Alphas in Bitcoin Ecosystem: (1) A comprehensive overview of Inscription Protocols

Amidst the mini bull run of November 2023, a prominent trend is emerging in the cryptocurrency world: the ascent of the Bitcoin ecosystem. You may have noticed an influx of buzzwords on your feed, including ‘inscription,’ ‘brc20,’ ‘ordinals,’ $ORDI, $SATS, and perhaps even $RATS, Atomicals, Runes, Pipe, along with the RGB Protocol, Taproot Assets, and Nostr Assets, frequently mentioned in the crypto communities and influencers’ tweets you follow.

Yes, this is magic internet JPEGs on Bitcoin (Taproot Wizards)

If you’re keen to navigate and comprehend the Bitcoin ecosystem but find yourself daunted by these technical concepts and terminologies, the Alpha Club’s “Alphas in Bitcoin Ecosystem” series of research reports is your go-to resource. It promises a comprehensive, systematic, and in-depth understanding of the entire Bitcoin landscape.

You wouldn’t want to miss out on Alpha Club and our forthcoming series of research reports focused on the Bitcoin ecosystem. Especially considering that during the crypto bull market of 2024–2025, the majority of opportunities in the crypto realm are expected to be predominantly within the Bitcoin ecosystem.

Part 2 will be released soon with a focus on CSV (Client-side validation) Protocols. The various inscription protocols mentioned in this article will also be elaborated and analyzed in more detail in subsequent chapters of this series of reports. Follow our twitter and stay tuned…

The catalog for this series of research reports is as follows:

Inscription Protocols

1.1 Ordinals Protocol

1.1.1 BRC20

1.1.2 ORC20

1.1.3 Trac & Tap Protocol

1.2 Atomicals Protocol

1.2.1 ARC20

1.3 Runes

1.3.1 Pipe Protocol

2. Client-Side Validation (CSV) Protocols

2.0 Lightning Network (It is not CSV but usually compatible with CSV protocols)

2.1 RGB Protocol

2.2 Taproot Asset Protocol

3. Other Protocols

3.1 Side Chain: Stacks

3.2 Rollup: Chainway

3.3 EVM-Compatible

3.3.1 Rootstack

3.3.2 DLC.Link

Inscription Protocols

We’ve grown so accustomed to the term “inscription” that we’ve often overlooked its origins and true meaning. The concept of inscription traces back to a method of asset creation on Bitcoin, introduced by the Ordinals Protocol on December 14, 2022.

This protocol enables the embedding of data into Bitcoin’s smallest unit, the “satoshis” (commonly referred to as “sats”). The act of embedding data is termed “inscribing,” and the embedded data itself is known as an inscription. This process endows the inscribed satoshis with distinctive characteristics of uniqueness and scarcity.

Thus, an inscription represents the “information” encoded within Bitcoin. In this context, information equates to assets, with any asset being definable through basic parameters such as its ticker and quantity. Consequently, inscriptions have ushered in a novel method for asset issuance on Bitcoin, marking the beginning of a transformative era in asset creation and management.

1.1 Ordinals Protocol

In the previous section, we explored how the Ordinals protocol can inscribe information into satoshis (sats). But how do we distinguish between these ‘boxes’ (sats) that contain different items (inscription data)? The Ordinals protocol addresses this by organizing sats according to the sequence in which they were minted. This ordering is linked to the timestamp attribute inherent in Bitcoin as a blockchain, where the order of transactions is pivotal and reflective of the timestamp. In the context of Bitcoin, time is not a physical entity but a logical construct, determined by the Lamport clock algorithm in its distributed system.

This ability to differentiate between sats is crucial, as it allows each sat to be marked as unique. This uniqueness is achieved through Bitcoin’s Unspent Transaction Output (UTXO) mechanism, which is integral to the Ordinals protocol. A UTXO represents the remaining balance after a Bitcoin transaction. For example, if Alice has 5 BTC and sends 4 BTC to Bob, the UTXO is 1 BTC, signifying Alice’s remaining balance. This UTXO then serves as a reference point for future transactions.

UTXO model

While information can be inscribed onto a satoshi (sat) within a Bitcoin Unspent Transaction Output (UTXO), it’s practically infeasible to have a UTXO composed of a single sat due to Bitcoin’s dust limit. Therefore, in reality, the actual data is inscribed onto one of the sats within a UTXO, while the remaining sats serve as ‘postage.’

Many Bitcoin scalability protocols, including Inscription and CSV, leverage the UTXO model for recording information. The enhancements brought by Bitcoin’s Segwit and Taproot upgrades provide substantial space (up to 4MB), allowing for the addition of extra information such as text or images. This expanded capacity paves the way for the creation of non-fungible assets (NFTs) utilizing Bitcoin’s storage capabilities.

Non-Segwit vs Segwit Block

Furthermore, the Ordinals protocol’s approach to marking and differentiating sats has sparked significant interest in a new concept: rare sats. An in-depth exploration of rare sats and their various types will be covered in the chapter dedicated to explaining the Ordinals protocol.

1.1.1 BRC20

With the insights provided, we’ve gained a foundational understanding of the Ordinals protocol and its mechanics. The concept of using Bitcoin’s Unspent Transaction Output (UTXO) mechanism to issue Non-Fungible Tokens (NFTs) is fascinating. But what about the issuance of fungible tokens?

We’re already familiar with Ethereum’s approach to token issuance through smart contracts, particularly with the ERC-20 (Fungible Token) and ERC-721 (Non-Fungible Token) standards. Ethereum’s Turing-complete environment, enabled by its Virtual Machine (EVM) that runs smart contracts, allows it to function beyond just a decentralized database.

Bitcoin, on the other hand, is not Turing-complete and does not utilize smart contracts for token standards. However, there’s a workaround. Bitcoin’s UTXO model can handle text, images, and JSON code — a lightweight format for data interchange. By incorporating JSON code within inscriptions and defining parameters such as the token ticker, maximum supply, mint limit, and event types (like deploy, mint, transfer), we can effectively replicate the smart contract functionality on the Bitcoin network.

Metadata Storage

This method is known as BRC20. While it may seem rudimentary, potentially inefficient in terms of UTXO set utilization with limited event types, these limitations are inherent to the BRC20 approach. Despite these drawbacks, the movement towards issuing fungible tokens on Bitcoin has been set in motion, gaining unstoppable momentum with the advent of $ORDI.

1.1.2 ORC20

ORC-20 represents an improvement over BRC-20.

The enhanced features of ORC-20 are as follows:

• Token Recognition: ORC-20 incorporates specific token identification symbols (IDs) to distinguish tokens with the same name.

Comparison of Metadata Storage between BRC-20 and ORC-20

• No Naming Restrictions: ORC-20 removes BRC-20’s four-letter naming limit, allowing for the creation of names of any length.
• Token Upgradability: ORC-20 introduces the ability to modify total supply and maximum minting amount per instance, offering greater flexibility in token issuance, such as reducing supply to increase scarcity.
• Double-Spending Attack Prevention: Utilizes UTXO in transactions to build-in a function that prevents double-spending attacks.
• Allowing Transfer from BRC-20 to ORC-20: Only the deployer of BRC-20 tokens can operate the transfer command to ORC-20.

Since its launch, ORC-20 had been lukewarm until the recent Nirvana upgrade.

In November 2023, ORC-20 announced the upcoming Nirvana upgrade, focusing on supporting stablecoin issuance and enhancing atomic transaction functions between ORC-20 tokens. Key details of the update include:

• A snapshot of all ORC-20 assets at block height 818418, supported by Geniidata and 20 Scan indices. Post-update, all ORC-20 assets will be upgraded and enabled for various functions, including Swap and OTC.
• Summary of specific updates:
• Improved inscription format for better BTC DeFi integration.
• Removal of unnecessary fields and introduction of basic functionalities for broader use cases.
• Adaptation to traditional stablecoin issuance methods, catering to issuers like USDT and USDC.
• Adoption of the verified BRC-20 transfer model to simplify transactions and facilitate support from centralized exchanges.
• Transition of reward mechanisms from centralized to decentralized, encouraging more developers to join the ORC-20 ecosystem.
• Native OTC feature enabling atomic swaps between ORC-20 tokens and order book functions similar to Uniswap V3 for AMM.
• Establishment of clear indexing rules for easier developer utilization.
• Fixing various bugs in the current version.

To address the liquidity challenges faced by BRC20, the ORC20 protocol has positioned its focus towards stablecoins and decentralized finance (DeFi), signifying strategic differentiations. The subsequent chapters will delve into whether ORC20 can experience a resurgence under this new narrative.

1.1.3 Tap Protocol

Tap Protocol is another solution designed to address the liquidity issues of BRC20. Committed to building OrdFi, Tap aims to enhance the liquidity of Ordinals and BRC20 assets and improve transaction efficiency through features like token staking, token swaps, and batch transfers.

Still in its early days, Tap Protocol’s ecosystem is under plenty of developments. Interestingly, Tap’s vision of “OrdFi” seemingly stands for DeFi in Ordinals, aligning with ORC20’s positioning. In the Ordinals DeFi space, these two BRC20 improvement protocols might engage in intense competition.

1.2 Atomicals Protocol

The Ordinals Protocol’s use of Bitcoin’s logical time to sort sats is an effective approach.

Clearly, this method is more suitable for NFTs than for FTs (Fungible Tokens): each sat is unique, and each NFT could correspond to a sat, although Bitcoin’s dust limit and UTXO mechanism might lead to sat wastage. For FTs, since they are fungible, differentiating sats seems unnecessary. Additionally, the number of sats in a UTXO is unrelated to the quantity of FTs, creating indexing challenges that often require off-chain indexers to resolve.

This method also results in sat wastage: information is inscribed on sats, but due to the dust limit, a UTXO must contain at least 546 sats. There are many ‘postage’ sats compared to the few that record information.

So, why distinguish sats if the information is written in UTXOs? A new asset standard could be constructed with UTXO at its core, leading to the concept of Atomicals:

1. Establish a new data format in UTXO as a token standard, named Atomicals.
2. Treat sats as homogeneous “atoms” representing the quantity of fungible tokens.
3. UTXO, being a native Bitcoin concept, is traceable on the blockchain and can be traced back through its entire history.

This traceable, new asset type based on Bitcoin’s native transaction forms is what the founder of Atomicals calls a digital object. This deliberate avoidance of the term “NFT” shows Atomicals Protocol’s ambition to establish a new asset type distinct from Ethereum NFTs and Ordinals NFTs.

Intriguingly, Atomicals chose PoW Consensus for minting inscriptions (both FT and NFT), termed Dmint (Decentralised Mint). This return to Bitcoin’s roots distinguishes Atomicals from other protocols.

Whether PoW brings fairness is debatable: it allows everyone to participate, but disparities in computing power and efficiency between GPU and CPU PoW mining exist.

While one thing is certain: PoW is a bold experiment likely to garner community attention and participation.

1.2.1 ARC20

Based on the explanation of Atomicals, understanding ARC-20 should be straightforward.

ARC-20, natively supported by the Atomical protocol, uses the Coloured Coin model, where each ARC-20 token corresponds to one sat in terms of quantity. Thus, ARC20 doesn’t require off-chain indexers, as all necessary information resides within the UTXO.

Defining ARC20 Token information in a UTXO — usually Ticker, Sum Supply, Mint Limit, Difficulty, Starting Block, etc. — allows users to mint and transfer via UTXO transactions.

The primary distinction between ARC20 and BRC20 is the dependency on off-chain indexing to identify token presence and balance. BRC20 relies on off-chain indexing as its token quantity is inscribed within sats and not directly readable, while ARC20 does not, with its token quantity being the number of sats in the UTXO.

In essence, BRC20 views sats as containers and UTXOs as record-keeping methods, while ARC20 sees sats as counters and UTXOs as containers.

Technically, ARC20 is more efficient and aligns more with Bitcoin’s native approach. Like Ethereum’s challenge to Bitcoin, Atomicals may one day challenge Ordinals.

1.3 Runes

Runes protocol, proposed by Ordinals founder Casey Rodarmor, was developed in response to the flaws he perceived in the existing Bitcoin network’s fungible token solutions like BRC-20, particularly the creation of excessive, non-functional UTXOs clogging the network.

Runes, like Atomicals, issues fungible tokens based on the UTXO mechanism, aligning with the Bitcoin community’s consensus to avoid redundant data in token transactions. However, Runes differs by using op_return for data storage, whereas Atomicals utilizes SegWit’s 4MB space.

Op_return, a special Bitcoin script opcode, makes UTXOs unspendable and removable from the UTXO set, reducing node maintenance costs. This approach is less burdensome on the blockchain but limits Runes to character-type fungible tokens due to the small data capacity of op_return (80 bytes). Atomicals, with a broader scope, can include NFTs (digital objects), domains (Realm), DID, and more.

Currently, Runes remains a concept as Casey is focused on maintaining Ordinals.

1.3.1 Pipe Protocol

Although Runes sparked intense discussions, its development was paused on November 2nd by Casey, who decided to focus on optimizing the Ordinals protocol. Benny, the founder of Trac/Tap Protocol, embraced Runes’ concept and proposed Pipe Protocol, with $Pipe being the first token post-Runes and the inaugural token of Pipe Protocol.

Like Runes, Pipe uses op_return and UTXO mechanisms to lessen the burden on the Bitcoin UTXO set. However, diverging from Runes, Pipe inherits BRC-20’s core philosophy of free deploy and fair mint, which Casey believed contributed to blockchain congestion. Unlike Runes, envisioned as a project-driven airdrop protocol, Pipe is still in its early stages. Its synergy with Benny’s other projects, Tap Protocol and Trac (a decentralized indexer on Ordinals), is eagerly anticipated by the market. $Pipe will be governed by $Tap, the initial token of the Tap Protocol developed by the Trac team, which in turn is governed by $Trac, a BRC-20 token.

Conclusion

In conclusion, Inscription Protocols can be broadly categorized into two groups: Ordinals and its challengers.

In the Ordinals ecosystem, BRC20 stays dominant, but its lack of liquidity and expandability opens opportunities for challengers like ORC20 and Tap Protocol in the DeFi space.

Among Ordinals’ challengers, Atomicals Protocol and Pipe Protocol, based on Runes’ concept, stand out. They focus on the UTXO mechanism for native Bitcoin transactions, significantly reducing the impact on Bitcoin’s main chain UTXO set.

Runes/Pipe’s use of op_return minimizes blockchain impact, but its data capacity limit restricts ecosystem expansion. Atomicals, leveraging Segwit’s larger space, supports applications like NFTs, domains, and DIDs, showing potential to form its own ecosystem.

In the next report, we will zoom in on CSV (Client-side validation) protocols. Follow our twitter and stay tuned…

Twitter: @tryalpha_club