Fred

This article has 28,000 words and an estimated reading time of about 25 to 30 minutes.

Introduction: The Historical Development of the BTC Ecosystem#

Recently, the popularity of Bitcoin inscriptions has sparked a frenzy among crypto users. Once regarded as "digital gold" and primarily seen as a store of value, Bitcoin has once again drawn attention to the development and potential 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 known as Satoshi Nakamoto, marking the birth of a decentralized digital currency that challenges traditional financial systems.

Bitcoin was born as an innovative solution to the inherent flaws of centralized financial systems, introducing the concept of a peer-to-peer electronic cash system that eliminates the need for intermediaries, thereby achieving trustlessness and disintermediation. The foundational technology of Bitcoin—blockchain—has fundamentally changed the way transaction records, verification, and security are handled. The Bitcoin white paper released in 2008 laid the groundwork for a decentralized, transparent, and tamper-proof financial system.

After its inception, Bitcoin underwent a gradual and stable growth phase. Early adopters were primarily tech enthusiasts and cryptography supporters who began mining and trading Bitcoin. The first recorded real transaction occurred in 2010 when programmer Laszlo purchased two pizzas for 10,000 Bitcoins, marking a historic moment in cryptocurrency adoption.

As Bitcoin gained increasing attention, related ecosystem infrastructure began to take shape. Exchanges, wallets, and mining pools emerged in large numbers to meet the demands of this new digital asset. With the development of blockchain technology and the market, the ecosystem expanded to include more stakeholders, including developers, entrepreneurial teams, financial institutions, and regulatory bodies, driving the diversification of the Bitcoin ecosystem.

In 2023, the long-silent market was revitalized by the explosive popularity of the Ordinals protocol and BRC-20 Tokens, ushering in a summer of inscriptions and prompting renewed focus on the oldest public chain, Bitcoin. What will the future development of the Bitcoin ecosystem look like? 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 explore its three core directions: asset issuance protocols, scalability solutions, and infrastructure, analyzing their current status, advantages, and challenges to discuss the future of the Bitcoin ecosystem.

Why We Need the Bitcoin Ecosystem#

Characteristics and Development History of Bitcoin#

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

Bitcoin differs from traditional financial accounting methods and has three core characteristics:

1. 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 consists of blocks, each containing the hash of the previous block, forming a chain structure that ensures transaction transparency and immutability.
2. Accounting through Proof of Work (PoW): The Bitcoin network uses a proof-of-work mechanism to verify transactions and maintain the ledger. This mechanism requires network nodes to solve mathematical problems to validate transactions and record them on the blockchain, ensuring the network's security and decentralization.
3. Mining and Bitcoin issuance: Bitcoin is issued through mining. Miners solve mathematical problems to validate transactions and create new blocks, receiving a certain amount of Bitcoin as a reward.
   Unlike common payment systems like PayPal, Alipay, and WeChat Pay, Bitcoin does not operate on a direct account balance model but uses the UTXO (Unspent Transaction Output) model.

Here, we briefly explain the UTXO model, which helps everyone understand the technical solutions of subsequent ecosystem projects. UTXO is a way to track Bitcoin ownership and transaction history, where each unspent output (UTXO) represents a transaction output in the Bitcoin network that has not been used by previous transactions and can be used to construct new transactions. Its characteristics can be summarized in three aspects:

1. 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.
2. Transaction validation relies on UTXO: When validating a transaction, the Bitcoin network checks whether the UTXOs referenced by the transaction inputs exist and are unspent to ensure the transaction's validity.
3. UTXO as transaction inputs and outputs: Each UTXO has a value and an owner's address. In new transactions, 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 provides higher security and privacy because each UTXO has its own owner and value, allowing for more precise tracking of transactions. Additionally, 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 block size limitations and a non-Turing complete programming language, Bitcoin largely plays the role of "digital gold" and has not been able to support more projects.

After Bitcoin's inception, colored coins emerged in 2012, allowing certain Bitcoins to represent other assets by adding metadata to the Bitcoin blockchain; in 2017, hard forks occurred due to the block size debate, including BCH, BSV, and others; after the forks, BTC continued to explore scalability solutions, launching the SegWit upgrade in 2017, which introduced extended blocks and block weight, expanding block capacity; the Taproot upgrade, which began in 2021, improved transaction privacy and efficiency. These key upgrades laid the foundation for the development of various scalability protocols and asset issuance protocols, leading to the later popularity of the Ordinals protocol and BRC-20 Tokens.

It can be seen that although Bitcoin was initially positioned as a peer-to-peer electronic cash system, many developers have always hoped that Bitcoin would not merely remain as "digital gold," but would enhance its scalability and enable more applications based on the Bitcoin blockchain.

Comparison of the Bitcoin Ecosystem and Ethereum Smart Contracts#

During the development of Bitcoin, in 2013, Vitalik Buterin proposed another blockchain—Ethereum, which was subsequently co-founded by Vitalik Buterin, Gavin Wood, and Joseph Lubin. The core concept of Ethereum is to provide a programmable blockchain that allows developers to build various applications on it, not limited to currency transactions. This programmability feature has made Ethereum a smart contract platform, allowing people to create and run blockchain-based applications that can execute automated contracts without the need to trust third parties.

One of the most significant features of Ethereum is its smart contracts, enabling developers to create various applications. With this feature, Ethereum has gradually become the leader in the crypto space, giving rise to various Layer 2 solutions, applications, and diverse asset types like ERC20 and ERC721, attracting many developers to build and enrich the Ethereum ecosystem.

So, since Ethereum can already implement smart contracts and develop various DApps, why do people still need to return to BTC to expand and develop applications? The core reasons can be summarized in three aspects:

1. Market consensus: Bitcoin is the earliest blockchain and cryptocurrency, possessing the highest recognition and trust among the public and investors. Therefore, it has a unique advantage in acceptance and recognition, with a current market capitalization of $800 billion, accounting for about half of the entire crypto market.
2. High degree of decentralization: Among mainstream blockchains, Bitcoin has the highest degree of decentralization. Its founder, Satoshi Nakamoto, has become anonymous, and the entire chain is developed by the community; whereas Ethereum still has Vitalik and the Ethereum Foundation controlling its development.
3. Retail demand for Fair Launch: The demand for Web3 cannot be separated from new asset issuance methods. In traditional project token issuance, whether FT or NFT, the project party typically acts as the issuer, and retail investors' returns heavily depend on the project party and the backing VC's market-making; in the Bitcoin ecosystem, innovative Fair Launch venues like inscriptions have emerged, giving retail investors more voice and thus attracting more money and wealth into the BTC ecosystem. The renewed attention on the Bitcoin ecosystem largely stems from the Fair Launch characteristics of inscriptions.

This is why, although BTC is weaker than Ethereum in terms of TPS and block time, and was initially intended for cryptocurrency transactions, many developers still hope to introduce smart contracts on it for application development.

In summary, just as the rise of BTC originated from a consensus on value—people generally recognize Bitcoin as a valuable digital asset and medium of exchange—the innovation in the crypto world is largely related to asset attributes. The current heat of the BTC ecosystem is mainly driven by asset types like Ordinals protocol and BRC-20 inscriptions. This heat also feeds back into the entire Bitcoin ecosystem, causing more people to refocus on it.

Unlike previous bull markets, retail influence is growing in this round. Traditionally, VCs and project parties dominated the crypto market, investing in and promoting the development of many blockchain projects. However, as retail interest in crypto assets increases, they want to play a larger role in the market and participate in project development and decision-making. To some extent, retail investors have also driven the development and renewed prosperity of the Bitcoin ecosystem.

Therefore, although the Ethereum ecosystem is more flexible in terms of smart contracts and decentralized applications, the Bitcoin ecosystem, as digital gold and a stable store of value, along with its leading position and market consensus, still holds an unparalleled importance in the entire cryptocurrency field. Thus, people continue to pay attention to and strive to develop the Bitcoin ecosystem to further explore its potential and possibilities.

Analysis of the Current Development Status of Bitcoin Ecosystem Projects#

In the process of developing the Bitcoin ecosystem, it can be seen that Bitcoin currently faces two main dilemmas:

• The scalability of the Bitcoin network is low, and building applications on it requires better scalability solutions.
• There are few applications in the Bitcoin ecosystem, and its development needs some blockbuster applications/projects to attract more developers and generate more innovation.

To address these two dilemmas, the Bitcoin ecosystem is mainly constructed from three aspects:

1. Relevant protocols for asset issuance
2. Scalability solutions: on-chain scalability and Layer 2
3. Infrastructure projects like wallets and cross-chain bridges

As the entire Bitcoin ecosystem is still in its early stages of development, applications like DeFi are still in their infancy. Therefore, this article will mainly analyze the development status of the Bitcoin ecosystem in terms of asset issuance, on-chain scalability, Layer 2, and infrastructure.

Asset Issuance Protocols#

The recent surge in the Bitcoin ecosystem starting in 2023 is closely tied to the Ordinals protocol and BRC-20, allowing Bitcoin, which was originally only a store of value and exchange medium, to also serve as a venue for asset issuance, greatly expanding its use cases.

In terms of asset issuance protocols, after Ordinals, various different types of protocols such as Atomicals, Runes, and PIPE have emerged to help users and project parties issue assets on BTC.

Ordinals & BRC-20#

First, let's take a look at the Ordinals protocol. Simply put, Ordinals is a protocol that allows people to mint NFTs similar to those on Ethereum on Bitcoin. The initially popular Bitcoin Punks and Ordinal punks were minted based on this protocol; later, the now-popular BRC-20 standard also emerged from the Ordinals protocol, kicking off the summer of inscriptions.

The birth of the Ordinals protocol can be traced back to early 2023, introduced by Casey Rodarmor. He has been working in technology since 2010, having worked at Google, Chaincode Labs, and Bitcoin Core, and is currently a co-host of SF Bitcoin BitDevs (a Bitcoin discussion community).

Casey became interested in NFTs in 2017 and was inspired to use Solidity to develop Ethereum smart contracts. However, he disliked building NFTs on Ethereum, considering it a "Gutenberg machine" (using overly complex methods to achieve simple things), and thus abandoned the idea. In early 2022, he rekindled the idea of implementing NFTs on Bitcoin. During his research on Ordinals, he mentioned that his inspiration came from Satoshi Nakamoto referencing something called "atomic" in the original Bitcoin codebase, indicating that Casey's motivation was, to some extent, to make Bitcoin interesting again, leading to the birth of Ordinals.

So how does the Ordinals protocol achieve what people commonly refer to as BTC NFTs, or Ordinal Inscriptions? There are two core elements:

• The first element is assigning a serial number to each Satoshi, achieving a labeling of Bitcoin's smallest unit and tracking these Satoshis during transaction spending, making Satoshis non-fungible, which is a very creative approach.
• The second element is supporting the attachment of arbitrary content to individual Satoshis, including text, images, videos, audio, etc., thereby creating unique Bitcoin-native digital items—inscriptions (also commonly referred to as NFTs).
  By numbering Satoshis and attaching content, Ordinals allows people to have NFTs similar to those on Ethereum on Bitcoin.

Next, let's delve into the technical details to better understand how Ordinals is implemented. In the first element of serial number assignment, new serial numbers can only be created in the Coinbase Transaction (the first transaction in each block). By transferring UTXOs, we can trace back to the corresponding Coinbase transaction to determine the numbering of Satoshis in that UTXO. However, it is important to note that this numbering system does not originate from the Bitcoin chain but is indexed by off-chain indexers. So essentially, it is the off-chain community that establishes a numbering system for Satoshis on-chain.

After the birth of the Ordinals protocol, many interesting NFTs emerged, such as Ordinal punks and TwelveFold, and as of now, Bitcoin inscriptions have exceeded 54 million. Based on the Ordinals protocol, BRC-20 was also born, ushering in the summer of BRC-20.

The BRC-20 protocol is based on the Ordinals protocol, embedding functionalities similar to ERC-20 Tokens into script data, thus enabling the processes of token deployment, minting, and trading.

1. Deploying tokens: Specify "deploy" in the script data, along with the token name, total issuance, and quantity limit per token. The indexer can start recording the corresponding token's minting and trading once it recognizes the token deployment information.
2. Minting tokens: Specify "mint" in the script data, indicating the name and quantity of the tokens to be minted. The indexer recognizes this and increases the balance of the recipient in the ledger.
3. Trading tokens: Specify "transfer" in the script data, indicating the token name and quantity. The indexer deducts the corresponding quantity of tokens from the sender's balance in the ledger and adds it to the recipient's balance.

From the technical principles of minting, it can be seen that since the balances of BRC-20 tokens are inscribed in the script data of the segregated witness, they cannot be recognized and recorded by the Bitcoin network, so an indexer is needed to record the BRC-20 ledger locally. Essentially, Ordinals just uses the Bitcoin network as storage space, recording metadata and operational instructions on-chain, while all actual operations and state updates are processed off-chain.

After the emergence of BRC-20, the entire inscription market exploded, with BRC-20 accounting for the vast majority of Ordinals asset types. As of January 2024, BRC-20 assets account for over 70% of all Ordinals asset types. Additionally, from a market capitalization perspective, the current market cap of BRC-20 tokens has reached $2.6 billion, with the leading token Ordi valued at $1.1 billion and Sats also around $1 billion. The emergence of BRC-20 tokens has brought a new boost to the Bitcoin ecosystem and even the crypto world.

The popularity of BRC-20 is also hidden behind many reasons, which can be summarized in two core aspects:

• Wealth creation effect: The explosive success of Web3 protocols and projects is inseparable from the wealth creation effect, and BRC-20, as a new asset class on the BTC chain, has a natural appeal, attracting a large amount of user attention and occupying mental space.
• Fair Launch: BRC-20 inscriptions have the characteristic of fair launch, where no one is a natural market maker. Compared to traditional Web3 projects, Fair Launch allows retail investors to stand on equal footing with VCs in token investments, making them more willing to participate in Fair Launch projects; even if some scientists want to maliciously mint a large number of BRC-20 tokens, there is still a minting cost involved.

In summary, although the Ordinals protocol has faced considerable controversy since its inception, with concerns that Bitcoin NFTs and BRC-20 will rapidly increase block size, leading to higher requirements for node operation equipment and fewer nodes, thus reducing decentralization; from a positive perspective, the Ordinals protocol and BRC-20 have showcased a new value use case for Bitcoin (beyond digital gold), bringing new vitality to the ecosystem and attracting many developers to refocus on and develop the Bitcoin ecosystem, working on scalability, asset issuance, and infrastructure.

Atomicals & ARC-20#

The Atomicals protocol was launched in September 2023 by an anonymous developer from the Bitcoin community, aiming to create a more native and complete asset issuance protocol without relying on external indexing mechanisms.

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

• In terms of indexing, the Atomicals protocol does not adopt the mechanism of numbering Satoshis off-chain but chooses to index using UTXO as the unit.
• In terms of content attachment or "inscription," the Atomicals protocol does not attach content to the script data of individual Satoshis in the segregated witness but inscribes it within the UTXO.

Additionally, the Atomicals protocol introduces a PoW mechanism, controlling the mining difficulty by adjusting the length of prefix characters, requiring miners to use CPUs to compute matching hash values, thus achieving a fairer distribution method.

Under the Atomicals protocol, three types of assets have emerged: NFTs, ARC-20 Tokens, and Realm Names. Among them, Realm is an innovative domain name system on the Atomicals protocol, which differs from traditional domain names that add suffixes; Realm uses the domain name as a prefix.

Next, let's focus on ARC-20. Unlike BRC-20, which was self-created based on the Ordinals protocol, ARC-20 is the token standard officially supported by the Atomicals protocol. Unlike BRC-20, which writes tokens into the script data of the segregated witness, ARC-20 uses a colored coin mechanism, with token registration information recorded on UTXO, and transactions are entirely processed by the BTC network, thus differing from BRC-20 in many aspects, as detailed in the table below:

In summary, the transactions of the Atomicals protocol rely on the BTC network, avoiding the creation of a large number of meaningless transactions, thus having a minimal impact on the network's transaction costs; it also does not rely on off-chain ledgers to record transaction information, making it more decentralized; furthermore, the transfer process only requires one transaction (whereas BRC-20 requires two), significantly enhancing the transfer performance of ARC-20.

However, on the other hand, unlike retail participation in fair launches, the mining mechanism of ARC-20 may lead to the market effectively paying for miners, thus diminishing its advantages in fair launch inscriptions. Additionally, preventing users from mistakenly spending ARC-20 tokens is another challenge that needs to be addressed.

Runes & Pipe#

As mentioned earlier, the emergence of BRC-20 has led to many meaningless UTXOs, which has greatly dissatisfied Ordinals developer Casey. In September 2023, he proposed the Runes protocol based on the UTXO model.

Overall, the Runes protocol is quite similar to the ARC-20 standard, also inscribing token data in UTXO scripts, with token transactions relying on the BTC network. The difference is that the number of Runes can be defined, unlike ARC-20, where the minimum precision is 1.

However, the Runes protocol is still in the conceptual stage. A month after the proposal of the Runes protocol, Benny, the founder of Trac, launched the Pipe protocol, which is fundamentally similar to Runes; additionally, according to Benny's statements on the official Discord, it aims to support more asset types (similar to ERC-721 and ERC-1155 asset types on Ethereum).

BTC Stamps & SRC-20#

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

This integration ensures that data remains permanently on-chain, unaffected by deletion or modification, making it more secure and tamper-proof. Once data is embedded as a Bitcoin Stamp, it is permanently stored on the blockchain. This feature is invaluable for ensuring data security and integrity, providing a robust solution for applications requiring immutable records, such as legal documents, digital art authentication, and historical archives.

From a technical perspective, the Stamps protocol uses the method of embedding base64 format image data in transaction outputs, encoding the binary content of the image into a base64 string, placing that string as a suffix in the transaction description key, and then broadcasting it to the Bitcoin ledger using the Counterparty protocol. This type of transaction splits the data 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, paralleling the BRC-20 token standard.

• In the BRC-20 standard, the protocol stores all transaction data in the segregated witness data, and since the adoption rate of SegWit is not 100%, there is a risk of pruning.
• In the SRC-20 standard, data is stored in UTXO, making it a permanent part of the blockchain that cannot be deleted.

BTC Stamps supports various types of assets, including NFTs and FTs. The SRC-20 Token is one of the FT standards, featuring more secure data storage and tamper-proof characteristics. However, the downside is that the minting cost is quite high; initially, the mint fee for SRC-20 was around $80, several times that of BRC-20 minting costs. However, after the SRC-21 standard upgrade on May 17 last year, the mint fee for a single mint dropped to around $30, comparable to ARC-20 mint fees. Despite the decrease, the cost remains relatively high, about six times that of BRC-20 tokens (recently, BRC-20 mint fees have been around $4-5).

Although the mint fee for SRC-20 is high, like ARC-20, SRC-20 only requires one transaction during the minting process; in contrast, BRC-20 tokens require initiating two transactions to complete minting and transfer. When the network is smooth, the number of transactions does not significantly impact, but once the network is congested, the time cost of initiating two transactions will significantly increase, requiring users to pay more gas to expedite transactions. Additionally, it is worth mentioning that SRC-20 Tokens support four types of BTC addresses, including Legacy, Taproot, Nested SegWit, and Native SegWit, while BRC-20 only supports Taproot addresses.

In summary, SRC-20 tokens have clear advantages over BRC-20 in terms of security and transaction convenience. Its non-prunable feature aligns well with the Bitcoin community's emphasis on security, and its ability to be freely split offers more flexibility compared to the ARC-20 model, where each Satoshi represents one token. On the other hand, transfer costs, file sizes, and type restrictions are challenges SRC-20 currently faces, and we look forward to further exploration and development of SRC-20 in the future.

ORC-20#

The ORC-20 standard aims to enhance the use cases of BRC-20 tokens and optimize existing issues with BRC-20. On one hand, the current BRC-20 tokens can only be sold in secondary markets, and the total supply cannot be changed, lacking mechanisms like staking and minting that can invigorate the entire system, as seen in ERC-20.

On the other hand, BRC-20 tokens heavily rely on external indexers for indexing and accounting. Additionally, there may be double-spending attacks; for example, if a BRC-20 token has already been fully minted, according to the BRC-20 token standard, using the mint function to mint additional identical tokens is invalid, but since the transaction pays fees to the Bitcoin network, this minting will still be recorded. Therefore, it completely relies on external indexers to determine which inscriptions are valid or invalid. For instance, in April 2023, during the early stages of Unisat's development, a hacker executed a double-spending attack, but fortunately, it was promptly fixed without expanding the impact.

To address the dilemmas faced by BRC-20, the ORC-20 standard was born. ORC-20 is compatible with the BRC-20 standard and enhances adaptability, scalability, and security, while eliminating the possibility of double spending.

In terms of technical logic, ORC-20 tokens are also added to the Bitcoin blockchain as JSON files, with the differences being:

• ORC-20 has no restrictions on names and namespaces and has flexible keys. Additionally, ORC-20 supports a wider range of JSON data formats, and all ORC-20 data is case-insensitive.
• BRC-20 has a maximum minting value and an immutable supply after initial deployment, while the ORC-20 protocol allows changes to the initial value and maximum minting value.
• ORC-20 transactions use the UTXO model, where the sender specifies the amount to be received by the recipient and the remaining balance to be sent back to themselves. For example, if someone has 3,333 ORC-20 tokens and wants to send 2,222 tokens to someone, they will also send 1,111 tokens back to themselves as a new "input." This entire process is the same as the UTXO process in Bitcoin. If the two steps are not completed, the transaction can be canceled midway; since UTXOs can only be used once, this fundamentally prevents double spending.
• ORC-20 tokens include an ID identifier at deployment, allowing even tokens with the same name to be distinguished by ID.

In simple terms, ORC-20 can be seen as an upgraded version of BRC-20, granting BRC-20 tokens greater flexibility and richness in economic models. Due to ORC-20's compatibility with BRC-20, it is also easy to wrap BRC-20 tokens into ORC-20 tokens.

Taproot Assets#

Taproot Assets is an asset issuance protocol launched by the Bitcoin Layer 2 network development team, Lightning Labs, and is directly integrated with the Lightning Network. Its core characteristics and current status can be summarized in three aspects:

• Fully based on UTXO, meaning it can integrate well with Bitcoin-native technologies like RGB and Lightning.
• Unlike Atomicals, Taproot Assets, like the Runes protocol, allows users to customize the number of token transactions, enabling the creation or transfer of multiple tokens in a single transaction.
• Directly integrated with the Lightning Network, users can use Taproot transactions to initiate Lightning channels, depositing Bitcoin and Taproot Assets into the Lightning channel in a single Bitcoin transaction, thereby reducing transaction costs.

However, it is important to note that there are currently some drawbacks:

• There is a risk of malicious behavior: The metadata of Taproot Assets is not stored on-chain but relies on off-chain indexers to maintain state, requiring additional trust assumptions. Data is stored locally or in a Universe (a collection of servers containing historical data and verification information for specific assets) to maintain token ownership.
• It is not a fair launch: Users cannot mint tokens on the Bitcoin network independently; instead, all tokens are issued by the project party, which transfers them to the Lightning Network, with issuance and distribution controlled by the project party, essentially losing the characteristic of a fair launch.

Elizabeth Stark, co-founder of Lightning Labs, is committed to leading the revival of Bitcoin through Taproot Assets while promoting the Lightning Network to become a multi-asset network. With the native integration of Taproot Assets and Lightning, users do not need to bridge assets to sidechains or other Layer 2s; they can directly deposit Taproot Assets into Lightning channels for trading, facilitating transactions.

Summary of Current Status Analysis#

In summary, the emergence of the Ordinals protocol and BRC-20 token standard has brought a wave of inscriptions, redirecting attention to asset issuance protocols on Bitcoin, leading to the emergence of diversified asset issuance protocols like Atomicals, Runes, BTC Stamps, and Taproot Assets, as well as the creation of ARC-20, SRC-20, and ORC-20.

In addition to the mainstream asset issuance protocols mentioned above, many other asset protocols are also in conceptualization and development, such as BRC-100, a decentralized computing protocol based on Ordinals theory, aiming to enrich asset use cases and support the development of applications like DeFi and GameFi; the BRC-420 standard, similar to ERC-1155, can combine multiple inscriptions into a complex asset, thus having more application scenarios in gaming and the metaverse (for example, the ERC-1155 protocol is suitable for gaming scenarios that combine NFTs and FTs); even some memecoin communities have begun to launch new asset protocols on BTC (for example, the Dogecoin community launched DRC-20), presenting a flourishing scene.

From the current project status, the existing asset issuance protocols can be divided into BRC-20 faction and UTXO faction. The former includes BRC-20 and its upgraded version ORC-20, which inscribes data in the segregated witness script data, relying on off-chain indexers for indexing and accounting; the latter mainly includes ARC-20, SRC-20, Runes, and Pipe, which aim to achieve asset types and Taproot Assets.

The two factions of BRC-20 and ARC-20 also symbolize two approaches to asset protocols in the BTC ecosystem:

• One is a solution with extreme simplicity like BRC-20, which, while not complex in function, has a very elegant and straightforward thought process and code, meeting the minimum unit of demand with just a few lines of innovation, making it a good MVP version.
• The other is a protocol like ARC-20 that addresses problems as they arise. Throughout the development of ARC-20, many bugs and optimization needs have emerged, but it leans more towards a bottom-up development path, solving problems as they come.

Currently, due to its first-mover advantage, BRC-20 has already secured the top position among asset protocols. It remains to be seen who among SRC-20, ARC-20, and others will occupy the second position or even surpass BRC-20 in the future.

Returning to the essence, on one hand, the "inscription" track has brought a new model of Fair Launch to retail investors, significantly increasing attention on the Bitcoin ecosystem; on the other hand, according to OKLink data, the income of Bitcoin miners has seen fees account for over 10% since December last year, providing tangible benefits to miners. It is believed that driven by the interests of the Bitcoin ecosystem community, the inscription ecosystem and asset issuance protocols on Bitcoin will enter a new period of exploration and development.

On-chain Scalability#

The asset issuance protocols have rekindled interest in the Bitcoin ecosystem, but due to the scalability and transaction confirmation time dilemmas of Bitcoin, achieving long-term development of the ecosystem also requires addressing the field of Bitcoin scalability.

In enhancing Bitcoin's scalability, there are currently two main development routes: one is on-chain scalability, optimizing on Bitcoin Layer 1; the other is off-chain scalability, commonly understood as Layer 2. In this section and the next, we will discuss the development status of the Bitcoin ecosystem from both on-chain scalability and Layer 2 perspectives. In terms of on-chain scalability, on-chain scalability aims to improve TPS through block size and data structure, such as BSV and BCH; however, these have not gained consensus from the mainstream BTC community. Among the on-chain scalability upgrade solutions that have mainstream consensus, the most notable are the SegWit upgrade and the Taproot upgrade.

SegWit Upgrade#

In July 2017, Bitcoin underwent a Segregated Witness (SegWit) upgrade, significantly enhancing scalability as a soft fork.

The main goal of SegWit was to address the transaction processing capacity limitations and high transaction fees faced by the Bitcoin network. Before SegWit, the size of Bitcoin transactions was limited to 1MB per block, leading to transaction congestion and high fees. SegWit reorganized the transaction data structure by separating the witness data (including signatures and scripts) and storing it in a new section called the "witness area," effectively increasing the block capacity by separating transaction signature data from transaction data.

SegWit introduced a new unit of block size measurement called weight units (wu). Blocks without SegWit have 1 million wu, while blocks using SegWit have 4 million wu. This change allows block sizes to exceed the 1MB limit, effectively expanding block capacity, thus increasing the throughput of the Bitcoin network, allowing each block to accommodate more transaction data, and reducing transaction congestion and rising transaction fees due to increased block capacity.

Moreover, the importance of the SegWit upgrade is not limited to this; it also facilitated many significant events that followed, including the subsequent Taproot upgrade, which largely developed on the foundation of the SegWit upgrade. For example, the now-popular Ordinals protocol and BRC-20 token operations also occur within segregated data, making the SegWit upgrade a booster and foundation for this summer of inscriptions.

Taproot Upgrade#

The Taproot upgrade is another significant upgrade to the Bitcoin network, conducted in November 2021, combining three related proposals: BIP 340, BIP 341, and BIP 342, aimed at enhancing Bitcoin's scalability. The goal of the Taproot upgrade is to improve the privacy, security, and functionality of the Bitcoin network. It introduces new smart contract rules and cryptographic signature schemes, making Bitcoin transactions more flexible, secure, and better protected in terms of privacy.

The core advantages of this upgrade can be summarized in three aspects:

• Schnorr signature aggregation: BIP 340 proposed Schnorr signatures, allowing multiple public keys and signatures to be aggregated into a single public key and signature, thereby reducing the size of transaction data. By aggregating signatures, the network can process more transactions, making overall operations faster and cheaper, thus maximizing block space savings.
• Stronger privacy: BIP 341's P2TR uses a new script type that combines the functions of the previous two scripts, P2PK and P2SH, introducing another privacy element and providing a better transaction authorization mechanism. P2TR also makes all Taproot outputs appear similar, making it more difficult to distinguish between multi-signature and single-signature transactions. This makes it harder to identify transaction inputs that store private data for each participant.
• Enabling more complex smart contracts: Previously, Bitcoin's smart contract functionality was limited, but after the upgrade, Taproot allows multiple parties to use Merkle trees to sign a single transaction. Taproot introduces a new script type called "Tapscript," allowing developers to write more complex smart contracts, including conditional payments, multi-party consensus, and other functionalities, providing more possibilities for Bitcoin's future development.

In summary, through the SegWit and Taproot upgrades, the Bitcoin network has improved scalability, transaction efficiency, privacy, and functionality, laying a solid foundation for future innovation and development.

Off-chain Scalability: Layer 2#

Due to the structural limitations of the Bitcoin chain itself and the decentralized nature of the Bitcoin community consensus, on-chain scalability solutions often face skepticism from the community. Therefore, many builders have begun to explore off-chain scalability, constructing off-chain scalability protocols or Layer 2 solutions to build a second-layer network on top of the Bitcoin network.

Currently, Bitcoin's Layer 2 types can be roughly divided based on data availability and consensus mechanisms: state channels, sidechains, and Rollups.

State channels allow users to build communication channels off-chain, conducting high-frequency transactions and then recording the final results on-chain, primarily limited to trading scenarios. The core difference between Rollups and sidechains lies in the inheritance of security; Rollup's consensus is formed on the mainnet, and if the mainnet fails, it cannot operate; whereas sidechains have independent consensus, so if a sidechain's consensus fails, it cannot operate.

In addition to the aforementioned Layer 2 solutions, there are also scalability protocols like RGB that aim to enhance network scalability.

State Channels#

State channels are temporary communication channels created on the blockchain for efficient off-chain interactions and transactions. They allow participants to interact multiple times and ultimately record the final results on the blockchain. State channels can improve transaction speed and throughput while reducing associated transaction costs.

When discussing state channels as Layer 2, the most notable example is the Lightning Network. The earliest state channel project on Bitcoin is the Lightning Network, which was first proposed in 2015 and launched by Lightning Labs in 2018.

The Lightning Network is a state channel network built on the Bitcoin blockchain that allows users to conduct fast transactions off-chain by opening payment channels. The successful launch of the Lightning Network marked the first implementation of state channel technology and laid the groundwork for subsequent state channel projects and developments.

Next, let's focus on the implementation technology of the Lightning Network. As a Layer 2 payment protocol built on the Bitcoin blockchain, the Lightning Network aims to facilitate rapid transactions between participating nodes and is considered an effective solution to Bitcoin's scalability issues. The core of the Lightning Network is that a large number of transactions occur off-chain, and only when all transactions are completed and the final state is confirmed do they get recorded on-chain.

First, the trading parties use the Lightning Network to open a payment channel and transfer funds to a Bitcoin address as a commitment. Then, parties can conduct any number of transactions off-chain through the Lightning Network, updating the temporary allocation of channel funds without needing to record this on-chain. When the parties complete their transactions, they close the payment channel, and the smart contract allocates the committed funds based on the transaction records.

Next comes the closing of the Lightning Network. One node first broadcasts the current transaction record state to the Bitcoin network, including settlement proposals and the allocation of committed funds. If both parties confirm the proposal, the funds are immediately paid on-chain, completing the transaction.

In another scenario, if a closing anomaly occurs, such as a node exiting the network or broadcasting an incorrect transaction state, the settlement will be delayed until a dispute period, during which the node may dispute the settlement and fund allocation. If the disputing node broadcasts an updated timestamp that includes some transactions omitted from the first proposal, the correct results will be recorded, and the malicious node's commitment will be forfeited and awarded to the other node.

From the core logic of the Lightning Network, it has the following four advantages:

• Real-time payments without needing to create a transaction for each payment on the blockchain, with payment speeds reaching milliseconds to seconds.
• High scalability. The entire network can handle millions to billions of transactions per second, far exceeding traditional payment systems, and can operate and pay without relying on intermediaries.
• Low cost. By conducting transactions and settlements off-chain, the Lightning Network incurs extremely low fees, making instant micropayments and other emerging applications possible.
• Cross-chain capability. It allows for atomic swaps off-chain through heterogeneous blockchain consensus rules. As long as the blockchains support the same cryptographic hash function, cross-chain transactions can occur without trusting third-party custodians.

Although the Lightning Network faces some challenges, such as users needing to learn and understand how to use it, open and close channels, it has significantly reduced the burden on the Bitcoin mainnet by enabling a large number of transactions to occur off-chain. Currently, its TVL is approaching $200 million.

However, the state channel Layer 2 is limited to trading scenarios, making it unable to support as many types of applications and scenarios as Ethereum's Layer 2, prompting many Bitcoin developers to consider broader Layer 2 solutions for Bitcoin.

After the birth of the Lightning Network, Elizabeth Stark aimed to develop the Lightning Network into a multi-asset network, leading to the emergence of asset protocols like Taproot Assets to enrich and broaden the use cases of the Lightning Network. Additionally, some subsequent scalability solutions have integrated with the Lightning Network to gain a larger scope of use. The Lightning Network serves not only as a state channel but also as fertile ground for the emergence and stimulation of more diverse BTC ecosystem projects.

Sidechains#

The concept of sidechains was first mentioned in the 2014 paper "Enabling Blockchain Innovations with Pegged Sidechains" by Adam Back, the inventor of Hashcash, and others, which pointed out that there is still much room for improvement if Bitcoin is to provide better services. Thus, the technology of sidechains was proposed, allowing Bitcoin and other blockchain assets to transfer between multiple blockchains.

In simple terms, a sidechain is an independent blockchain network that runs in parallel with the main chain, allowing for customizable rules and functions to achieve higher scalability and flexibility. In terms of security, these sidechains need to maintain their own security mechanisms and consensus protocols, so their security depends on the design of the sidechain. Sidechains typically have higher autonomy and customizability but may have lower interoperability with the main chain. Additionally, a key element of sidechains is the ability to transfer assets from the main chain to the sidechain for use, often involving cross-chain transfers and locking assets.

For example, Rootstock ensures the security of its sidechain network through merged mining, while Stacks uses a proof-of-transfer (PoX) consensus mechanism. Below, we will explore these two cases to help understand the current status of BTC sidechain solutions.

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

The core design philosophy of RSK is to connect Bitcoin with the RSK network through sidechain technology. The 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 Bitcoin's security and decentralization.

• RSK's core advantages include Ethereum language compatibility and merged mining:
  Ethereum language compatibility: Compared to other smart contract platforms like Ethereum, one of RSK's main advantages is its compatibility with Bitcoin. The RSK Virtual Machine (RVM) is an improved version based on the Ethereum Virtual Machine (EVM), allowing developers to use Ethereum smart contract development tools and languages to build and deploy smart contracts. This provides developers with a familiar development environment and the ability to leverage Bitcoin's strong security.
• Merged mining promotes miner participation: RSK also introduces a consensus algorithm called "merged mining," which combines with the Bitcoin mining process. This means that Bitcoin miners can mine RSK while mining Bitcoin, providing security for the RSK network. This merged 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, allowing miners to contribute hash rates to mine blocks on RSK. Ultimately, merged mining can enhance miners' profitability without requiring additional resources.

RSK attempts to solve the long transaction confirmation times and network congestion issues of Bitcoin by placing smart contracts on a sidechain, providing developers with a powerful platform to build decentralized applications and adding more functionality and scalability to the Bitcoin ecosystem, promoting larger-scale 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 achieves 10-20, which is noticeably faster than the Bitcoin network, but still falls short compared to the high performance of Ethereum Layer 2, facing some challenges in supporting high-concurrency applications.

Next, let's look at Stacks. Stacks is a Bitcoin-based sidechain with its own consensus mechanism and smart contract functionality. The Stacks blockchain interacts with the Bitcoin blockchain to achieve security and decentralization, incentivized by the Stacks token (STX).

Stacks was initially named Blockstack, and the project was launched in 2013. The Stacks testnet was launched in 2018, and its mainnet was released in October 2018. In January 2020, with the launch of Stacks 2.0 mainnet, the network underwent a significant update. This update natively connected and anchored Stacks to Bitcoin, allowing developers to build decentralized applications.

One notable aspect of Stacks is its consensus mechanism—Proof of Transfer (PoX). Proof of Transfer is a variant of Proof of Burn (PoB). The burn proof mechanism was initially proposed as the consensus mechanism for the Stacks blockchain. In the "burn proof" mechanism, miners participating in the consensus algorithm send Bitcoin to a burn address, proving that they have incurred costs for the new block. In the Proof of Transfer mechanism, this approach has undergone all modifications: the cryptocurrency used is not destroyed but distributed to a group of participants who help ensure the security of the new chain.

Thus, in the consensus mechanism of Stacks, miners wishing to mine Stacks tokens (STX) and participate in consensus must send Bitcoin transactions to predefined random Bitcoin addresses to produce blocks on the Stacks blockchain. Which miner can generate a block is ultimately determined by sorting. However, the probability of being selected increases with the amount of Bitcoin miners transfer to the Bitcoin address list, and the Stacks protocol rewards them with STX.

In a sense, the consensus mechanism of Stacks mimics Bitcoin's proof-of-work mechanism. However, Stacks miners do not consume energy to mine new blocks; instead, they use Bitcoin to maintain the Stacks blockchain. For the programmability and scalability of Bitcoin, Proof of Transfer is also a very sustainable solution. Due to the relatively niche development language of Stacks, the number of active developers has not been particularly high, and ecosystem development has been relatively slow, with its current TVL only at $50 million. Although the official claims it is a Layer 2, it currently more closely resembles a sidechain.

It is expected to become a true Layer 2 solution after the Nakamoto upgrade planned for the second quarter of this year. The Nakamoto Release is a hard fork set to launch on the Stacks network, improving transaction throughput and achieving 100% finality of Bitcoin transaction confirmations.

One of the most notable changes in the Nakamoto upgrade is the acceleration of block confirmation times, reducing transaction confirmation times from Bitcoin's 10 minutes to a few seconds by increasing block production rates to approximately one new block every 5 seconds, allowing transactions to be confirmed within a minute, which is very beneficial for the development of DeFi projects.

In terms of security, the Nakamoto upgrade will align the security of Stacks transactions with that of the Bitcoin network. The integrity of the network will also improve, enhancing its ability to handle Bitcoin reorganizations. Even in the case of Bitcoin reorganizations, most Stacks transactions will remain valid, ensuring the reliability of the network.

In addition to the Nakamoto upgrade, Stacks will also introduce 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.

In addition to Rootstock and Stacks, there are also different sidechain solutions like Liquid Network, which enhance the scalability of the Bitcoin network through various consensus mechanisms.

Rollup#

Rollup is a Layer 2 solution built on the main chain that improves throughput by transferring most computations 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-chain is usually submitted in batches to the main chain for verification. Moreover, Rollup often does not require direct asset transfers; assets remain on the main chain, with only verification results submitted to the main chain.

Although Rollup is often regarded as the most orthodox Layer 2 solution, with broader use cases compared to state channels and better security inheritance than sidechains, its development is still in very early stages. Here, we will briefly introduce Merlin Chain, B² Network, and BitVM.

Merlin Chain is a Layer 2 solution launched by Bitmap.Game and the BRC-420 development team, Bitmap Tech, utilizing ZK-Rollup to enhance Bitcoin's scalability. Bitmap Tech is also a deep builder of the Bitmap project. Notably, Bitmap, as a fully on-chain, decentralized, and fairly launched metaverse project, has reached 33,000 users holding its assets, surpassing Sandbox to become the project with the most holders in the metaverse.

Merlin Chain recently launched its testnet, allowing assets to freely cross-chain between Layer 1 and Layer 2, and supports Bitcoin's native wallet, Unisat. In the future, it will also support BRC-20, Bitmap, BRC-420, Atomicals, SRC20, and Pipe, among other Bitcoin-native asset types.

In terms of implementation, the sorters on Merlin Chain batch process transactions, generate compressed transaction data, ZK state roots, and proofs. The compressed transaction data and ZK proofs are uploaded to the BTC network's Taproot through a decentralized Oracle, ensuring the network's security. Regarding the decentralization of the Oracle, each node needs to stake BTC as a penalty, and users can challenge the ZK-Rollup based on the compressed data, ZK state roots, and ZK proofs. If the challenge is successful, the staked BTC of the malicious node will be confiscated.

In addition to Merlin Chain, Bitcoin's Layer 2 Rollup solutions also include B² Network, which aims to improve transaction speed and expand application diversity without sacrificing security. Its core features can be summarized in two aspects:

• Rollup solution: B² Network provides an off-chain transaction platform supporting Turing-complete smart contracts, improving transaction efficiency and reducing costs. Unlike sidechains and scalability solutions, Rollup better inherits the security of the Bitcoin blockchain.
• Combining ZKP and fraud proofs: By integrating zero-knowledge proof (ZKP) technology and fraud-proof challenge-response protocols with Bitcoin's Taproot, it ensures enhanced privacy and security for transactions.

Regarding how B² Network implements BTC Layer 2 Rollup solutions, we can look at its core Rollup Layer and DA Layer (data availability layer). In the Rollup layer, B² Network adopts ZK-Rollup as the Rollup layer, responsible for executing user transactions within the Layer 2 network and outputting related proofs. The DA layer includes decentralized storage, B² nodes, and the Bitcoin network, responsible for permanently storing rollup data copies, verifying rollup zk proofs, and ultimately confirming through Bitcoin.

Additionally, BitVM aims to implement Rollup by processing Turing-complete smart contracts and complex computations off-chain, reducing congestion on the Bitcoin blockchain. In October 2023, Robin Linus released the BitVM white paper, hoping to improve Bitcoin's scalability and privacy through the development of zero-knowledge proof (ZKP) solutions. BitVM uses Bitcoin's existing script language to represent NAND logic gates on Bitcoin, enabling the implementation of Turing-complete smart contracts.

In BitVM, there are two main roles: the prover and the verifier. The prover is responsible for initiating computations or claims, essentially presenting a program and asserting its expected results. The verifier's role is to validate this claim, ensuring that the computation results are accurate and trustworthy.

In cases of disputes, such as when the verifier questions the accuracy of the prover's statement, the BitVM system uses a fraud-proof-based inquiry-response protocol. If the prover's claim is untrue, the verifier can submit a fraud proof to the immutable Bitcoin blockchain, demonstrating the fraudulent behavior and maintaining the overall credibility of the system.

However, BitVM is still in the white paper and building stages, and practical use is still some time away. Overall, the entire BTC Rollup track is currently in a very early stage, and how these networks perform in terms of DApp support and TPS and other performance metrics will need to await market validation after the networks officially launch.

Others#

In addition to the aforementioned state channels, sidechains, and Rollups, there are also some off-chain scalability solutions that adopt client verification methods, with the most representative being the RGB protocol.

RGB is a private and scalable client-verified smart contract system developed on Bitcoin and the Lightning Network by the LNP/BP Standards Association. Initially proposed by Giacomo Zucco and Peter Todd in 2016, the project was named RGB to signify its intention to be "a better version of colored coins."

RGB addresses the scalability and transparency issues of the Bitcoin main chain using smart contracts, where two users reach an agreement in advance, and once the conditions of the agreement are met, it automatically completes. Moreover, since RGB is integrated with Lightning, there is no need for KYC, maintaining anonymity and privacy, as it does not require interaction with the Bitcoin main chain.

RGB aims to open up a scalable new world for Bitcoin, including issuing NFTs, tokens, fungible assets, implementing DEX functionality, and smart contracts. Bitcoin Layer 1 serves as the foundational layer for final settlement, while the Lightning Network, RGB, and other Layer 2 solutions facilitate faster anonymous transactions.

RGB has two core characteristics: client verification mode and one-time sealing:

• Client verification mode: RGB operates in client verification mode, implementing smart contracts. In RGB, data is stored off-chain, while smart contracts are responsible for verifying the validity of the data and executing related logic. Bitcoin transactions or Lightning channels only serve as anchoring points for verifying data, while the actual data and logic are verified by the client. This design allows RGB to build a smart contract system on top of Bitcoin and the Lightning Network without modifying their protocols.
• One-time sealing: RGB tokens need to be associated with specific UTXOs. When spending UTXOs, Bitcoin transactions include a message commitment indicating that the message contains RGB inputs, the UTXOs to which they go, asset IDs, and amounts. Although transferring RGB tokens requires Bitcoin transactions, the UTXOs for RGB transfer outputs and Bitcoin outputs do not need to be the same, meaning that RGB tokens can be output to another UTXO completely unrelated to the current UTXO transaction without leaving a trace on Bitcoin. Once you send assets through RGB, you cannot see where they go, and even if you receive assets, their transaction history is difficult to trace, 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 that UTXO is restricted by Bitcoin scripts. This design ensures the uniqueness of contract states, as each UTXO can only be associated with one contract state and cannot be reused after use, preventing direct crossovers of different smart contracts in historical records. Anyone can verify the validity and uniqueness of contract states by checking Bitcoin transactions and related scripts.

By leveraging Bitcoin's scripting capabilities, RGB establishes 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 secure foundation of Bitcoin while ensuring the uniqueness and security of contract states.

Thus, RGB smart contracts provide a more layered, scalable, private, and secure approach. As an innovative attempt within the Bitcoin ecosystem, it aims to support the construction of more diverse and complex applications and functionalities without sacrificing Bitcoin's security and decentralization characteristics.

Summary of Current Status Analysis#

Since Bitcoin's inception, many developers have been dedicated to expanding Bitcoin and building Layer 2 solutions to create more applications. The popularity of inscriptions has redirected attention to the Bitcoin Layer 2 field.

In terms of state channels, the Lightning Network is the earliest instance and one of the first Layer 2 solutions, reducing the load and transaction delays on the Bitcoin network by establishing bidirectional payment channels. Currently, the Lightning Network has gained widespread adoption and development, with its number of nodes and channel capacity continually increasing. This provides Bitcoin with faster transaction speeds and low-cost micropayment capabilities. From the current TVL performance, the Lightning Network remains the highest TVL Layer 2, approaching $200 million, far ahead of other solutions.

In terms of sidechains, both Rootstock and Stacks enhance scalability for the Bitcoin ecosystem in different ways. RSK incentivizes Bitcoin miners to participate in the operation of the RSK network through merged mining, providing a platform for developers to build decentralized applications. Stacks offers additional functionality and scalability to the Bitcoin network through its Proof of Transfer consensus and smart contract capabilities, though it still faces challenges in ecosystem development and developer activity. Furthermore, after the upcoming Nakamoto upgrade, Stacks is expected to become a true Bitcoin Layer 2 solution.

In the Layer 2 Rollup space, development remains relatively slow, primarily focusing on offloading computation execution processes off-chain and proving the correctness of smart contract operations on-chain through various methods. Currently, Merlin Chain and B² Network have launched testnets, and their performance remains to be observed. BitVM is still in the white paper stage, with a long way to go for future development.

Additionally, scalability protocols like RGB operate in client verification mode to implement smart contracts. RGB stores data off-chain, while smart contracts only verify the validity of the data and execute related logic. Bitcoin transactions or Lightning channels merely serve as anchoring points for verifying data, while the actual data and logic are verified by the client.

Overall, Bitcoin developers are making efforts and attempts in various directions, including state channels, sidechains, scalability protocols, and Layer 2 Rollups. The emergence of these scalability solutions brings more functionality and scalability to the Bitcoin network, injecting more possibilities into the development of the Bitcoin ecosystem and the cryptocurrency industry.

Infrastructure#

In addition to asset issuance protocols and scalability solutions, an increasing number of projects are emerging, particularly in the infrastructure field, such as wallets supporting inscriptions, decentralized indexers, cross-chain bridges, launchpads, and more, all flourishing in development. Since most projects are still in very early stages, this section will focus on some key projects in different infrastructure areas.

Wallets#

In the explosive growth of the BRC-20 protocol, wallets play a crucial role. The number of inscription wallets on the market is increasing, including Unisat, Xverse, and recently launched inscription wallets by OKX and Binance. This section will focus on Unisat, the core driver of the inscription track, to help better understand the wallet field.

UniSat Wallet is an open-source wallet and indexer for storing and trading Ordinals NFTs and BRC-20 tokens. When discussing the explosion of Ordinals and BRC-20, Unisat is an unavoidable topic. Initially, when Ordinals NFTs were first launched, they did not attract a frenzy of enthusiasm but rather sparked many doubts, with some believing that Bitcoin should focus on its payment functionality as digital gold and that there was no need to build an ecosystem. In the very early stages of the market, purchasing Ordinals NFTs could only be done through over-the-counter transactions, leading to significant decentralization and trust issues.

Later, after Domo launched the BRC-20 token standard in March 2023, many people also believed that adding a JSON code was vastly different from smart contracts, and the market remained largely skeptical and observant.

The Unisat team chose to bet on the Ordinals and BRC-20 track, becoming one of the earliest wallets to support Ordinals NFTs and BRC-20 tokens, as well as the official wallet of the Ordinals protocol, allowing users who could only trade OTC to trade Ordinals NFTs and BRC-20 tokens relatively smoothly, just like trading other tokens.

With the explosive popularity of the first inscription, Ordi, a large number of users began to flock to the BTC ecosystem. As a leading supporter of the BRC-20 ecosystem, Unisat also gained widespread attention, with its main functions and features including:

• Storing and trading Ordinal NFTs, minting and transferring BRC-20 tokens
• Open-source indexing code, supporting more exchanges and projects entering the BRC-20 indexing track
• Users can register instantly without running a full node

Additionally, Unisat is very responsive to the entire Bitcoin asset protocol ecosystem. Besides BRC-20 tokens, Unisat quickly supported other asset types, such as ARC-20 tokens from the Atomicals protocol, indicating that Unisat is developing towards a comprehensive trading platform for Bitcoin asset protocols.

(Source: Unisat's official website supports asset types from Ordinals and Atomicals protocols)

In summary, as one of the earliest wallets and indexers supporting BRC-20, Unisat has lowered the barriers for users to participate in inscriptions, attracting more users into the BTC ecosystem. To some extent, the rapid development of Unisat and BRC-20 has mutually promoted and achieved each other.

Decentralized Indexing#

Due to the need for off-chain third-party servers for accounting and indexing of BRC-20 tokens, there is a centralization issue with off-chain indexers, which may face potential risks. If an indexer is attacked, users' accounting may be lost, making asset security difficult to guarantee. Therefore, some project parties are committed to developing decentralized indexing services.

Among them, Trac Core is a decentralized indexer that also provides oracle services, developed by founder Benny. The asset issuance protocol Pipe mentioned earlier was also launched by Benny, aiming to provide better services for various aspects of the BTC ecosystem.

The core of Trac Core is to solve the problems of indexing and oracles, serving as a comprehensive tool to provide services for the Bitcoin ecosystem, including filtering, organizing, and simplifying access to Bitcoin data. As mentioned earlier, the current BRC-20 tokens require off-chain third-party servers for accounting and indexing, leading to centralization issues with off-chain indexers, which may face potential risks. If an indexer is attacked, users' accounting may be lost, making asset security difficult to guarantee. Therefore, Trac Core aims to introduce more nodes to achieve decentralized indexing.

Additionally, Trac Core will establish channels to obtain external data from off-chain sources, fulfilling its role as a Bitcoin oracle to provide more comprehensive services.

Besides Trac Core and Pipe, Benny, the founder of Trac, has also developed the Tap Protocol, aiming to enrich the Ordinals ecosystem by enabling tokens to engage in more DeFi activities, including lending, staking, leasing, and more, thus providing the possibility of "OrdFi" for Ordinals assets. Currently, the three projects in the Trac ecosystem—Trac Core, Tap Protocol, and Pipe—are still in very early stages, and their future development needs continuous attention.

Moreover, projects like Unisat and Atomic.finance are also exploring and developing decentralized indexing, and we look forward to further breakthroughs in the direction of decentralized indexing for BRC-20, providing users with more comprehensive and secure services.

Cross-chain Bridges#

In Bitcoin's infrastructure, asset cross-chain capabilities are also a very important part. Projects like Mubi and Polyhedra have begun to focus on this direction. Here, we will analyze Polyhedra Network to help understand the situation of BTC cross-chain bridges.

Polyhedra Network is an infrastructure for cross-chain interoperability, allowing multiple blockchain networks to access, share, and verify data securely and efficiently. This interoperability enhances the overall functionality and efficiency of the blockchain ecosystem through seamless communication, data transfer, and collaboration between systems.

In December 2023, Polyhedra Network announced that its zkBridge supports Bitcoin message transmission protocols, enabling the Bitcoin network to interact with other Layer 1/Layer 2 blockchains, thereby improving Bitcoin's interoperability.

When Bitcoin serves as the message-sending chain, zkBridge allows the updated contracts on the receiving chain (i.e., light client contracts) to directly verify Bitcoin's consensus and each transaction on Bitcoin through Merkle proofs. This compatibility ensures that zkBridge can comprehensively protect the security of consensus proofs and transaction Merkle proofs on Bitcoin. zkBridge allows Layer 1 and Layer 2 networks to access current and historical data on Bitcoin.

When Bitcoin serves as the message-receiving chain, to ensure the correctness of the written information, zkBridge adopts a mechanism similar to Proof of Stake (PoS), inviting validators from the sending chain to stake native tokens, and these stakers are authorized to write data on the Bitcoin network. Meanwhile, validators use the MPC protocol; if a malicious entity controls members of the MPC protocol and alters messages, users can initiate zkBridge requests to send malicious messages to Ethereum, where a penalty contract will assess the validity of the messages. If the messages are malicious, the staked tokens of the malicious MPC members will be confiscated to compensate user losses.

In summary, cross-chain bridge protocols can effectively tap into the potential of idle Bitcoin, enhancing secure communication between Bitcoin and PoS chains, allowing for more cross-chain and scenario possibilities for assets on the Bitcoin chain.

Staking Protocols#

Since its inception, Bitcoin has been limited to the realm of digital gold in transactions. Therefore, how to tap into idle Bitcoin to generate more asset yield and empowerment is a question many Bitcoin developers are exploring. In terms of Bitcoin staking protocols, projects like Babylon and Stroom are currently attempting to implement this. This section will focus on how Babylon achieves Bitcoin staking and incentives.

The Babylon project was launched by a team of consensus protocol researchers and experienced engineers from Stanford University, including David Tse and Fisher Yu, aiming to extend Bitcoin's security to protect the entire decentralized world.

Unlike other projects, Babylon does not aim to build a new layer or ecosystem on Bitcoin but seeks to extend Bitcoin's security to other blockchains, including Cosmos, BSC, Polkadot, Polygon, and other PoS chains to share security.

Its core function is the Bitcoin staking protocol, which allows Bitcoin holders to stake their BTC on PoS chains and earn rewards to secure PoS chains, applications, and application chains. Unlike existing methods, Babylon does not choose to bridge to PoS chains but opts for remote staking, an innovative protocol that eliminates the need to bridge, wrap, or custody staked Bitcoin. On one hand, this allows Bitcoin holders to participate in staking and earn monetary incentives from idle BTC; on the other hand, it enhances the security of PoS chains and application chains. Thus, Bitcoin is not limited to being a store of value and exchange but extends its security capabilities to more blockchains.

Additionally, it uses the Bitcoin timestamp protocol to place timestamps of events from other blockchains onto Bitcoin, allowing these events to enjoy Bitcoin's timestamp like Bitcoin transactions, thus achieving rapid staking unbinding, reducing security costs, and ensuring cross-chain security.

In summary, the development of Bitcoin staking protocols like Babylon brings new use cases for idle Bitcoin, transforming Bitcoin from a static asset into a dynamic contributor to network security. This transformation could lead to broader adoption and create stronger, more interconnected blockchain networks.

Challenges and Limitations in the Development of the Bitcoin Ecosystem#

BRC-20 Needs to Address the Decentralized Indexing Issue#

Although the popularity of BRC-20 has brought traffic and attention to the Bitcoin ecosystem, it has also prompted the emergence of various asset protocols, such as ARC-20, Trac, SRC-20, ORC-20, and Taproot Assets, which aim to address the issues faced by BRC-20 from different angles, resulting in many new asset standards.

However, among all asset types in Bitcoin, BRC-20 still maintains a significant lead. According to CoinGecko data, the market capitalization of BRC-20 tokens has exceeded $2.3 billion, approaching the market cap of RWA ($2.4 billion) and even surpassing Perpetuals ($1.7 billion), indicating its significant position in the Web3 industry.

Currently, one of the most concerning dilemmas in BRC-20 is the challenge of decentralized indexing. Since BRC-20 tokens cannot be recognized and recorded by the Bitcoin network, they require third-party indexers to maintain the BRC-20 ledger locally. Currently, third-party indexers, whether Unisat or OKX, still rely on centralized indexing methods, requiring extensive local accounting and indexing. There may be risks of discrepancies between indexers and the inability to recover from attacks on indexers.

As a result, some developers have begun to explore decentralized indexers, such as Trac Core, which is striving towards decentralized indexing. Additionally, projects like Best In Slots and Unisat are also exploring and attempting to address this issue, but so far, no mature, feasible, and recognized solutions have emerged, and the overall exploration is still in its early stages.

Current Scalability Solutions Are Still in Very Early Stages and Cannot Support Large-Scale Applications#

Bitcoin was born as a decentralized currency for peer-to-peer payments, and thus has some technical limitations, including transaction throughput restrictions, delays in block confirmation times, and energy consumption issues.

To build more complex applications on the Bitcoin network, two problems must be addressed:

• Increase TPS to make the network faster
• Support smart contracts to enable more applications to be built in the Bitcoin ecosystem

Currently, scalability solutions like the Lightning Network, RGB, Rootstock, Stacks, and BitVM are attempting to address scalability from different angles, but their scale and adoption rates remain limited. Taking the Lightning Network, which currently has the highest TVL among scalability solutions (around $200 million), as an example, its biggest issue is the limitation of scenarios; it can only facilitate transactional behavior and cannot realize more scenarios. Meanwhile, scalability protocols like RGB and sidechains like Rootstock and Stacks are still in early stages, with relatively weak effects on scalability and smart contract functionality compared to Ethereum's Layer 2, and currently cannot support large-scale applications.

The Bitcoin Ecosystem Needs to Find Its Own Native Scenarios; Simply Copying Existing Applications Is Difficult to Break Through#

After the popularity of inscriptions, builders have been focusing on what the next explosive application for Bitcoin will be. Due to Bitcoin's inherent non-Turing completeness, merely copying Ethereum applications to the Bitcoin network is unlikely to yield new breakthroughs; more opportunities need to be triggered by leveraging Bitcoin's unique characteristics rather than following Ethereum's old path.

The core feature of Bitcoin is its asset attribute. As the earliest and most reputable cryptocurrency, Bitcoin's market capitalization has approached $800 billion, accounting for about half of the entire cryptocurrency market.

Starting from Bitcoin's three core characteristics—asset security, asset issuance, and asset yield—there is much room for exploration.

• First, in terms of asset security, the core lies in users' ownership of Bitcoin. In Ethereum's staking, once users stake ETH, ownership transfers to the protocol and is no longer theirs. However, BTC believers and large holders are very concerned about BTC ownership, so if operations can generate yield without changing ownership, it may be a new avenue. Additionally, the security of asset cross-chain and scalability protocols is also one of the most critical factors for BTC holders when considering interactions.
• In terms of asset issuance, the emergence of inscriptions somewhat symbolizes users' yearning for fair launches, representing a form of anti-elitism and VC. Every user stands on a more equal footing to obtain alpha. Therefore, if breakthroughs in asset issuance are to be made, it may be necessary to explore advantages beyond fairness that can attract more people to participate.
• Regarding asset yield, how to create more yield scenarios for users' BTC and BRC-20 tokens, including lending, staking, derivatives, liquidity mining, etc., is also a path worth exploring.

Conclusion#

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 Bitcoin's development. In 2009, the Bitcoin network officially launched, becoming the world's first cryptocurrency. As the first decentralized digital currency, Bitcoin has led the wave of cryptocurrency development since its inception in 2009.

In terms of impact, Bitcoin has not only changed the landscape of the financial industry but has also had a widespread and profound effect on the entire world.

• First, it provides a convenient way for cross-border transfers and payments without the intervention of third-party institutions. This offers opportunities for financial inclusion globally and improves the accessibility of financial services.
• Second, Bitcoin's decentralized nature allows individuals to have complete control over their funds, enhancing personal financial security and privacy protection.
• Additionally, Bitcoin has spurred the development of blockchain technology, paving the way for decentralized applications and innovations in digital assets.

In terms of financial inclusion, some countries have begun to accept and use cryptocurrencies as legal tender. El Salvador became the first country in the world to adopt Bitcoin as legal tender in 2021, and the Central African Republic also accepted Bitcoin as legal currency in 2022. Furthermore, other countries are exploring similar initiatives, considering incorporating cryptocurrencies into their legal tender systems. In regions where financial infrastructure is lacking or financial services are hard to reach, Bitcoin provides a fast and low-cost means of cross-border payments and transfers. It offers opportunities for those without bank accounts or access to traditional financial services. Additionally, the approval of the Bitcoin spot ETF in the U.S. on January 10, 2024, symbolizes a significant advance for Bitcoin in the traditional financial world.

In terms of blockchain technology development, after Bitcoin, more blockchain technologies supporting smart contracts, such as Ethereum, Solana, and Polygon, have emerged, expanding the use of blockchain beyond just value storage and transactions to areas like DeFi, NFTs, GameFi, SocialFi, and DePIN, attracting a more diverse array of users and builders.

As the blockchain industry has developed, people's attention has increasingly shifted to chains like Ethereum that support smart contracts, while interest in Bitcoin has largely remained at the "digital gold" stage. The recent explosion of BRC-20 inscriptions has redirected the public's focus back to Bitcoin, prompting thoughts on whether the Bitcoin ecosystem can continue to give rise to unique application scenarios. This has led to the emergence of many new asset protocols, including BRC-20, ARC-20, SRC-20, ORC-20, and others, as well as interesting explorations like BRC-420 and Bitmap, hoping to better asset issuance from different angles. Unfortunately, after BRC-20, other asset protocols and projects have yet to generate as much excitement.

However, for builders, the BTC ecosystem is still in a very early stage, with project teams primarily consisting of independent developers and small teams. For teams genuinely looking to innovate, there are many opportunities and exploration spaces within the BTC ecosystem.

In terms of scalability, Bitcoin has undergone multiple technical upgrades and improvements over the past 15 years, including reduced transaction confirmation times, discussions on scalability solutions, and enhanced privacy protection. Current explorations in scalability include state channels (Lightning Network), scalability protocols (RGB), sidechains (Rootstock and Stacks), and Layer 2 Rollup (BitVM), but overall, the path to scalability that can support diverse applications is still in very early stages. There is still much exploration and experimentation needed to achieve scalability on non-Turing complete Bitcoin.

In summary, the recent explosion of inscriptions has drawn users and builders' attention back to the Bitcoin ecosystem. Whether it is the yearning for fair asset launches or the belief in Bitcoin as the most legitimate and decentralized public chain, an increasing number of developers are beginning to build within the Bitcoin ecosystem. For the future development of Bitcoin's ecosystem, Bitcoin needs to find native application scenarios that differ from Ethereum's old path, perhaps ushering in a second spring for 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 has been willing to share during our discussions. I genuinely hope that all builders in this track continue to thrive!

Author: Fred

References#

https://cointelegraph.com/learn/what-is-the-src-20-Token-standard
https://docs.Ordinals.com/
https://github.com/mikeinspace/stamps/blob/main/BitcoinStamps.md
https://www.investing.com/news/Cryptocurrency-news/unisat-halts-marketplace-following-doublespend-attacks-3062947
https://medium.com/fourpillars/orc-20-src-