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Evolution and challenge of BTC expansion from asset issuance

AC Capital
9 min readNov 23, 2023

Intro

The present paper aims to integrate the new norm introduced by Ordinals into the BTC ecosystem, examine the current challenges faced by BTC expansion from an asset issuance perspective, and ultimately forecast that RGB & Taproot assets with asset issuance + application scenarios possess the potential to spearhead the forthcoming narrative.

Co-produced by Infinitas, AC Capital

Abstract (TL; DR)

  • Ordinals Eco-explosion: Opening up new possibilities for Bitcoin asset issuance
  • Ordinals brings the new normal: competition for block space, UTXO expansion
  • Evolution and challenges of BTC expansion from asset issuance
  • The expansion solution in the asset issuance + application scenario has huge growth potential

1. Ordinals goes viral: Opening up new possibilities for Bitcoin asset issuance

As a digital store of value or currency, the Bitcoin community has adopted a more conservative stance since the 2017 hard fork, and there has been a lack of new narratives in recent years. However, the introduction of the Ordinals protocol in early 2023 marked a turning point for Bitcoin’s fate. With the subsequent emergence of the Ordinals ecosystem and its widespread adoption by users, transaction fees on the Bitcoin chain surpassed Ethereum’s for the first time in six years. This event reignited narrative imagination within the crypto industry and refocused attention on the potential of the Bitcoin blockchain.

Source：https://cryptofees.info/

Prior to implementing the Ordinals protocol, BTC underwent several significant technical upgrades. In 2017, SegWit (Segregated Witness) was activated, expanding block space to 4 MB and improving transaction throughput. Shortly after that, developers introduced Lightning Network as a Layer2 solution for Bitcoin transactions. The Taproot upgrade in 2021 further enhanced security, efficiency, privacy features while introducing programmability to Bitcoin.

Despite these technical improvements, they did not fully address real pain points until Ordinals emerged as it opened up opportunities for practical applications within BTC’s ecosystem. In December 2022 Casey launched an extension protocol called Ordinals which allowed data inscriptions on individual Satoshi within the Bitcoin network. By assigning unique numbers to each token and enabling comments through this protocol expansion mechanism.

Inspired by this breakthrough development with Ordinals protocol,Domo created BRC-20 — an experimental Token standard for Bitcoin on March 8th ,2023 using ordinals-based JSON data and Inscription technology to deploy token contracts,mint coins,and facilitate token transfers.The . Satoshi is utilized as storage medium managing various information related to tokens.

The previous methods of casting and issuing assets in Bitcoin, such as color coins in 2012 and Counterparty in 2014, failed to effectively address users’ pain points. BRC20 utilizes the Fair launch+ protocol to exert control over assets and stimulate genuine user demand. The remarkable growth of BRC-20 has also unlocked unprecedented possibilities for asset issuance on the Bitcoin network.

To date, Ordinals has ecologically produced more than 41 million digital inscriptions, which are inscribed on the world’s oldest and most secure distributed ledger, including images, text, audio and even applications. The inscription (BRC-20) accounts for the largest proportion. Ordinals ecosystem has derived BRC-20, ATOM, PIPE and RUNES and other innovative branch protocols. Ordinals explosion for the BTC ecosystem to bring new traffic, but also for the BTC ecosystem buried new foils.

Source：https://dune.com/dgtl_assets/bitcoin-ordinals-analysis

2. Ordinals brings the new norm on the chain: the fight for block space, the expansion of UTXO

The prominence of ordinals is also manifested in the substantial transaction fees utilized by users, the minimal data footprint of text inscriptions, the elevated transaction processing fees paid by BRC-20 users, the record-breaking number of miners filling the block space with an unprecedented number of transactions, the excessive volume of BRC-20 transactions hogging the transaction bandwidth, and the heightened number of BRC-20 transactions. Consequently, the transaction block entry time elongates and the fee escalates.

Source：https://studio.glassnode.com/workbench/btc-transaction-count-momentum

In 2022, miners amassed a total of 5,374 BTC from transaction fees, and considering ordinals minted a total of 2,886 BTC from transaction fees, ordinals have rendered miners’ earnings no longer reliant on Bitcoin rewards, ensuring that Bitcoin miners are marginally less dependent on pure block rewards. The steep increase in the proportion of transaction fees also introduces a secondary curve to miners’ income.

After a significant surge in the number of Ordinals ecological inscriptions, the broader Bitcoin community has engaged in a heated discussion about their impact on Bitcoin. Critics argue that, at the cost of financial transactions, Ordinals transactions will merely exacerbate the Mempool congestion in the Bitcoin network, leading to higher transaction fees and ultimately impeding peer-to-peer transactions.

Casey, the founder of the Ordinals protocol, stated in September that the existing homogenized token protocol on the Bitcoin blockchain is nearly 100 percent fraudulent and a Meme. However, they do not appear to be disappearing anytime soon, just as casinos never “vanish” quickly. To address this issue, a more robust asset issuance protocol, Runes, has been developed, allowing gamblers to continue betting without generating a multitude of UTXOs that overload nodes.

Ajian, the founder of BTCStudy, also voiced concerns that BRC20 is a outdated technology from a technical standpoint. The minting and transfer of BRC-20 do not necessitate an association with the UTXO, yet it curtails the number of tokens that can be generated by a single UTXO.They are likely to perpetually remain within the UTXO set, leading to the expansion of the UTXO set. This, in turn, exacerbates the burden on full Bitcoin nodes, and significantly impairs the inspection capability and trustless performance of the Bitcoin network.

Source:https://statoshi.info/d/000000009/unspent-transaction-output

Since BRC20 trading commenced (April 2023), the UTXO set of Bitcoin has surged from 5 GB to 8.16 GB. Consequently, the Bitcoin development community has been engaging in discussions regarding the implementation of technical measures to impede inscription transactions, which are eroding the Bitcoin network as the UTXO set continues to expand.

3. Evolution and challenge of BTC expansion from asset issuance

The current BTC ecosystem is not lacking in asset issuance protocols, but rather in smart contracts and scalability. Scalability plays a crucial role in determining the development potential and lifespan of BTC expansion in a specific direction. The Bitcoin Layer1 expansion scheme is highly complex, thus the community prefers to build a new Layer2 solution based on Bitcoin Layer1. This approach ensures compatibility with the existing Bitcoin system while addressing on-chain congestion issues.

After the completion of the Segwit, the Bitcoin ecology has fully developed in the direction of Layer2 such as lightning network and side chain. Whether it is lightning network, side chain or RGB protocol, the development of Bitcoin Layer2 is in full swing, not to discuss the Liquid alliance chain here, only from the perspective of better asset issuance. There are important challenges in comparing Brc-20, Stacks, Bitvm, Lightning Network, RGB, and Taproot Assets in the three dimensions of Turing complete, decentralization, and scalability:

  • Stacks: The side chain Stacks currently has 19.3 MTVL on the chain, offering numerous benefits. One notable advantage is the seamless migration of existing Ethereum applications to this platform. However, it should be noted that side chain solutions like RSK are grappling with centralization issues. In Q4, we can anticipate the Nakamoto upgrade for Stacks. Additionally, sBTC will soon be available as a smart contract.
  • BRC-20: Script, although not fully Bell-complete, boasts a large user base and a relatively simple protocol. However, its chain footprint is substantial and the complete capital security of BRC-20 is overly centralized. Additionally, its lack of scalability and Turing incompleteness impose limitations on further development. Currently, projects like Rune, Arc-20, Pipe, and BRC-20Swap are actively addressing these concerns.
  • The Lightning Network: The Lightning Network is the most extensive and influential Layer 2 solution within the Bitcoin ecosystem. An increasing number of companies are joining the Lightning Network ecosystem, which enables off-chain payments through specific state channels and final settlement on the Bitcoin blockchain. However, it should be noted that the Lightning Network does not support token issuance, is primarily suitable for high-frequency transactions, and lacks smart contract functionality. Although the user base and usage scenarios of the Lightning Network are still relatively limited, there is great potential in protocols developed based on this network, such as Taproot Assets and RGB.
  • RGB: Drawing inspiration from Peter Todd’s concepts of Single-use seal and Client-Side Validation proposed in 2016, RGB, introduced smart contract capabilities to Lightning networks. In April 2023, RGB v.010 was released. Due to its technical complexity, the ecosystem has not yet fully developed; however, Infinitas, Bitlight Labs, Diba, Bitswap, Pandora Prime Inc., and other projects have successively explored the potential of implementing RGB. The CEO of Tether also expressed that RGB is the optimal choice for issuing stablecoins on the Bitcoin chain and mentioned Tether’s consideration of issuing USDT through RGB.
  • Taproot Assets: The Taproot Assets v0.3 mainnet alpha version, which follows the client asset verification protocol, is scheduled to be released in October 2023. Its objective is to facilitate the expansion of Bitcoin into a scalable multi-asset network. However, it should be noted that Taproot Assets are distributed by project parties rather than being actively cast by users. This application scenario makes Taproot Assets more suitable for asset issuance by project parties and institutions. Currently, the Nostr Assets Protocol has been developed on top of Taproot Assets to introduce assets into the Nostr social protocol.
  • BitVM: The BitVM white paper was released in October 2023, introducing the utilization of Rollups-like concepts to execute complex programs off-chain and subsequently store crucial evidence on the blockchain. Similar to the Turing-complete smart contract that revolutionized Bitcoin, BitVM imposes significant computational demands and remains theoretically executable only. Further comprehension is required for scalability and practical implementation.

4. The BTC expansion solution for asset issuance + application scenarios has huge growth potential

The next stage of the BTC expansion competition presents two fundamental challenges that require resolution:

  • From an asset issuance perspective: Does the technical approach align with applicable use cases? Is it decentralized? Is it Turing complete? Is it scalable?
  • From an asset flow perspective: Will industry infrastructure and users embrace and support the progress made in agreements?

From the perspective of asset issuance, there is still a significant gap between BTC’s current asset issuance and Ethereum. One aspect is the lack of well-established projects, while another is the comparatively smaller user base compared to Ethereum. However, as the blockchain network with the highest market value at present, BTC Layer2 has immense potential for future growth when combined with asset issuance protocols and application scenarios.

The current Ordinals provide opportunities for asset issuance on Bitcoin; however, they do not support on-chain computing like Ethereum does. To address this limitation and achieve asset settlement similar to Ethereum, BTC ecosystem can explore technical advancements in asset issuance such as client-side validation paradigms like RGB & Taproot Assets which have emerged as important new narrative ecosystems within Ordinals inscriptions.

Simultaneously, in the future era of multi-asset Bitcoin, diversified application scenarios are crucial for its ecological expansion. Stablecoins serve as a prerequisite for diversified application scenarios and Lightning Network emerges as an excellent platform for stablecoin issuance; nevertheless, there remains a shortage of stablecoin accumulation. Taproot Assets and RGB possess potential to expedite development across various domains including high-frequency payments, stablecoins, DeFi (Decentralized Finance), NFTs (Non-Fungible Tokens), etc., thereby encompassing more sectors and users while expanding Lightning Network’s diverse application scenarios.

Sum up

Revised sentence: The Bitcoin ecosystem is currently experiencing the first wave of Ordinals east wind. In addition to asset issuance, it requires more complex and sustainable application scenarios for sustainable empowerment. From the perspective of asset issuance technology evolution, RGB & Taproot Assets and other client verification paradigms are driving change towards less on-chain calculation and more on-chain verification. This has led to a more reasonable asset issuance method for the Bitcoin ecosystem.

If you are a developer in related areas of RGB & Taproot Assets who believes in the potential of mass adoption of client-side validation paradigm, please feel free to contact AC Capital and Infinitas or leave a comment if you have different views.

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AC Capital

Written by AC Capital

106 Followers

AC Capital is an investment firm focusing on Blockchain and Fin-tech, committed to discovering unicorns and boosting their development.

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