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Comprehensive analysis of the technological evolution of the Bitcoin ecosystem.

2023-12-07 19:30

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Original Title: "Aqua Labs Research | A Comprehensive Analysis of the Evolution of Bitcoin Ecosystem Technology from Colored Coins to Smart Contracts"

Original Source: Aqua Labs Research

As the first successful decentralized digital currency, Bitcoin has been at the core of the cryptocurrency field since its inception in 2009. As an innovative means of payment and a tool for storing value, Bitcoin has sparked widespread global interest 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 become popular in the market, and various scripts have experienced growth of over 100 times. The on-chain transactions of Bitcoin are severely congested, with an average gas of over 300 sat/vB. At the same time, the airdrop from Nostr Assets has further attracted market attention, and the proposal of protocol design whitepapers such as BitVM and BitStream indicates that the Bitcoin ecosystem has vibrant potential.

Aqua Labs research team conducted a comprehensive review of the current state of the Bitcoin ecosystem, covering technological advancements, market dynamics, regulations, and other aspects, to conduct an in-depth analysis of Bitcoin technology and study market trends. Our goal is to provide a panoramic view of Bitcoin development. The article first reviews the basic principles and development history of Bitcoin, and then delves into the technological innovations of the Bitcoin network, such as Lightning Network and Segregated Witness, and predicts their future development trends.

Asset Issuance: Starting with Colored Coins

The essence of the script ecosystem is to provide low-threshold asset issuance rights for ordinary individuals, accompanied by simplicity, fairness, and convenience. The appearance of script protocols on Bitcoin can be traced back to 2023, but as early as 2012, the concept of using Bitcoin for asset issuance existed, known as Colored Coins.

Colored Coins: Early Attempts

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 and tangible assets held by third parties and facilitate ownership transactions through Colored Coins. The term "Colored" refers to adding specific information to Bitcoin's unspent transaction outputs (UTXOs) to distinguish them from other Bitcoin UTXOs, thereby introducing heterogeneity into homogeneous Bitcoins. With Colored Coins technology, the issued assets have many of the same characteristics as Bitcoin, including preventing double spending, 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. Special software is required to identify transactions related to Colored Coins. Obviously, Colored Coins only have value in communities that recognize 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 communities can take advantage of many of Bitcoin's advantages 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 introduced the Open Assets Protocol as a way to implement Colored Coins. Asset issuers use asymmetric encryption to calculate asset IDs, ensuring that only users with the asset ID private key can issue the same asset. For asset metadata, the OP_RETURN opcode is used to store metadata in a script, called a "marker output", which stores colored information without polluting UTXOs. Because it utilizes Bitcoin's public-private key encryption tools, asset issuance can be executed through a multi-signature mechanism.

EPOBC

In 2014, ChromaWay launched the EPOBC protocol, which stands for Enhanced, Padded, Order-Based Coloring. The protocol includes two operations: issuance and transfer. The issuance operation is used to issue assets, while the transfer operation facilitates the transfer of assets. Asset types cannot be explicitly encoded or differentiated, and each issuance transaction will issue a new asset, determining its total quantity 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.

Other information about EPOBC assets is stored in the nSequence field of Bitcoin transactions. The nSequence field is a reserved field in Bitcoin transactions consisting of 32 bits. The 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 originating transaction to determine its category and legitimacy.

Mastercoin/Omni Layer

Compared with the aforementioned agreements, Mastercoin has achieved more successful results in commercial implementation. In 2013, Mastercoin conducted the first-ever ICO, raising 5000 BTC and ushering in a new era. The well-known USDT was initially issued on the Bitcoin blockchain and introduced through the Omni Layer.

Mastercoin has a lower dependence on Bitcoin and chooses to maintain most of its state off-chain, storing only a minimal amount of information on the blockchain. Essentially, Mastercoin views Bitcoin as a decentralized logging system, using any Bitcoin transaction to broadcast changes in asset operations. Validating transaction validity involves constantly scanning the Bitcoin blockchain and maintaining an off-chain asset database. This database preserves the mapping between addresses and assets, with addresses reusing the Bitcoin address system.

Early Colored Coins mainly used the OP_RETURN opcode in scripts to store metadata about assets. After the SegWit and Taproot upgrades, new derivative protocols have more options.

SegWit, short for Segregated Witness, mainly separates the witness (transaction input script) from the transaction. The main reason for this separation is to prevent attacks by modifying the input script. However, it also has a benefit: effectively increasing the block capacity, allowing more witness data to be stored.

Taproot introduces an important feature called MAST, which allows developers to include metadata for any asset in outputs using Merkle trees. It enhances fungibility and scalability with Schnorr signatures, and supports multi-hop transactions through the Lightning Network.

Ordinal Numbers, BRC20, and Simulated Trading: A Grand Social Experiment

Broadly speaking, ordinal numbers consist of four components.

·BIP used for sorting sats

·Use Bitcoin Core nodes to track an indexer of all Satoshi positions (ordinal numbers).

· Wallet for transactions related to ordinal numbers.

·Block explorer used to identify ordinal-related transactions.

Of course, the core is the BIP/protocol itself. The ordinal defines a sorting scheme (starting from 0, based on the order in which they were mined) and assigns numbers to the smallest unit of Bitcoin, Satoshis. This introduces heterogeneity and scarcity to the originally homogeneous Satoshis.

It can reuse BTC infrastructure, including single signature, multi-signature, time locking, height locking, etc., without explicitly creating ordinals. It provides good anonymity and does not leave explicit on-chain footprints. However, the disadvantages are also obvious, as a large number of small unspent UTXOs may increase the size of the UTXO set, potentially leading to so-called dust attacks. In addition, the space occupied by indexes is large, and specific information is required each time a specific number of satoshis are spent:

·Blockchain Headlines

·The Merkle path to the coinbase transaction that created the Satoshi.

·Create the coinbase transaction for the Satoshi.

In order to prove that a specific Satoshi is included in a specific output.

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Sidechains: The Ethereum Method in Bitcoin

Stacks

Stacks positions itself as the smart contract layer for Bitcoin, using its native token as the Gas token. Stacks adopts a micro-block mechanism and evolves synchronously with Bitcoin, with their blocks being confirmed simultaneously. In Stacks, this is called the "anchored block". Each Stacks transaction block corresponds to a Bitcoin transaction, achieving higher transaction throughput. As blocks are generated simultaneously, Bitcoin acts as a rate limiter for creating Stacks blocks, preventing denial-of-service attacks on its peer-to-peer network.

Stacks achieves consensus through Proof of Transfer (PoX) with its dual spiral mechanism. Miners send BTC to STX holders to compete for the right to mine blocks, and successful miners receive STX rewards upon successfully mining a block. During this process, STX holders receive a proportionate amount of 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 native tokens (as seen in RSK).

For transaction data in the Stacks blockchain, the hash value of the transaction data is stored in the Bitcoin transaction script using the OP_RETURN bytecode. With the built-in functionality of Clarity, Stacks nodes can retrieve the Stacks transaction data hash stored in the Bitcoin transaction.

Stacks can be seen as almost a second layer chain for Bitcoin; however, there are still some shortcomings in cross-border asset movement. After Nakamoto's upgrade, Stacks supports sending Bitcoin transactions to complete asset transfers, but due to the complexity of the transactions, these transactions cannot be verified on the Bitcoin chain. Asset transfers can only be verified through a multi-signature committee.

RSK

RSK utilizes a merged mining algorithm, allowing Bitcoin miners to assist in block production for RSK at almost zero cost and receive additional rewards. RSK does not have a native token and continues to use BTC (RBTC) as its 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. Asset transfers are conducted using locking and minting mechanisms, where assets are sent to multi-signature addresses on Liquid by using BTC, allowing assets to enter the Liquid sidechain. 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 software development kits (SDKs) related to financial services for developers. The total locked value (TVL) on the Liquid network is currently about 3000 BTC.

Nostr Assets: Enhanced Centralization

"Any computable function can be verified on Bitcoin."

Dear user, here is the translation of the content you provided:

—Robin Linus, founder of BitVM.

- Early: Although EVM has a comprehensive virtual machine architecture, BitVM only has one function to verify whether a string is 0 or 1.

After discussing BitVM, we can shift our focus to an all-in-one BRC20 tool solution.

2. Unlocking Liquidity: Innovative Signature Solution Breaks BRC Asset Liquidity Bottleneck

Due to the unique nature of BRC assets, liquidity has always been a challenge for the entire industry. The all-in-one BRC20 tool successfully completed the transaction of BRC assets through its innovative signature solution, providing users with a more flexible and efficient solution, effectively unlocking liquidity.

Conclusion

A comprehensive review of the text shows that due to limitations in processing and computing power on the Bitcoin mainnet, Bitcoin must move its calculations 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-side verification solutions utilize certain fields in Bitcoin transactions to store critical information, treating the Bitcoin mainnet as a distributed logging system to ensure the availability of key data, similar to Sovereign Rollups. While this approach does not require modifications to the Bitcoin protocol layer and provides greater feasibility, it cannot fully inherit the security of Bitcoin.

On the other hand, some teams are working on on-chain verification, attempting to use existing tools to achieve arbitrary computation on Bitcoin and achieve efficient scalability through zero-knowledge proof technology. However, these solutions are still in the early stages, with high computational costs and unlikely to be implemented in the short term.

Against this backdrop, an all-in-one BRC tool has become a noteworthy solution. By providing a low gas method to quickly obtain effective inscriptions, promoting fair launch of BRC assets, and addressing liquidity challenges and fair sales through innovative signature schemes, the all-in-one BRC tool demonstrates its value in the current ecosystem. Despite the technical challenges facing the Bitcoin ecosystem, the all-in-one BRC tool provides users with a more flexible and efficient trading experience, offering a unique solution for the development of Bitcoin.

Of course, some people may wonder why not turn to Ethereum, as Ethereum and other blockchains have powerful computing capabilities like Bitcoin. Why re-implement the transaction process on Bitcoin?

Because it is Bitcoin.