Original title: "Aqua Labs Research | From Colored Coins to Smart Contracts, a comprehensive analysis of the technological evolution of the Bitcoin ecosystem"
Original source: Aqua Labs Research
Bitcoin has been at the heart of the cryptocurrency space since its inception in 2009 as the first successful decentralized digital currency. As an innovative means of payment and store of value, Bitcoin has triggered widespread attention around the world in cryptocurrency and blockchain technology. However, as the Bitcoin ecosystem continues to mature and expand, it faces various challenges, including transaction speed, scalability, security, and regulatory issues.
Recently, the script ecosystem led by BRC20 has taken the market by storm, with various scripts experiencing more than a hundredfold growth. Bitcoin's on-chain transactions are severely congested, with the average Gas reaching more than 300 sat/vB. At the same time, the airdrop from Nostr Assets has further attracted market attention, and the introduction of protocol design white papers such as BitVM and BitStream shows that the Bitcoin ecosystem has a booming potential.
The Aqua Labs research team conducts in-depth analysis of Bitcoin technology and studies market trends by conducting a comprehensive review of the current state of the Bitcoin ecosystem, covering technological advancements, market dynamics, regulations, and more. We aim to provide a panoramic perspective on the development of Bitcoin. The article first reviews the basic principles and development history of Bitcoin, then delves into the technical innovations of the Bitcoin network, such as the Lightning Network and Segregated Witness, and predicts its future development trends.
Asset Issuance: Starting with Colored Coins
The essence of the script ecosystem is to provide ordinary individuals with low-threshold asset issuance rights, accompanied by simplicity, fairness and convenience. The appearance of the script protocol on Bitcoin can be traced back to 2023, but as early as 2012, the concept of asset issuance using Bitcoin already existed, known as Colored Coins.
Colored Coins: An Early Attempt
Colored Coins refers to a set of technologies that use the Bitcoin system to record the creation, ownership, and transfer of assets other than Bitcoin. This technology can be used to track digital assets and tangible assets held by third parties, facilitating ownership transactions through Colored Coins. The term "Colored" refers to the addition of specific information to Bitcoin's unspent transaction outputs (UTXOs) to distinguish them from other Bitcoin's UTXOs, thereby introducing heterogeneity in homogeneous Bitcoins. Through the Colored Coins technology, the issued assets have many of the same characteristics as Bitcoin, including double-spending prevention, privacy, security, transparency, and censorship resistance, ensuring the reliability of transactions.
It is worth noting that the protocol defined by Colored Coins is not implemented by typical Bitcoin software. Specialized software is required to identify transactions related to Colored Coins. Obviously, Colored Coins are valuable only in the community that recognizes the Colored Coins protocol; otherwise, the colored properties of heterogeneous Colored Coins will be lost and return to pure Satoshi. On the one hand, Colored Coins recognized by small-scale communities can use many advantages of Bitcoin for asset issuance and circulation. On the other hand, it is almost impossible to merge the Colored Coins protocol into the largest consensus Bitcoin core software through a soft fork.
Open assets
In late 2013, Flavien Charlon launched the Open Asset Protocol as an implementation of Colored Coins. Asset issuers use asymmetric cryptography to calculate asset IDs, ensuring that only users with the private key of the asset ID can issue the same asset. For asset metadata, the OP_RETURN opcode is used to store metadata in the script, called a "marker output", which stores colored information without polluting UTXOs. Since it utilizes Bitcoin's public-private key cryptographic tools, asset issuance can be performed through a multi-signature mechanism.
EPOBC
In 2014, ChromaWay launched the EPOBC protocol, which stands for Enhanced, Padded, Order-Based Coloring. The protocol consists of two operations: genesis and transfer. The genesis operation is used to issue assets, while the transfer operation facilitates the transfer of assets. Asset types cannot be explicitly encoded or distinguished, and each genesis transaction issues a new asset, with its total quantity determined during the issuance process. EPOBC assets must be transferred using the transfer operation, and if an EPOBC asset is used as an input in a non-transfer operation transaction, the asset will be lost.
Additional information about EPOBC assets is stored in the nSequence field of Bitcoin transactions. The nSequence field is a reserved field in Bitcoin transactions and consists of 32 bits. Its lowest six bits are used to determine the transaction type, while bits 6 to 12 are used for padding to meet the anti-dust attack requirements of the Bitcoin protocol. The advantage of using the nSequence field to store metadata information is that no additional storage space is required. Since there is no asset ID for identification, every transaction involving EPOBC assets must be traced back to the founding transaction to determine its category and legitimacy.
Mastercoin/Omni Layer
Compared to the aforementioned protocols, Mastercoin has achieved more successful results in commercial implementation. In 2013, Mastercoin conducted the first ever ICO, raising 5,000 BTC and ushering in a new era. The well-known USDT was originally issued on the Bitcoin blockchain and introduced through the Omni Layer.
Mastercoin is less dependent on Bitcoin, choosing to maintain most of its state off-chain and storing only minimal information on-chain. Mastercoin essentially treats Bitcoin as a decentralized log system, using any Bitcoin transaction to broadcast changes in asset operations. Verification of transaction validity involves constantly scanning the Bitcoin blockchain and maintaining an off-chain asset database. This database retains the mapping relationship between addresses and assets, and the addresses reuse the Bitcoin address system.
Early Colored Coins mainly used the OP_RETURN opcode in the script to store metadata about the asset. After SegWit and Taproot upgrades, new derivative protocols have more options.
SegWit, or Segregated Witness, is primarily about separating witnesses (transaction input scripts) from transactions. The main reason for this separation is to prevent attacks by modifying input scripts. However, it also brings a benefit: effectively increasing block capacity, allowing more witness data to be stored.
Taproot introduces an important feature called MAST, which enables developers to include metadata for any asset in the output using Merkle trees. It enhances fungibility and scalability with Schnorr signatures and supports multi-hop transactions via the Lightning Network.
Ordinals, BRC20 and simulated trading: a grand social experiment
Broadly speaking, ordinals consist of four components:
BIP for sorting sats
An indexer that tracks all satoshi positions (ordinals) using a Bitcoin Core node
Wallets that process transactions related to ordinals
A block explorer to identify transactions associated with ordinals
The core, of course, is the BIP/protocol itself. Ordinals define an ordering scheme (starting at 0, based on the order they were mined) to assign numbers to Satoshis, the smallest unit in Bitcoin. This introduces heterogeneity to the otherwise homogeneous Satoshis, introducing scarcity.
It can reuse BTC's infrastructure, including single signature, multi-signature, time lock, height lock, etc., without explicitly creating ordinals. It provides good anonymity and leaves no explicit on-chain footprint. However, the disadvantages are also obvious, because a large number of small unused UTXOs may increase the size of the UTXO set, potentially leading to so-called dust attacks. In addition, the index takes up a lot of space, and each time a specific satoshi is spent, specific information is required:
Blockchain Header
The Merkle path to the coinbase transaction that created that satoshi
Create a coinbase transaction for that satoshi
To prove that a specific satoshi is included in a specific output.
In this context, inscription is the act of inscribing arbitrary content onto sats. The specific method involves placing the content into the Taproot script path spending script, completely on-chain. The inscribed content is serialized in the HTTP response format and pushed into a non-executable script in the spending script, called an "envelope". Specifically, inscription involves adding OP_FALSE before the conditional statement, placing the inscribed content inside a non-executable conditional statement rendered in JSON format. The size of the inscribed content is limited by the Taproot script to a total of 520 bytes.
Since the Taproot spending script requires the existence of a Taproot output to spend, inscription requires two steps: commitment and reveal. In the first step, a Taproot output is created that commits to the inscription. In the second step, the inscription and the corresponding Merkle path are used to spend the Taproot output from the previous step, revealing the inscription on-chain.
The original purpose of inscription was to introduce non-fungible tokens (NFTs) to Bitcoin. However, new developers created BRC20, which simulated ERC20 on its basis, enabling the issuance of homogeneous assets in ordinals. BRC20 includes operations such as Deploy, Mint, and Transfer, each of which requires two steps: commitment and reveal. The transaction process is more complicated and more costly.
Take actual data as an example:
The selected part is the inscribed content, and the deserialized result is as follows:
The goal of the ARC20 protocol, which originated from Atomicals, is to simplify transactions by binding each ARC20 token unit to a satoshi, reusing the Bitcoin transaction system. After issuing assets through the commitment and reveal steps, transfers between ARC20 tokens can be achieved by directly transferring the corresponding satoshi. The design of ARC20 is more in line with the literal definition of colored coins - adding new content to existing tokens to create new tokens, where the value of the new token is not less than the original token, similar to gold and silver jewelry.
Client-Side Validation (CSV) and Next-Generation Asset Protocol
Client-side validation, proposed by Peter Todd in 2017, involves off-chain data storage, on-chain commitments, and client-side validation. Asset protocols that currently support client-side validation include RGB and Taproot assets (Taro).
RGB
In addition to client-side validation, RGB uses Pedersen hashing as a commitment mechanism and supports output masking. When requesting a payment, the UTXO of the receiving token does not need to be publicly disclosed; instead, a hash value is sent, which enhances privacy and censorship resistance. When spending tokens, the masked value needs to be revealed to the recipient to verify the transaction history.
In addition, RGB introduces AluVM to increase programmability. During client verification, the user not only verifies the incoming payment information, but also receives all transaction history from the payee, tracing back to the asset's genesis transaction for finality. Verifying all transaction history ensures the validity of the received assets.
Taproot Assets
Developed by Lightning Labs, Taproot Assets enables instant, high-frequency, low-cost transfers of issued assets on the Lightning Network. Designed entirely around the Taproot protocol, it improves privacy and scalability.
Witness data is stored off-chain and verified on-chain, either locally or in an information repository called a "universe" (similar to a Git repository). Witness verification requires all historical data from asset issuance, propagated through the Taproot asset gossip layer. Clients can cross-verify using a local copy of the blockchain.
Taproot assets use a sparse Merkle Sum Tree to store the global state of assets, which brings higher storage costs but provides efficient verification. Inclusion/non-inclusion proofs allow transactions to be verified without retracing the asset transaction history.
Scalability: Bitcoin’s Enduring Proposition
Although Bitcoin has the highest market capitalization, security, and stability, it has deviated from the original vision of a "peer-to-peer electronic cash system." The limited block capacity makes Bitcoin unable to handle a large number of frequent transactions, so various protocols have emerged in the past decade to solve this problem.
Payment channels and the Lightning Network: Bitcoin’s orthodox solutions
The Lightning Network works by establishing payment channels. Users can create payment channels between any two parties, connect channels to form a broader payment channel network, and even make payments between users indirectly without a direct channel. For example, if Alice and Bob wanted to make multiple transactions without recording each one on the Bitcoin blockchain, they could open a payment channel between them. They can execute multiple transactions within this channel, requiring only two blockchain records: once when the channel is opened and once when it is closed. This significantly reduces the time waiting for blockchain confirmation and reduces the burden on the blockchain.
Currently, the Lightning Network has over 14,000 nodes, 60,000 channels, and a total capacity of over 5,000 BTC.
Sidechains: Ethereum’s approach to Bitcoin
Stacks
Stacks positions itself as a smart contract layer for Bitcoin, using its native token as a gas token. Stacks uses a microblock mechanism that evolves in sync with Bitcoin, and their blocks are confirmed at the same time. In Stacks, this is called an "anchored block." Each Stacks transaction block corresponds to a Bitcoin transaction, achieving higher transaction throughput. Since blocks are generated simultaneously, Bitcoin acts as a rate limiter for the creation of Stacks blocks, preventing denial of service attacks on its peer-to-peer network.
Stacks achieves consensus through a double helix mechanism of proof of transfer (PoX). Miners send BTC to STX holders to compete for the right to mine a block, and after successfully mining a block, the successful miner will be rewarded with STX. In this process, STX holders receive a corresponding proportion of the BTC sent by the miner. Stacks aims to incentivize miners to maintain the historical ledger by issuing native tokens, although incentives can still be achieved without a native token (as seen in RSK).
For transaction data in the Stacks blockchain, the hash of the transaction data is stored in the Bitcoin transaction script using the OP_RETURN bytecode. Through Clarity’s built-in functionality, Stacks nodes can retrieve the Stacks transaction data hash stored in the Bitcoin transaction.
Stacks can be seen as an almost second-layer chain for Bitcoin; however, there are still some flaws in terms of cross-border asset movement. After the Nakamoto upgrade, Stacks supports sending Bitcoin transactions to complete the transfer of assets, but due to the complexity of the transactions, these transactions cannot be verified on the Bitcoin chain. The transfer of assets can only be verified through a multi-signature committee.
RSK
RSK uses a merged mining algorithm, where Bitcoin miners can assist RSK in block production at almost zero cost and receive additional rewards. RSK has no native token and continues to use BTC (RBTC) as a Gas Token. RSK has an execution engine compatible with the Ethereum Virtual Machine (EVM).
Liquid
Liquid is a federated sidechain of Bitcoin with controlled node access, overseen by 15 members responsible for block production. Assets are transferred using a lock-and-mint mechanism, where assets are enabled to enter the Liquid sidechain by using BTC sent to a multi-signature address on Liquid. To exit, L-BTC is sent to a multi-signature address on the Liquid chain. The security of the multi-signature address is set to 11 out of 15.
Liquid focuses on financial applications and provides developers with a software development kit (SDK) related to financial services. The total locked value (TVL) on the Liquid network is currently around 3,000 BTC.
Nostr Assets: Increased Centralization
Nostr Assets, originally named NostrSwap, is a BRC20 exchange. It was upgraded to the Nostr Assets protocol on August 3, 2023, supporting the transfer of all assets within the Nostr ecosystem. The Lightning Network handles asset settlement and security. Nostr Assets enables users to send and receive Lightning Network assets using Nostr's public and private keys. Transactions on the Nostr Assets protocol, except for deposits and withdrawals, are gas-free, encrypted, and stored on the Nostr protocol relay using IPFS for fast and efficient access. It supports natural language interaction, eliminating the need for complex interfaces. Nostr Assets provides users with a simple and convenient way to transfer and trade assets, which, when combined with the flow effect of the Nostr social protocol, has the potential to find important applications in certain areas. However, fundamentally, it is a method of controlling (custodial) wallets using Nostr messages. Users deposit assets into the Nostr Assets relay by transferring them on the Lightning Network, similar to depositing assets into a centralized exchange. When users want to transfer and trade assets within Nostr Assets, they send a message signed with the Nostr key to the server. After verification, the server records the transaction internally, bypassing execution on the Lightning Network or Mainnet, achieving zero gas fees and high TPS.
BitVM: Programmability and unlimited scalability
“Any computable function can be verified on Bitcoin.”
—Robin Linus, founder of BitVM
BitVM was proposed by Robin Linus, the founder of ZeroSync. It uses existing Bitcoin OP Codes (OP_BOOLEAN, OP_NOT) to build AND and NOT gates, breaking down programs into basic AND and NOT gates. It puts the root of the spending script into a Taproot transaction to achieve low-cost on-chain storage. According to computational theory, all logical calculations can be built using AND and NOT gates. In theory, BitVM is Turing complete and can perform all calculations on Bitcoin. However, in practice, there are many limitations.
BitVM operates in a P2P mode and follows the concept of OP Rollup. There are two roles: prover and verifier. In each transaction, the prover and verifier jointly construct the transaction and deposit the collateral. The prover provides the result, and if the verifier calculates a different result, they submit fraud proof to the chain to punish the prover. The main use cases of BitVM are for minimal trust bridges and ZKP extensions (ZK Rollup). BitVM's proposal is a compromise because it is difficult to gain support in the Bitcoin community for increasing the complexity of OP_CODE. It leverages existing OP_CODEs to implement new features.
BitVM introduces a new scaling paradigm, but there are many challenges in practice:
- Premature: While EVM has a comprehensive virtual machine architecture, BitVM has only one function to verify if a string is 0 or 1.
- Storage overhead: Building a program using NAND gates may require hundreds of megabytes of data, with billions of Taproot leaves.
- P2P: The current model involves interaction between two parties, and the prover-challenger structure has incentive problems. There are considerations to expand to 1-N or N-N, similar to the ideal OP Rollup (single-party honesty assumption).
After discussing BitVM, we can shift our focus to the one-stop BRC20 tooling solution.
One-stop BRC20 tooling solution
1. Fair Launch
The multitude of assets in the BRC20 space can be overwhelming, so effective management is critical for users. Therefore, a one-stop BRC20 tool is welcome as it allows users to quickly obtain valuable inscriptions in a low-gas manner, thus achieving a fairer launch for BRC assets.
2. Unlocking liquidity: Innovative signature solution breaks the BRC asset liquidity bottleneck
Due to the unique nature of BRC assets, liquidity has always been a challenge for the entire industry. The one-stop BRC20 tool successfully completed the transaction of BRC assets through exchange through its innovative signature solution, providing users with a more flexible and efficient solution, effectively unlocking liquidity.
3. Fair sales: solving the issuance problem
The one-stop BRC20 tool not only facilitates one-click inscription release and batch transfer of inscriptions, but also solves industry pain points by quickly locking inscriptions and completing inscriptions on the chain process with low Gas. All these efforts are aimed at providing users with a fairer and more efficient sales experience.
in conclusion
A comprehensive review of the text shows that due to the limitations of the Bitcoin mainnet in terms of processing and computing power, Bitcoin must move computing off-chain to promote a more prosperous and diverse ecosystem. Currently, there are two main solutions:
On the one hand, off-chain computing and client verification solutions use certain fields in Bitcoin transactions to store key information, treating the Bitcoin mainnet as a distributed log system to ensure the availability of key data, similar to Sovereign Rollups. Although this approach does not require modifying the Bitcoin protocol layer and provides higher feasibility, it cannot fully inherit the security of Bitcoin.
On the other hand, some teams are working on on-chain verification, trying to implement arbitrary computations on Bitcoin using existing tools and achieve efficient expansion through zero-knowledge proof technology. However, these solutions are still in their early stages, have high computational costs, and are unlikely to be implemented in the short term.
In this context, the one-stop BRC tool becomes a noteworthy solution. By providing a low-gas method to quickly obtain valid inscriptions, promoting the fair launch of BRC assets, and solving liquidity challenges and fair sales through innovative signature schemes, the one-stop BRC tool demonstrates its value in the current ecosystem. Despite the technical challenges facing the Bitcoin ecosystem, the one-stop BRC tool provides users with a more flexible and efficient transaction experience, providing a unique solution for the development of Bitcoin.
Of course, some people might wonder why not just switch to Ethereum, since Ethereum and other blockchains have the same powerful computing power as Bitcoin. Why re-implement the transaction process on Bitcoin?
Because it’s Bitcoin.
References:
https://wizardforcel.gitbooks.io/masterbitcoin2cn/content/appdx8.html
https://github.com/chromaway/ngcccbase/wiki/EPOBC_simple
https://github.com/OpenAssets/open-assets-protocol/blob/master/specification.mediawiki
https://twitter.com/LNstats
https://twitter.com/robin_linus/status/1723472140270174528
https://github.com/fiksn/bitvm-explained
https://bitcoinmagazine.com/technical/the-big-deal-with-bitvm-arbitrary-computation-now-possible-on-bitcoin-without-a-fork
https://mirror.xyz/0x5CCF44ACd0D19a97ad5aF0da492AC0388469DfE9/_k3vtpI7a5cQn5iISH7-riECpyudfI4BTeeeBMwNYDQ
This article is contributed by a contributor and does not necessarily represent the views of BlockBeats.