Bitcoin chain itself, coupled with the decentralized nature of the Bitcoin community consensus, on-chain scaling solutions are often questioned by the community. Therefore, many builders have begun to explore off-chain scaling solutions, building Layer2 protocols on top of the Bitcoin network.

Among them, the types of Layer2 for Bitcoin can be roughly divided into: state channels, sidechains, Rollup, etc. based on data availability and consensus mechanisms.

The state channel allows users to build communication channels off-chain, conduct high-frequency transactions off-chain, and record the final results on-chain. The scenario is mainly limited to transaction scenarios. The core difference between Rollup and sidechains lies in the inheritance of security. The consensus of Rollup is formed on the main network, and it cannot operate once the main network fails; while the consensus of the sidechain is independent, so it cannot operate once its own consensus fails.

In addition, besides Layer2 mentioned above, there are also expansion protocols like RGB for off-chain expansion to improve the scalability of the network.

In simple terms, a sidechain is an independent blockchain network that runs parallel to the main chain and can customize rules and functions to achieve higher scalability and flexibility. In terms of security, these sidechains need to maintain their own set of security mechanisms and consensus protocols, so their security depends on the design of the sidechain. Sidechains usually have higher autonomy and customization, but interoperability with the main chain may be lower. In addition, a key element of sidechains is the ability to transfer assets from the main chain to the sidechain for use, which usually involves cross-chain transfers and asset locking operations.

For example, Rootstock ensures the security of the sidechain network by merging mining, and Stacks uses the consensus mechanism of transfer proof (PoX). Below, these two cases will help you understand the current status of BTC sidechain solutions.

First, let's take a look at Rootstock. Rootstock (RSK) is a sidechain solution for Bitcoin, aimed at providing more functionality and scalability to the Bitcoin ecosystem. RSK's goal is to provide a more powerful decentralized application (DApp) development platform and advanced smart contract functionality by introducing smart contract capabilities to the Bitcoin network. Currently, the TVL has reached $130 million.

RSK's core design philosophy is to connect Bitcoin with the RSK network through sidechain technology. A sidechain is an independent blockchain that can interact bidirectionally with the Bitcoin blockchain. This makes it possible to create and execute smart contracts on the RSK network while leveraging the security and decentralization features of Bitcoin.

· Merge mining promotes miner participation: RSK has introduced a consensus algorithm called "merge mining," which is combined with the Bitcoin mining process. This means that Bitcoin miners can mine RSK while mining Bitcoin, providing security for the RSK network. This merge mining mechanism aims to increase the security of the RSK network and provides an incentive for Bitcoin miners to participate in the operation of the RSK network. Since both blockchains use the same consensus, Bitcoin and RSK consume the same mining power, so miners can contribute hash rate to mine blocks on RSK. Ultimately, merge mining can increase miner profitability without requiring additional resources.

RSK is attempting to solve the problem of long transaction confirmation times and network congestion on Bitcoin layer 1 by placing smart contracts on a sidechain. It provides developers with a powerful platform to build decentralized applications and adds more functionality and scalability to the Bitcoin ecosystem, promoting greater adoption and innovation.

RSK creates a new block approximately every 30 seconds, significantly faster than Bitcoin's 10-minute block time. In terms of TPS, RSK ranges from 10-20, which is noticeably faster than the Bitcoin network. However, compared to the high performance of Ethereum Layer2, it still falls short and faces some challenges in supporting high-concurrency applications.

Next, let's take a look at Stacks. Stacks is a Bitcoin-based sidechain with its own consensus mechanism and smart contract functionality. The Stacks blockchain achieves security and decentralization by interacting with the Bitcoin blockchain and is incentivized through the Stacks coin (STX).

Stacks, originally named Blockstack, started its project in 2013. The Stacks testnet was launched in 2018, and its mainnet was released in October 2018. In January 2020, with the release of Stacks 2.0 mainnet, the network underwent a major update. This update natively connects and anchors Stacks to Bitcoin, allowing developers to build decentralized applications.

One of the noteworthy consensus mechanisms of Stacks is Transfer Proof (PoX). Transfer Proof is a variation of Proof-of-Burn (PoB). PoB was originally proposed as the consensus mechanism for the Stacks blockchain. In the PoB mechanism, miners participating in the consensus algorithm would send Bitcoin to a burn address to prove that they have incurred costs for the new block. In Transfer Proof, this mechanism has been modified: the cryptocurrency used will not be destroyed, but will be distributed to a group of participants who help ensure the security of the new chain.

Therefore, in the consensus mechanism of Stacks, miners who want to mine Stacks' token STX and participate in consensus need to send Bitcoin transactions to predefined random Bitcoin addresses in order to generate blocks on the Stacks blockchain. The miner who can generate the block is ultimately determined by sorting. However, the probability of being selected will increase as the amount of Bitcoin transferred by the miner to the Bitcoin address list increases, and the Stacks protocol will reward them with STX.

In a sense, the consensus mechanism of Stacks is imitating the proof-of-work mechanism of Bitcoin. However, Stacks miners do not consume energy to mine new blocks, but use Bitcoin to maintain the Stacks blockchain. For the programmability and scalability of Bitcoin, transfer proof is also a very sustainable solution. Due to the relatively niche development language Clarity of Stacks, the number of active developers has not been particularly high, and the ecological construction has been relatively slow. The current TVL is only 50 million US dollars. Although the official claims it is its Layer2, it is currently more in the category of sidechains in essence.

It will only become a true Layer2 after its planned Nakamoto upgrade in the second quarter of this year. Nakamoto Release is a hard fork that is about to be launched on the Stacks network, increasing transaction throughput and achieving 100% finality for Bitcoin transactions.

One of the most significant changes in Nakamoto's upgrade is the acceleration of block confirmation time, reducing transaction confirmation time from 10 minutes in Bitcoin to a few seconds. By increasing block production rates and producing a new block approximately every 5 seconds, transactions may be confirmed within a minute, which is very beneficial for the development of Defi projects.

Regarding security, Nakamoto's upgrade will ensure that the security of Stacks transactions is consistent with that of the Bitcoin network. The integrity of the network has also been improved, and the ability to handle Bitcoin reorganizations has been enhanced. Even in the case of Bitcoin reorganizations, most Stacks transactions will remain valid, ensuring the reliability of the network.

Aside from the Nakamoto upgrade, Stacks will also be launching sBTC. sBTC is a decentralized, programmable 1:1 Bitcoin-backed asset that can be deployed and transferred between Bitcoin and Stacks (L2). sBTC enables smart contracts to write transactions to the Bitcoin blockchain, while ensuring security through the entire Bitcoin hash power.

Other sidechain solutions besides Rootstock and Stacks include Liquid Network, which uses different consensus mechanisms to improve the scalability of the Bitcoin network.

3）Rollup

Rollup is a layer-two solution built on the main chain, which improves throughput by moving most of the computation and data storage from the main chain to the Rollup layer. In terms of security, Rollup relies on the security of the main chain, and transaction data on the chain is usually batched and submitted to the main chain for verification. Additionally, Rollup often does not require direct transfer of assets, as assets remain on the main chain and only verification results are submitted to the main chain.

Although Rollup is often regarded as the most orthodox Layer2, with a wider range of use cases compared to state channels and inheriting more security from Bitcoin compared to sidechains, the development is still in a very early stage. Here, we briefly introduce Merlin Chain, B² Network, and BitVM.

Merlin Chain is a Layer2 developed by Bitmap and BRC-420 development team Bitmap Tech, which uses ZK-Rollup to improve the scalability of Bitcoin. It is worth mentioning that Bitmap, as a fully on-chain, decentralized, and fair-launch metaverse project, has a user base of 33,000 for its asset Bitmap, surpassing Sandbox to become the project with the most holders in the metaverse.

Merlin Chain has recently launched its testnet, which allows for free cross-chain asset transfers between Layer1 and Layer2, and supports the native Bitcoin wallet Unisat. In the future, it will also support Bitcoin native asset types such as BRC-20, Bitmap, BRC-420, Atomicals, SRC20, and Pipe.

In terms of implementation, the sorter on Merlin Chain performs batch processing transactions, generates compressed transaction data, ZK state roots, and proofs. The compressed transaction data and ZK proofs are uploaded to the Taproot of the BTC network through a decentralized Oracle to ensure network security. In terms of decentralized Oracle, each node needs to pledge BTC as a penalty, and users can challenge ZK-Rollup based on compressed data, ZK state roots, and ZK proofs. If the challenge is successful, the pledged BTC of the node will be confiscated to prevent the Oracle from acting maliciously. Currently, the network is still in the testnet phase, and it is expected to go live in the mainnet within two weeks. We look forward to its performance after the mainnet goes live.

除了 Merlin Chain 之外，比特币 Layer2 Rollup 解决方案还有 B² Network，希望在不牺牲安全性的情况下提高交易速度并扩大应用多样性。其核心特点可以总结为以下两个方面：

Apart from Merlin Chain, there is also B² Network as a Bitcoin Layer2 Rollup solution, aiming to improve transaction speed and expand application diversity without sacrificing security. Its core features can be summarized in the following two aspects:

· Rollup Solution: B² Network provides an off-chain transaction platform that supports Turing-complete smart contracts, improving transaction efficiency and reducing costs. Unlike sidechain and scaling solutions, Rollup better inherits the security of the Bitcoin blockchain.

· Combining ZKP and Fraud Proofs: By combining zero-knowledge proof (ZKP) technology and fraud proof challenge-response protocols with Bitcoin's Taproot, it ensures enhanced privacy and security of transactions.

Regarding how B² Network implements BTC Layer2 Rollup solution, we can look at its core Rollup Layer and DA Layer (Data Availability Layer). In terms of the Rollup Layer, B² Network adopts ZK-Rollup as the Rollup Layer, responsible for executing user transactions within the Layer2 network and outputting related proofs. In the DA Layer, it includes decentralized storage, B² nodes, and the Bitcoin network. This layer is responsible for permanently storing a copy of the rollup data, verifying rollup zk proofs, and ultimately confirming them through Bitcoin.

Additionally, BitVM has implemented Rollup by processing Turing-complete smart contracts off-chain to reduce congestion on the Bitcoin blockchain. In October 2023, Robin Linus released the BitVM whitepaper, aiming to improve Bitcoin's scalability and privacy by developing zero-knowledge proof (ZKP) solutions. BitVM uses the existing Bitcoin scripting language to represent NAND logic gates on Bitcoin, enabling the implementation of Turing-complete smart contracts.

其中，在 BitVM 中有两个主要角色：证明者和验证者。证明者负责启动计算或声明，本质上是呈现一个程序并断言其预期结果。验证者的作用是验证这一主张，确保计算结果准确且值得信任。

Translation:

There are two main roles in BitVM: Prover and Verifier. The Prover is responsible for initiating a computation or declaration, essentially presenting a program and asserting its expected result. The Verifier's role is to verify this claim, ensuring that the computation result is accurate and trustworthy.

In case of disputes, such as when a validator questions the accuracy of a prover's statement, the BitVM system uses a fraud-proof challenge-response protocol. If the prover's claim is not true, the validator can send a fraud-proof to the immutable ledger of the Bitcoin blockchain, which will prove fraudulent behavior and maintain the overall credibility of the system.

However, BitVM is still in the stage of whitepaper and construction, and it will take some time before actual use. Overall, the entire BTC Rollup track is still in a very early stage. The future performance of these networks, whether it is support for Dapps or performance such as TPS, still needs to be tested by the market after the network is officially launched.

· One-time sealing: RGB tokens need to be associated with specific UTXOs. When spending UTXOs, a Bitcoin transaction will include a message commitment that indicates the message contains RGB inputs, the destination UTXO, asset ID, and amount. Although transferring RGB tokens requires a Bitcoin transaction, the UTXO for RGB transfer output does not need to be the same as the UTXO for Bitcoin output. This means that tokens on RGB can be output to another UTXO that is completely unrelated to the current UTXO transaction, without leaving a trace on Bitcoin. Once you send assets through RGB, you will not be able to see where they are going. Even if you receive assets, their transaction history is difficult to decipher, providing users with greater privacy protection.

From the above one-time sealing, it can be seen that each contract state in RGB is associated with a specific UTXO and access to and use of that UTXO is restricted by a Bitcoin script. This design ensures the uniqueness of the contract state, as each UTXO can only be associated with one contract state and cannot be reused after use, and different smart contracts will not directly cross in the transaction history. Anyone can verify the validity and uniqueness of the contract state by checking the Bitcoin transaction and related scripts.

By utilizing the scripting functionality of Bitcoin, RGB has established a secure model where ownership and access rights are defined and executed by scripts. This allows RGB to build a smart contract system on the basis of Bitcoin's security, ensuring the uniqueness and security of contract states.

Therefore, RGB smart contracts provide a more layered, scalable, private, and secure approach. As an innovative attempt in the Bitcoin ecosystem, it is committed to supporting the construction of more diverse and complex applications and functions without sacrificing the security and decentralization characteristics of Bitcoin.

Since the birth of Bitcoin, many developers have been committed to expanding Bitcoin and building Layer2, hoping to build more applications on it. The popularity of Mingwen has brought everyone's attention back to the Bitcoin Layer2 field.

Regarding sidechains, both Rootstock and Stacks are improving the scalability of the Bitcoin ecosystem in different ways. RSK incentivizes Bitcoin miners to participate in the RSK network by merging mining, providing a platform for developers to build decentralized applications. Stacks provides additional functionality and scalability to the Bitcoin network through its consensus mechanism of proof of transfer and smart contract capabilities. However, Stacks still faces some challenges in terms of ecosystem development and developer activity. Additionally, after the future Nakamoto upgrade, Stacks has the potential to become a true Bitcoin Layer2 solution.

In terms of Layer2 Rollup, the development is still relatively slow. The main idea is to offload the computation execution process off-chain and then prove the correctness of smart contract execution in different ways on-chain. Currently, Merlin Chain and B² Network have launched testnets, and their performance is yet to be further observed. BitVM is still in the whitepaper stage, and there is a long way to go for its future development.

In addition, there are expansion protocols such as RGB that run in client-side validation mode to implement smart contracts. RGB is stored off-chain, and smart contracts are only responsible for validating the data's validity and executing related logic. Bitcoin transactions or Lightning channels are only used as anchor points for validating data, while actual data and logic are validated by the client.

Overall, currently Bitcoin developers are working and experimenting in different directions such as state channels, sidechains, scaling protocols, and Layer2 Rollup. The emergence of these scaling solutions has brought more functionality and scalability to the Bitcoin network, injecting more possibilities for the development of the Bitcoin ecosystem and even the cryptocurrency industry as a whole.

4、Infrastructure

1) Wallet

UniSat Wallet is an open-source wallet and indexer used for storing and trading Ordinals NFT and BRC-20 tokens.

With the explosion of the first inscription Ordi, a large number of users have started to flock to the BTC ecosystem. Unisat, as a leading supporter of the BRC-20 ecosystem, has also gained widespread attention. Its main functions and features include the following:

· Store and trade Ordinal NFT, store, mint, and transfer BRC-20.

· The index code is open source, supporting more exchanges and projects to enter the BRC-20 index track.

(Source: Unisat supports asset types of Ordinals and Atomocials protocols)

Overall, as the earliest wallet and indexer to support BRC-20, Unisat has lowered the threshold for user participation in the inscription, attracting more users to enter the BTC ecosystem. To some extent, the rapid development of Unisat and BRC-20 is mutually promoting and achieving.

2) Decentralized Index

其中，Trac Core is a decentralized indexer and provides oracle services, developed by founder Benny. The asset issuance protocol Pipe mentioned above was also launched by Benny, aiming to provide better services for different aspects of the BTC ecosystem.

Trac Core's core is to solve the problems of indexing and oracle, and to provide comprehensive tools for the Bitcoin ecosystem, including filtering, organizing, and simplifying the access process to Bitcoin data. As mentioned earlier, the current BRC-20 tokens require off-chain third-party servers for accounting and indexing, which poses a potential risk of centralization in off-chain indexers. Once the indexer is attacked, users' accounting may face the dilemma of loss, and assets are difficult to guarantee. Therefore, Trac Core hopes to introduce more nodes to achieve decentralized indexers.

In addition, Trac Core will also establish a channel for obtaining external data from off-chain to serve as a Bitcoin oracle and provide more comprehensive services.

Except for Trac Core and Pipe, Benny, the founder of Trac, also developed Tap Protocol, aiming to enrich the Ordinals ecosystem and enable tokens to participate in more DeFi gameplay, including lending, staking, leasing, and other functions, thus giving the possibility of "OrdFi" assets to Ordinals. Currently, the three projects in the Trac ecosystem, Trac Core, Tap Protocol, and Pipe, are still in the very early stages, and their future development requires continuous attention.

3) Cross-chain bridge

In December 2023, Polyhedra Network announced its zkBridge support for the Bitcoin message transmission protocol, enabling the Bitcoin network to interact with other Layer1/Layer2 blockchains and improving Bitcoin's interoperability.

When Bitcoin is used as a message sending chain, zkBridge enables the update contracts (i.e. light client contracts) on the receiving chain to directly verify the consensus of Bitcoin and the Merkle proof of each transaction on Bitcoin through verification of Merkle proof. This compatibility ensures that zkBridge can fully protect the security of the consensus proof and transaction Merkle proof on Bitcoin. zkBridge allows Layer1 and Layer2 networks to access current and historical data on Bitcoin.

When Bitcoin is used as a message receiving chain, in order to ensure the correctness of the written information, zkBridge adopts a mechanism similar to Proof of Stake (PoS), inviting validators of the sending chain to stake native tokens, and then these validators are authorized to write data on the Bitcoin network. At the same time, validators use MPC protocol. If a malicious entity controls the MPC protocol members and tamper with the message, users can initiate zkBridge requests to send the malicious message to Ethereum. The punishment contract on Ethereum will evaluate the validity of the message. If the message is malicious, the staked tokens of the malicious MPC members will be confiscated and used to compensate for user losses.

Overall, cross-chain bridge protocols can effectively tap into the potential of idle Bitcoin and enhance the security communication between Bitcoin and POS chains, enabling more possibilities for cross-chain and scenario-based assets on the Bitcoin chain.

4) Pledge Agreement

The Babylon project was launched by consensus protocol researchers and experienced engineering teams including David Tse and Fisher Yu from Stanford University. The project aims to expand Bitcoin to protect the entire decentralized world.

Its core function is the Bitcoin collateral protocol, which allows Bitcoin holders to stake their BTC on the PoS chain and earn profits to protect the security of the PoS chain, applications, and application chains. Unlike existing methods, Babylon did not choose to bridge to the PoS chain, but chose remote equity collateral, which eliminates the need to bridge, package, or custody collateral Bitcoin. On the one hand, it allows Bitcoin holders to participate in collateral and obtain currency incentives from idle BTC, and on the other hand, it enhances the security of the PoS chain and application chain. This makes Bitcoin not only limited to the scenario of value storage and exchange, but also extends the security capabilities of Bitcoin to more blockchains.

However, currently among all asset types in Bitcoin, BRC-20 still maintains a leading position. According to CoinGecko's data, the current market value of BRC-20 tokens has exceeded $2.3 billion, which is close to the market value of RWA ($2.4 billion) and even higher than Perpetuals ($1.7 billion), indicating its significant importance in the Web3 industry.

Therefore, some developers have also begun to develop and explore in the direction of decentralized indexers, such as Trac Core striving towards decentralized indexers. In addition, there are also projects such as Best In Slots and Unisat that are starting to explore and experiment in this area. However, there is currently no mature, feasible and recognized solution, and it is still in the stage of overall exploration.

2、Currently, the expansion is still in a very early stage and cannot support large-scale applications.

Bitcoin was originally created as a decentralized currency for peer-to-peer payments, so it has some limitations in terms of technology, including restrictions on transaction throughput, delays in block confirmation times, and energy consumption issues.

· Support smart contracts, allowing more applications to be built on the Bitcoin ecosystem.

3. The Bitcoin ecosystem needs to find its own native scene, and it is difficult to break through by simply copying existing applications.

· First of all, the security of assets is the core issue, which is related to the ownership of Bitcoin. In Ethereum's staking, once users stake ETH, the ownership is transferred to the protocol and no longer belongs to the user. However, BTC believers and large holders are very concerned about the ownership of BTC. Therefore, if interest-bearing operations can be carried out without changing ownership, it may be a new way out. In addition, the security of cross-chain and scaling protocols for assets is also one of the most important factors for BTC holders to consider when interacting.

· In terms of asset issuance, the birth of Mingwen to some extent signifies users' yearning for fair launch, which is a symbol of anti-elitism and VC. Each user stands in a more equal position to obtain alpha. Therefore, if there is a new breakthrough in asset issuance, it may be necessary to explore what other advantages can be given to the public besides fairness to attract more people to participate.

· In terms of asset returns, how to provide users with more profit scenarios for BTC and BRC-20 Tokens, including lending, collateral, derivatives, liquidity mining, etc., is also a path worth exploring.

5. Summary

Bitcoin has been around for 15 years since Satoshi Nakamoto proposed the white paper "Bitcoin: A Peer-to-Peer Electronic Cash System" in 2008, laying the foundation for the development of Bitcoin. In 2009, the Bitcoin network was officially launched, becoming the world's first cryptocurrency. As the first decentralized digital currency, Bitcoin has been leading the wave of cryptocurrency development since its inception in 2009.

From the perspective of impact, Bitcoin has not only changed the pattern of the financial industry, but also had a wide and profound impact on the whole world.

· In addition, Bitcoin has also stimulated the development of blockchain technology, paving the way for decentralized applications and innovative digital assets.

In the development of blockchain technology, after Bitcoin, more blockchain technologies that support smart contracts have emerged, such as Ethereum, Solana, Polygon, etc., which have expanded the application of blockchain beyond just value storage and transactions, and into areas such as DeFi, NFT, Gamefi, Socialfi, DePIN, etc. This has also attracted a more diverse group of users and builders to join the industry.

With the development of the blockchain industry, people are paying more attention to Ethereum-like chains that support smart contracts, while the focus on Bitcoin remains in the "digital gold" stage. However, the popularity of the BRC-20 inscription has once again shifted the public's attention back to Bitcoin, prompting people to think about whether the Bitcoin ecosystem can continue to give birth to different application scenarios. As a result, many new asset protocols have emerged, including BRC-20, ARC-20, SRC-20, ORC-20, and some interesting explorations, such as BRC420 and Bitmap, hoping to better issue assets from different perspectives. Unfortunately, after BRC-20, other asset protocols and projects have not been able to create as big of a wave as BRC-20.

However, for the Builder, the BTC ecosystem is still in a very early stage, with the project teams mostly consisting of independent developers and small teams. For teams that truly want to do something and innovate, there are many opportunities and areas to explore in the BTC ecosystem.

As for expansion, Bitcoin has undergone multiple technological upgrades and improvements in the past 15 years, including shortening transaction confirmation times, discussing expansion plans, and enhancing privacy protection. Currently, the exploration of expansion direction includes state channels: Lightning Network, expansion protocol RGB, sidechains Rootstock and Stacks, and Layer2 Rollup BitVM. However, the overall expansion of carrying diverse applications is still in a very early stage. There is still a lot of exploration and experimentation to be done on how to expand on the non-Turing complete Bitcoin.

Overall, the recent explosion of the inscription has refocused users and builders on the Bitcoin ecosystem. Whether it is the longing for fair asset launches or the belief in Bitcoin as the most orthodox and decentralized public chain, more and more developers are starting to build in the Bitcoin ecosystem. For the future ecological development of Bitcoin, it needs to take a different path from Ethereum and find native application scenarios around its asset properties. Perhaps this will usher in the second spring of the Bitcoin ecosystem.

Finally, I would like to express my sincere gratitude to partners such as Constancie, Joven, Lorenzo, Rex, KC, Kevin, Justin, Howe, Wingo, Steven, and others for their help, as well as everyone who was willing to share during the communication process. I truly hope that all builders in this field will continue to improve!