From the perspective of asset issuance, look at the evolution and challenges of BTC expansion

Co-produced by Infinitas丨AC Capital

Author: Xuan Rui丨0xDragon888

Edit & Review: Echo | echoindahouse

Guidance: Hong Shuning

This article will combine the new normal brought by Ordinals to the BTC ecosystem, look at the current challenges of BTC scaling from the perspective of asset issuance, and finally predict that RGB & Taproot Assets with asset issuance + application scenarios have the potential to lead the next narrative.

Abstract (TL;DR)

1. Ordinals Ecosystem Explosion: Opening up new possibilities for Bitcoin asset issuance

2. Ordinals brings the new normal: the scramble for block space, the expansion of UTXOs

3. The evolution and challenges of BTC expansion from the perspective of asset issuance

4. The expansion scheme of asset issuance + application scenarios has huge growth potential

Ordinals Explosion: Opening New Possibilities for Bitcoin Asset Issuance

As digital gold or currency, the Bitcoin community has been conservative since the hard fork in 2017, and there has been no new narrative in recent years. At the beginning of 2023, the Ordinals protocol toggled the fate gears of Bitcoin, and then the Ordinals ecological users exploded, and the on-chain fees of Bitcoin exceeded Ethereum for the first time in six years, and the narrative imagination of the crypto industry returned to the Bitcoin blockchain.

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Prior to the birth of the Ordinals protocol, there were several major upgrades on the technical side of BTC. In 2017, the SegWit (Segregated Witness) upgrade was activated, expanding the block space to 4 MB and increasing transaction throughput. Immediately after the developers launched the Lightning Network, Bitcoin Layer 2 entered the public eye. The 2021 Taproot upgrade brings more secure, efficient, and private Bitcoin to bring programmability to Bitcoin.

The improvement on the technical side did not solve the real pain points, until the emergence of Ordinals completely opened the door to the landing of the BTC ecosystem. In December 2022, Casey launched the Ordinals protocol, an extension protocol for the Bitcoin network that allows data to be inscribed on Bitcoin Satoshis, which enables extended functionality by assigning a unique number to each satoshi and adding annotations.

Inspired by the Ordinals protocol, Domo created Bitcoin’s experimental Token token standard, BRC-20, on March 8, 2023, leveraging the ordinal numbers and inions (inscriptions) of JSON data to deploy token contracts, mint coins, and transfer tokens. Satoshi is used to store and manage various information about tokens.

Bitcoin has always had ways to mint and issue assets before, such as color coins in 2012 and Counterparty in 2014, but they have not captured user pain points, and the use of the Fair launch+ protocol to control assets on BRC20 has stimulated real user demand, and the explosive growth of BRC-20 has also opened up a new possibility of asset issuance on Bitcoin.

To date, the Ordinals ecosystem has generated more than 41 million digital inscriptions that are inscribed on the world’s oldest and most secure distributed ledger, including images, text, audio, and even applications. Its Chinese inscription (BRC-20) accounts for the largest proportion, and the Ordinals ecosystem has derived a number of innovative branch protocols such as BRC-20, ATOM, PIPE and RUNES, **** Ordinals explosion has brought new traffic to the BTC ecology and laid a new foreshadowing for the BTC ecology.

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Ordinals Brings the New Normal on the Chain: Contention for Block Space, UTXO Inflation

The Ordinals boom is also reflected in the high transaction fees of users, the small data footprint of text inscriptions, the willingness of BRC-20 users to pay high transaction fees, the fact that miners fill the block space with a record number of transactions, and the excessive number of BRC-20 transactions that will preempt the transaction bandwidth, resulting in longer block times and higher fees.

In 2022, miners will earn a total of 5,374 BTC from transaction fees, and since Ordinals minted a total of 2,886 BTC in transaction fees, the emergence of Ordinals has made miners’ earnings no longer dependent on Bitcoin rewards, ensuring that Bitcoin miners reduce their dependence on pure block rewards, and the proportion of transaction fees has increased significantly, which has also brought a second curve to miners’ income.

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After the dramatic growth in the number of inscriptions in the Ordinals ecosystem, the broader Bitcoin community has engaged in a heated debate about its impact on Bitcoin, arguing that Bitcoin believes that at the expense of financial transactions, Ordinals transactions will only increase the Mempool backlog on the Bitcoin network, inflate transaction fees, and ultimately hinder peer-to-peer transactions.

Casey, the founder of the Ordinals protocol, said in September that the current fungible token protocol on the Bitcoin blockchain is 99.9% scam and meme. However, they don’t seem to be going away anytime soon, just as casinos aren’t going to “go away” anytime soon. Build a better asset issuance protocol, Runes, so that gamblers can continue gambling without creating a large number of UTXOs to increase the burden on nodes.

Also raising concerns is BTCStudy founder Ajian, who said that from a technical point of view, BRC20 is a backward technology, and the minting and transfer of BRC-20 obviously do not require the association on the UTXO, but it limits the number of tokens that can be minted by a single UTXO, and they are likely to remain in the UTXO set forever, resulting in the expansion of the UTXO set, increasing the burden on Bitcoin full nodes, and the pit censorship ability and trustlessness of the Bitcoin network are significantly affected.

Since the opening of BRC20 trading (April 2023), Bitcoin’s UTXO set has ballooned from 5 GB to 8.16 GB, and the Bitcoin development community has been debating whether to use technical means to shield inscription transactions, which are eroding the Bitcoin network.

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Ordinals ecosystem supporters believe that the explosion of Ordinals has brought new traffic and user habits to the Bitcoin ecosystem, and the BTC ecosystem must also adapt to the new on-chain normal brought by Ordinals. The next step of the narrative of the Ordinals ecosystem should focus on solving the UTXO inflation, and finally a better way to issue assets can make the Bitcoin ecosystem have more native application ecology and promote the sustainable development of the Bitcoin ecosystem.

The evolution and challenges of BTC expansion from the perspective of asset issuance

At present, there is no shortage of asset issuance protocols in the BTC ecosystem, what is lacking is smart contracts and scalability, scalability can determine the development possibility and life cycle of BTC expansion in a certain direction, and the complexity of the Bitcoin Layer1 expansion scheme is high, and it is more accepted by the community to build a new Layer2 based on Bitcoin Layer1, which is compatible and does not affect the Bitcoin system, and at the same time solves the problem of on-chain congestion.

After the completion of Segregated Witness, the Bitcoin ecosystem is fully developing in the direction of Layer 2 such as the lightning network and sidechains. Whether it is the Lightning Network, Sidechain or RGB protocol, the development of Bitcoin Layer 2 is in full swing, and there are important challenges in the three dimensions of Turing completeness, decentralization and scalability compared to Brc-20, Stacks, Bitvm, Lightning Network, RGB, and Taproot Assets from the perspective of better asset issuance.

• **** Sidechain Stacks: **** Sidechain leader Stacks is currently on the chain at 19.3 MTVL, Stacks has many benefits, especially the existing Ethereum applications can be directly moved, but sidechain Stacks, RSK and other sidechain solutions are facing the problem of centralization, Q4 is about to usher in the Stacks Nakamoto upgrade, and sBTC will be launched as a smart contract.
• ****BRC20: **** inscription ecological leader, BRC-20 is a bitcoin script, the completeness of the Tuling is not complete, the user base is many, the protocol is simple enough, but it occupies too much on-chain space, and at the same time, BRC-20 completes the security of funds is too centralized, lacking scalability and Turing incomplete restrictions BRC-20 is further developed, and at present, Rune, Arc-20, pipe, BRC-20Swap, etc. are further solving related problems; Lightning Network: The Lightning Network is the largest and most influential Layer 2 in the Bitcoin ecosystem, and more and more companies are entering the Lightning Network ecosystem, where they make off-chain payments through specific state channels and make final settlements on the Bitcoin chain, but the Lightning Network cannot issue them Token, which is only suitable for high-frequency payments, has no smart contract function, has poor Turing completeness, and the number of users and usage scenarios of the Lightning Network is still small, but the protocols developed based on the Lightning Network, such as Taproot Assets and RGB, have more room for imagination.
• • RGB: Inspired by the concepts of single-use seal and client-side validation proposed by Peter Todd in 2016, RGB introduced smart contract functionality to the Lightning Network, and released GRB v.010 in April 2023. Bitswap, Pandora Prime Inc and other projects have successively opened up the possibility of RGB landing. Tether’s CEO also said that RGB is the best choice for issuing stablecoins on the Bitcoin chain, and Tether is considering the possibility of issuing USDT through RGB. Taproot Assets: It is also a client-side asset verification protocol, and the alpha version of Taproot Assets v0.3 mainnet will be released in October 2023, with the goal of expanding Bitcoin into a scalable multi-asset network. Institutional asset issuance, Nostr Assets Protocol, a new protocol built on top of Taproot Assets, introduces assets to the Nostr social protocol. BitVM: In the October 2023 whitepaper, BitVM uses a Rollups idea to execute complex programs off-chain, and then put key evidence on-chain. It is also a Turing-complete smart contract that brings Bitcoin to Bitcoin, but BitVM has extremely high requirements for computing power and only theoretical executability. Scalability and commercial implementation need to be further understood.

The BTC expansion scheme for asset issuance + application scenarios has great growth potential

With the improvement of the infrastructure of the Bitcoin ecosystem and the successive expansion routes, there are two core problems that need to be solved in the next stage of BTC scaling:

From the perspective of asset issuance: Is the technical route suitable for the landing application scenario, is it decentralized, is the Turing complete, and is it scalable?

From the perspective of asset circulation: Can the progress of the **** protocol be adopted and supported by the infrastructure and users in the industry?

From the perspective of asset issuance, BTC currently has a lot of gaps from Ethereum in asset issuance, one is the lack of well-known projects, and the other is that the user scale is not as good as Ethereum, but as the blockchain network with the highest market capitalization, BTC Layer2 with asset issuance protocol + application scenarios has great growth potential in the future.

The current Ordinals completely opens up the possibility of asset issuance on Bitcoin, but Ordinals cannot support on-chain computing like Ethereum, how can the BTC ecosystem complete asset settlement like Ethereum, **** From the perspective of the technical evolution of BTC asset issuance, client verification paradigms such as RGB & Taproot Assets have the potential to take over the Ordinals inscription as a new important narrative ecology.

At the same time, in the future Bitcoin multi-asset era, the BTC ecological outbreak also needs diversified application scenarios, the premise of diversified application scenarios is based on stablecoins, and the Lightning Network is the best stablecoin issuance platform, but there is not enough stablecoin precipitation, ****Taproot Assets and RGB have the potential to accelerate their development in the fields of high-frequency payment, stablecoins, DeFi, NFT, etc., covering more tracks and users, and expanding the diversified application scenarios of the Lightning Network.

Summary

From the perspective of asset issuance technology evolution, client verification paradigms such as RGB & Taproot Assets are driving change, less on-chain computing, more on-chain verification, and a more reasonable way of asset issuance in the Bitcoin ecosystem.

Reference

• _assets/bitcoin-ordinals-analysis

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