"Thousands of trees and ten thousand trees bloom with pear flowers," Overview of the Bitcoin ecosystem

Author: @YBBCapital Researcher Ac-Core

Introduction

2023 is an important year for the Bitcoin ecosystem as it reaches new heights. Amid significant challenges in both digital assets and traditional markets, Bitcoin-related ecosystems have awakened from dormancy as the year draws to a close. The explosive popularity of inscriptions has led some to remain skeptical, but it is undeniable that market enthusiasm has also brought about a return of the "builder culture" to Bitcoin. This momentum has fueled a wave of innovation in Bitcoin, with the market's fervor for inscriptions spilling over into other public chains. This article will explore the current development direction of the Bitcoin ecosystem, providing an overview of Bitcoin's current ecosystem without any investment advice.

BTC Market Hot Protocols

In Q1 2023, Bitcoin asset issuance protocols experienced rapid development, culminating in a thriving market by Q4. Particularly within the Ordinals protocol ecosystem, various tokens represented by BRC20 have triggered a noticeable wealth effect, igniting FOMO in the market. Even though it merely involves adding JSON script files to the Bitcoin blockchain, it has still garnered significant market attention. As time progresses, more noteworthy protocols have emerged, including Ordinals, Atomicals, Taproot Assets, Runes, and PIPE. This trend clearly indicates that the Bitcoin ecosystem is evolving towards greater diversity and innovation, with various asset issuance protocols providing broader choices and richer development opportunities.

Ordinals Protocol (BRC-20)

Image source: Hiro

In January 2023, Bitcoin developer Casey Rodarmor released the Ordinals protocol, which is an asset issuance protocol based on Bitcoin. It consists of two core components: the Ordinals ordinal theory and Inscription. The author of the Ordinals protocol, Casey, carries content on UTXOs through inscriptions, assigning unique identifiers to the smallest unit of Bitcoin—210 trillion Satoshis. Inscription is the process of associating content with unspent transaction outputs (UTXOs). The asset issuance process of the Ordinals protocol resembles writing information into witness data and recording token information in JSON format in the form of BRC20.

BRC-20 Token

BRC-20 is an experimental Bitcoin token standard created by Domo on March 8, 2023. Its core concept is to utilize JSON data within Ordinal Inscriptions. Through the BRC-20 standard, users can easily create Token contracts (Deploy), mint Tokens (Mint), and transfer Tokens (Transfer). As of December 18, 2023, statistics show that the total market capitalization of the BRC-20 sector has reached $640 million, highlighting the significant position of this token standard within the Bitcoin ecosystem and opening new possibilities for the development of digital assets.

BRC-20 trading volume data source: GeniiData

BRC-100

BRC-100 is a Bitcoin DeFi protocol built on Ordinals. Besides its token attributes, BRC-100 is also an application protocol, allowing developers to design DeFi and other application products based on the BRC-100 protocol. According to developer MikaelBTC, BRC-100 introduces protocol inheritance, application nesting, state machine models, and decentralized governance, bringing computational capabilities to the Bitcoin blockchain and enabling the construction of Bitcoin-native decentralized applications such as AMM DEX and lending.

Ordinals NFT

Software engineer Casey Rodarmor launched the Ordinals NFT protocol on the Bitcoin blockchain, which is now officially online. Users can now create and own their NFTs on the smallest unit of Bitcoin, Satoshi (Sat), using a random but logical sorting system that makes each Satoshi unique. It is reported that Ordinals NFTs differ from Ethereum NFTs in the following three main aspects:

• All related data is stored on the Bitcoin network, without relying on external storage like IPFS or AWS S3;
• Permissionless: Transactions can be completed in a decentralized manner through PSBT without needing "authorization";
• The minting cost is proportional to the transaction volume.

BRC-420

According to the official Gitbook of RCSV, BRC-420 focuses on modularizing on-chain inscriptions, including two key components: the metaverse standard and the instant royalty standard, which define an open and flexible format for assets in the metaverse and establish specific on-chain protocols for the creator economy. Unlike other Ordinals protocols that involve single inscriptions, the BRC-420 protocol adopts multiple recursive inscriptions.

Atomicals Protocol (ARC-20)

Image source: Atomicals Guidebook

Atomicals, also known as the atomic protocol, encompasses various asset types, including the fungible token ARC20 standard, NFTs, Realm, and Collection Containers. As a UTXO-based blockchain asset issuance protocol, Atomicals offers two minting methods: decentralized minting and direct minting. The decentralized minting method introduces Bitwork Mining, a minting method based on the PoW (Proof of Work) model. The protocol uses the smallest unit of Bitcoin, Satoshi, as the minimum unit for issuing assets, with the current minimum divisible unit of ATOM being 546, allowing for the sale or transfer of as little as 546 ATOM.

Unlike Ordinals, which relies on third-party sorters for asset transaction ordering, the Atomicals protocol can create (mint), transfer, and upgrade various digital items, including native NFTs, games, digital identities, domain names, and social networks. Additionally, the protocol supports the creation of interchangeable tokens, with the token name being ATOM (not to be confused with Cosmos's ATOM, which is merely a name similarity).

Recently, founder Arthur shared his views on meta-protocols in an interview on December 13. He believes that meta-protocols represent a new approach that allows developers to create their own data structures and rules without being constrained by existing strict structures. Protocols representing meta-protocols, such as the Atomicals Protocol, are emerging continuously, providing developers with opportunities to create new structures using smart contracts. This trend enables creators to focus their efforts on the Atomicals Virtual Machine (AVM). The launch of this virtual machine allows developers to build smart contract programs on the Bitcoin network, providing them with unprecedented ways to create experiences. This means that creators can concentrate on implementing smart contracts within the Bitcoin ecosystem, driving the process of digital innovation.

Atomicals Asset Types:

• ARC20: A token format standard similar to BRC20 on Ordinals;
• Realm: A new concept proposed by Atomicals aimed at revolutionizing traditional domain names, to be used as prefixes;
• Collection Containers: A data type used to define NFT Collections, primarily for storing readable NFTs and related metadata. According to data from December 20, the current market capitalization leader, TOOTHY, has a total market value of 46.12 BTC, with a 7-day trading volume of 25.74 BTC.

Image source: Atomical Market

ARC-20 AVM

On December 13, Atomicals founder Arthur stated in an interview that meta-protocols are a new way for developers to create their own data structures and rules without being limited by existing strict structures. Meta-protocols like the Atomicals Protocol are emerging continuously, enabling developers to create new structures using smart contracts. This allows creators to focus on the Atomicals Virtual Machine (AVM), which enables developers to build smart contract programs on the Bitcoin network.

Runes Protocol

Runes, proposed by Casey Rodarmor, the creator of the Ordinals protocol, aims to address the efficiency issues present in BRC-20. Unlike the complexity of some protocols, Runes is designed to be simple and elegant. By using OP_RETURN in transactions, Runes facilitates token allocation to specific UTXOs, featuring output indices, token quantities, and token IDs.

The Runes protocol is a fungible token protocol based on the Bitcoin UTXO model, managing and transferring tokens through simple tuples (ID, OUTPUT, AMOUNT) and OP_RETURN operations. Its main characteristics include a simplified protocol that supports certain operations without requiring additional off-chain data or native tokens, optimizing on-chain data usage.

The proposal of the Runes protocol stems from Casey's dissatisfaction with the large number of UTXOs created by BRC20 using the Ordinals protocol, leading him to propose a fungible token protocol based on the Bitcoin UTXO model. Currently, the Runes Protocol remains a concept by Casey, lacking a complete client and development tools, although it is controversial in certain areas.

PIPE Protocol

Image source: Trac Official

The PIPE protocol is an asset issuance protocol developed by Benny, inspired by Casey's Runes protocol and Domo's BRC-20 standard based on Ordinals. The PIPE protocol cleverly integrates features from Runes and these two protocol standards, launching three protocols within the BTC ecosystem: Trac Core, Tap, and Pipe (abbreviated as TTP, collectively known as Trac Systems).

The main functions of the PIPE protocol include Deploy, Mint, and Transfer, abbreviated as DMT. These functions allow PIPE protocol assets to be easily created, distributed, and transferred within the Bitcoin network. In addition to supporting fungible tokens, the PIPE protocol also provides a complete non-fungible token data structure and standards.

• Trac Core: An oracle and decentralized indexer for Bitcoin inscriptions;
• Tap: An extension of the Ordinals protocol rather than a fork, allowing seamless compatibility with BRC20;
• Pipe: A new protocol forked from Ordinals, but the actual process requires liquidity to be reminted;
• Trac Token: Deployed on the Ordinals-BRC20 protocol, later serving as the governance token for the Tap protocol;
• TAP Token: Deployed on the Ordinals-Tap protocol.

Stamps (SRC-20)

On December 6, Bitcoin core developer Luke Dashjr revealed on social media that inscriptions are exploiting a vulnerability in the Bitcoin Core client to send junk data to the blockchain. This vulnerability allows users to set additional data size limits when forwarding or mining transactions, while inscriptions bypass this limit by disguising their data as program code. Dashjr stated that this vulnerability would be fixed in the upcoming v27 release next year. However, he later responded to questions related to Ordinals by claiming that inscriptions themselves do not exist and are a scam.

This statement cast a "cold water" on the Ordinals ecosystem, leading to significant price fluctuations in BRC-20 tokens, with ORDI dropping over 25% in a single day. Dashjr's critics argue that the Bitcoin network belongs to the community, and developers have no right to determine the fate of the Ordinals protocol based on personal preferences. Even if Dashjr completes updates to the Bitcoin program, as long as miners do not adopt the updated program, the entire Bitcoin network cannot complete the upgrade.

Although the controversy surrounding inscriptions has yet to reach a final conclusion, this turmoil has prompted reflection on the nature of Ordinals and blockchain, while also drawing attention to another token standard, SRC-20, and the Bitcoin Stamps protocol. The Ordinals protocol is a derivative protocol that uses Bitcoin UTXOs as a medium for data storage, storing arbitrary data through Bitcoin's OP_RETURN function. This protocol results in larger Bitcoin blocks, bringing centralization risks and increasing network operating costs. In contrast, the Bitcoin Stamps protocol, created by Mike In Space, is the first NFT token protocol standard on the Bitcoin chain based on the Counterparty (XCP) protocol. Stamps encode image data as Base64 strings, stored in Bitcoin UTXOs, emphasizing data reliability and the inability to be permanently removed from the Bitcoin public ledger compared to Ordinals.

This controversy has driven people to reflect on the nature of Ordinals and blockchain, while also sparking interest in the SRC-20 standard and the Bitcoin Stamps protocol. SRC-20 is similar to BRC-20 but avoids the controversies brought by Ordinals. Bitcoin Stamps emphasize data reliability and permanence by directly writing image data into Bitcoin UTXOs.

Expansion of Turing Completeness:

Alan Turing

The Turing machine is an abstract computational model proposed by Alan Turing in 1936, used to define the concept of computability. Turing completeness is a concept related to computational theory, referring to whether a computational system can simulate the computation process of any Turing machine, emphasizing that if a computational system is Turing complete, it has the capability to execute any Turing machine computation process. It is worth noting that the Bitcoin blockchain itself is not Turing complete; in the impossible triangle of blockchain, it achieves decentralization and security by completely sacrificing scalability. Therefore, this design choice helps prevent malicious code from running on the Bitcoin network, ensuring the security and stability of the network.

BitVM

On October 9, Robin Linus, the head of the ZeroSync project, published a white paper titled "BitVM: Compute Anything On Bitcoin," sparking thoughts on enhancing Bitcoin's programmability. BitVM stands for "Bitcoin Virtual Machine." It proposes a solution for Turing-complete Bitcoin contracts that can be verified without changing the consensus of the Bitcoin network, allowing any computable function to be validated on Bitcoin and enabling developers to run complex contracts on Bitcoin without altering its fundamental rules.

BitVM is a new paradigm of Optimistic Rollup + Fraudproof + Taproot Leaf + Bitcoin Script computation. It allows developers to simulate program behavior without imposing any load or changes on the actual Bitcoin network. BitVM employs its unique scheme, which includes the following roles:

● Prover and Verifier: The former uses information from a system input to create a proof, while the latter must verify the proof's computation result without knowing the specific content of the information, ensuring the accuracy of the computation result;

● Off-chain computation and on-chain proof: Without changing Bitcoin's consensus, BitVM undoubtedly requires transferring a large amount of computation and expansion off-chain to enhance flexibility.

RGB

RGB is a standard association (Lightning Network Protocol / Bitcoin Protocol) that supervises the development of various layers of Bitcoin, covering Bitcoin protocols, Lightning Network protocols, and RGB smart contracts. The RGB protocol is suitable for scalable and privacy-preserving Bitcoin and Lightning Network smart contract systems, aiming to run complex smart contracts on UTXOs to introduce them into the Bitcoin ecosystem. The official description states: a scalable and confidential smart contract protocol suite for Bitcoin and the Lightning Network, usable for issuing and transferring assets and broader rights.

Layer 2 Expansion Solutions

Image source: Bitcoin Layer 2: Your Complete Guide

Stacks

Stacks is a Bitcoin Layer 2 that allows the use of smart contracts, aiming to link itself to the Bitcoin chain through its unique "Proof of Transfer" (PoX) consensus mechanism, achieving high decentralization and scalability without increasing additional environmental impact. Stacks is an open-source Bitcoin Layer 2 blockchain that brings smart contracts and decentralized applications to Bitcoin. Originally named Blockstack, its foundational work began as early as 2013. The technical architecture of Stacks includes a core layer and subnets, allowing developers and users to choose between the two, with the mainnet being highly decentralized but with low throughput, while subnets have lower decentralization but higher throughput. The Nakamoto upgrade being conducted by Stacks will significantly enhance network performance and introduce an important product—SBTC.

Stacks has updated to a version called Nakamoto, allowing Stacks not only to settle Bitcoin transactions but also to upgrade to 100% Bitcoin reorganization resistance, increasing the speed of Stacks, with an estimated block time of 5 seconds;

SBTC introduces a decentralized and native anchoring method to enhance the total locked value (TVL) and user numbers of the Stacks network by issuing stablecoins based on SBTC.

Lightning Network

The Lightning Network is a second-layer expansion solution for the Bitcoin network, aimed at addressing scalability and transaction speed issues. It is a payment protocol based on smart contracts, allowing participants to make quick, low-cost micro-payments without having to record every transaction on the Bitcoin blockchain.

In the Lightning Network, participants can open a multi-signature payment channel, enabling almost instantaneous payments through direct transactions within the channel, avoiding the need to conduct each transaction on the Bitcoin main chain. Actual settlements with the Bitcoin main chain occur only when the channel is opened and closed. This significantly enhances the processing capacity of the Bitcoin network, reduces transaction fees, and accelerates transaction confirmation speeds.

The Lightning Network operates similarly to message passing in a network, transmitting payments from one node to another through multiple payment channels, forming a payment network that covers the entire network. This design allows participants to make cross-node and cross-channel payments, achieving high interconnectivity. Its core functions include:

• Issuing stablecoins: Providing users with stablecoins in a borderless financial world based on Bitcoin's intrinsic value, allowing for the creation of a new stablecoin, taUSD, and enabling users to transfer BTC and taUSD into Lightning Network channels with a single Bitcoin transaction for DeFi operations;
• Multi-Universe mode: Universes are repositories that store all the information necessary for initializing and synchronizing specific Taproot Asset states;
• Asset issuance and redemption API: Making it as easy for users to trade various assets on Bitcoin as it is to invest in stocks and bonds in the real world, mapping to the issuance of real-world assets;
• Asynchronous receiving function: Providing developers with tools to add Uniform Resource Identifier (URI) to on-chain addresses;
• Scalability: New functionality build-loadtest command allows developers to conduct stress tests on the software.

MVC

MVC is a revolutionary public chain that integrates multiple innovations. On December 8, Jason Kwok, the Chief Operating Officer of the Bitcoin sidechain MVC, announced the roadmap for the first quarter of next year, stating that the development of the Bitcoin cross-chain bridge will be completed. MVC is based on the UTXO and PoW models, achieving high performance, low cost, and strong decentralization. With Layer 1 DID and smart contract technology, it provides the Bitcoin Virtual Machine MVC, aiming to lead 8 billion users into the Web3 era as a top blockchain.

The roadmap for MVC in the first quarter of next year includes updates in nine major areas: building a trustless asset bridge; releasing two Bitcoin-compatible wallets; launching a brand-new block explorer; built-in support for Ordinals and BRC-20; Metacontract integrated development environment; MetaID Bitcoin version; MVC/BTC compatible DEX Orders.Exchange; initiating the first phase of Proof of Building; and launching MVC node V0.2.

BEVM

BEVM is a fully decentralized BTC Layer 2 project that achieves decentralized cross-chain from BTC to BTC Layer 2 through Musig2 aggregated multi-signature technology and Bitcoin light nodes. By being EVM-compatible, it expands the smart contract scenarios of Bitcoin, allowing BTC to break free from the non-Turing completeness and lack of smart contract support of the Bitcoin blockchain, enabling the construction of decentralized applications with BTC as the native Gas.

BEVM utilizes Schnorr signatures and Mast contracts brought by the Taproot upgrade, achieving decentralized BTC cross-chain with over 1000 Bitcoin light nodes. In its network, BTC can circulate freely between L1 and L2 without trust, using BTC as Gas, and being EVM-compatible, quickly gaining support from the Bitcoin community and maximizing developer and user participation, thus rapidly achieving a commercial closed loop for BTC L2.

As BEVM is an EVM-compatible Layer 2, various decentralized applications that can be deployed on the ETH EVM can also be deployed on BEVM, with the only difference being that BTC Layer 2 uses BTC as Gas. Each transaction on BTC Layer 2 will be packaged into BTC Layer 1 in a 10:1 ratio as a sequencer to share the security of BTC Layer 1. In the long run, BEVM's BTC Layer 2 solution will enhance Bitcoin's scalability, reduce costs, and cultivate a more secure and decentralized financial ecosystem, which is of great significance for Bitcoin's long-term development.

Sidechain Expansion Solutions:

Image source: DCX Learn: What is a Sidechain

RSK

RSK is the first EVM-compatible sidechain on the Bitcoin network, a stateful smart contract platform backed by Bitcoin miners. Miners earn rewards through merged mining, actively participating in the smart contract revolution. RSK aims to achieve smart contracts, instant payments, and higher scalability, enhancing the value and utility of the Bitcoin ecosystem. A notable feature of RSK smart contracts is that they use Bitcoin's mining mechanism to maintain their network and security. This means that the RSK smart contract blockchain has higher security and decentralization than Ethereum while avoiding some scalability and performance issues present in the Ethereum network.

RIF is a network based on RSK smart contracts, providing a range of infrastructure services (DeFi, storage, domain services, payment solutions) to address the technical complexities, inadequate user experience, insufficient security, and lack of unified standards faced by second-layer networks.

Spiderchains

Spacechain is the latest proposal for Bitcoin sidechain design, merging mining, requiring miners to run both Bitcoin nodes and the sidechain nodes they wish to mine. The transaction chain starts from a UTXO, creating two outputs for each transaction. The first output is a marker UTXO, indicating that this transaction chain is related to a certain Spacechain; the second output is a small denomination UTXO that anyone can spend, although due to its small denomination, it requires additional inputs and outputs. From the second transaction of the chain, anyone can spend the second output from the Spacechain transaction chain and use it to commit their sidechain block header. Meanwhile, Spiderchain is built on top of the main chain's base layer, created by Botanix Labs in September of this year, aiming to port the Ethereum Virtual Machine to a platform anchored to the Bitcoin network. Its uniqueness lies in the fact that it does not directly involve miners in consensus and does not use any form of merged mining. Spiderchain creates a second-layer proof-of-stake system on Bitcoin using multi-signature and escrow collateral, without requiring any changes to Bitcoin for deployment.

Softchains

Ruben Somsen proposed a sidechain mechanism called Softchain in January 2021. This concept originated from Somsen's earlier proposal of "PoW Fraud Proof," aimed at enhancing the security of Simplified Payment Verification (SPV). In Softchain, main chain nodes need to download and verify the block headers of each Softchain sidechain. When a chain split occurs, main chain nodes must download the relevant blocks and use the UTXO set to commit to verifying these blocks, forming the basis for a bi-directional anchoring mechanism.

Other Protocols:

Image source: What is a Network Protocol and How Does it Work

Omni (Stablecoin)

The Omni protocol, proposed by JR Willett in January 2012, is a digital currency and communication protocol based on the Bitcoin blockchain, enabling features such as smart contracts, user assets, and decentralized peer-to-peer exchanges. In 2014, USDT was the first stablecoin issued on the Bitcoin blockchain based on the Omni Layer protocol. This early-mover advantage captured a significant portion of the cryptocurrency stablecoin market, with Omni-USDT based on the Bitcoin network, where the deposit address is a BTC address, and deposits and withdrawals occur over the BTC network.

Colored Coins (Asset Issuance)

Chia is a more efficient and environmentally friendly cryptocurrency platform provided by Bram Cohen, the founder of the BitTorrent protocol. Chia introduces a new consensus mechanism called Proof of Space and Time (PoST), which serves as an alternative to the traditional Proof of Work (PoW) consensus mechanism. The recently popular script protocol has existed since 2012, utilizing Bitcoin for asset issuance.

DLCs (Scalable Smart Contracts)

On November 4, DLC.Link announced the launch of dlcBTC, an innovative solution aimed at securely enabling Bitcoin for DeFi operations on Ethereum. It is scheduled for release in February 2024, empowering Bitcoin holders to seamlessly participate in DeFi protocols like Curve and AAVE without custodians or third parties.

Ethscriptions (Inscriptions Protocol for Creating and Transferring Content on Ethereum)

The earliest Ethscriptions protocol was created in 2016, but Tom Lehman developed related products for the protocol on June 17 of this year. Ethscriptions is an inscriptions protocol that creates and transfers digital content on Ethereum using transaction call data, bypassing the need for smart contracts for storage and execution to apply deterministic protocol rules to Ethereum call data for state computation, achieving trust in each other's contract results without informing or relying on third parties.

Multibit (Cross-Chain Bridge)

The Multibit cross-chain bridge aims to bridge the Bitcoin network and Ethereum Virtual Machine (EVM) network, currently facilitating transactions among the ETH, BNB, and BTC networks, primarily to provide DeFi services for BRC-20 assets.

Conclusion:

2023 can be considered a pioneering year for the Bitcoin ecosystem. Although its development has been challenging due to its inherent lack of Turing completeness, the emergence of inscriptions has not only shifted market attention to the Bitcoin ecosystem but also attracted many developers. Perhaps we are on the eve of an ecological explosion, similar to the "hundred flowers blooming" scenario that erupted during the last bull market in 2021.

In the current situation, protocols that can stand out are also worth our anticipation and discussion, as the circulation and transmission of digital gold are far from over.