Summary
As we all know, Bitcoin does not have the smart contract capabilities of Ethereum . Unlike Ethereum's ERC20 contract, connecting to Bitcoin's UTXO is an unavoidable link . Based on the UTXO architecture application, its security is naturally shared with the main chain. This model also brings a lot of expectations to the market. It is possible to build an ecological model different from Ethereum L2, which is also the expectation of the market.
Compared with Ethereum, UTXO is the most distinctive data model of Bitcoin, so the Bitcoin Layer2 ecosystem is expected to present an ecological model different from that of Ethereum. With the intensification of industry competition and the continuous advancement of technology, Ethereum L2 has developed rapidly in recent years. The on-chain fees of Ethereum have been controlled as a whole under the prosperous ecology, while the development of the Bitcoin network ecology is still very rudimentary. The recent rise of Ordinals applications such as inscriptions and runes has provided a possibility for building applications based on UTXO. The active on-chain transactions brought about by activities such as the inscriptions in 2023 and the runes this year have laid the foundation for tapping the potential of UTXO.
The Taproot upgrade further enhances the development potential of the Bitcoin ecosystem. As we all know, the Bitcoin Taproot upgrade is the most important upgrade since the activation of Segregated Witness (SegWit). Taproot aims to further improve the privacy and efficiency of the network. The most significant change in the Taproot upgrade is that it allows multiple complex signatures (such as multi-signature wallets) to be aggregated and verified together instead of individually. By aggregating signatures, the network's performance is faster, fees are lower, and block space is saved. Taproot provides a new way to perform Bitcoin transactions by enhancing user privacy and flexibility, which will greatly improve Bitcoin's scalability.
The Cell of Nervos CKB is similar to a smarter UTXO. Bitcoin UTXO is a box with a paper ledger , while Cell replaces the ledger in the box with an Excel electronic document. Nervos CKB inherits the architecture of Bitcoin UTXO and creates the Cell Model, a general UTXO model as a state storage that maintains the simplicity and consistency of UTXO. In CKB, all states are stored in Cell, calculations are completed off-chain, and transactions are verified and uploaded to the chain by nodes. Cell represents the basic data storage unit in Nervos. Unlike Bitcoin UTXO, it can contain various data types, such as CKByte, Token, JavaScript code, or serialized data such as JSON strings. This richer data type broadens the capabilities of Cell and expands UTXO - such as implementing smart contracts (even customized smart contracts, such as issuingNFT tokens, limiting the supply of tokens, and formulating usage conditions that meet unique needs).
Will the uniqueness of UTXO also give birth to a different ecological world? The deep mining of Bitcoin UTXO by inscriptions and runes makes it possible to deploy assets based on UTXO, and the upgrade of UTXO by Nervos CKB further liberates computing power. These indicate the different application potential of UTXO, which seems to be more interesting and has become a new expectation of the industry. Looking at the development of Ethereum, from the ERC20 standard that gave birth to ICO, to the development of AMM that provided the source power for DeFi, to the emergence of NFT and the metaverse, its ecological paradigm has gradually become fuller. But this process is not achieved overnight, and there are many twists and turns in the middle. Bitcoin's recent innovations have gained a certain market popularity from the beginning, which is a good phenomenon, indicating that the market has great expectations and confidence in the potential of UTXO. But the popularity comes quickly and cools down quickly. After the appearance of runes, the popularity of inscriptions naturally decreases. At present, both inscriptions and runes are still in the stage of scrambling for "mints". Minting is just the beginning, and how to develop applications and enrich the ecology later is more important. The situation of Nervos CKB is similar. The current ecological applications can be said to be a simple "copy" of the Ethereum ecosystem.
Risk warning : Blockchain technology research and development is not as good as expected; regulatory policy uncertainty; Web3.0 business model implementation is not as good as expected.
1. Core Viewpoint
Bitcoin UTXO itself does not have smart contract capabilities, and Bitcoin has not yet produced a rich ecosystem like Ethereum. With the exploration of UTXO potential by Ordinals protocol, Nervos CKB, etc., new application models such as inscriptions and runes have emerged, gradually becoming the focus of industry attention. Based on the UTXO architecture application, its security is naturally shared with the main chain. This model also brings a lot of expectations to the market. It is possible to build an ecological model different from Ethereum L2, which is also the expectation of the market.
This article analyzes several typical UTXO application models and provides a prospect for the Bitcoin ecosystem.
2. UTXO’s Spring, BTC Layer2 Ecosystem is expected to develop further
2.1 BTC Layer2 based on UTXO is expected to give birth to a new ecological model
The working principle of blockchain requires decentralized nodes to reach consensus and confirmation, which will inevitably lead to a decrease in efficiency. Therefore, when processing tasks (transferring or executing contract programs), it is naturally not as fast as centralized nodes. This is a typical Blockchain Trilemma problem (security, scalability, and decentralization cannot be optimal at the same time). From the perspective of improving scalability, the second-layer network (Layer2, L2) is a widely adopted solution. With the rapid development of Ethereum L2 in recent years, the on-chain fees of Ethereum under the prosperous ecology have been controlled as a whole, while the ecological development of the Bitcoin network is still very rudimentary. The on-chain transactions brought about by the activities such as the inscriptions in 2023 and the runes this year are active, and it can be seen that the fees of the Bitcoin network have a rapid rise (see Figure 2).
The UTXO mechanism makes every satoshi of Bitcoin "non-homogeneous", which is expected to give birth to an ecological model different from Ethereum. Since Bitcoin has no accounts, the output created by Bitcoin transactions is not actually a simple public key address, but a script. We can understand it this way. In the transaction where Bob pays Alice 1.5 BTC, the output script created by Bob will contain Alice's public key Hash. The meaning of the entire script is that whoever can provide a signature to run this script containing Alice's public key can spend the 1.5 BTC of this transaction. Obviously, only Alice's private key can be used to create a signature, and signatures created by other private keys will not be verified by this script, thus ensuring that others cannot impersonate Alice to spend this output. In other words, the BTC in UTXO is not recorded in someone's account as a balance - each transaction initiator creates a lock for these BTC through a script, and the owner has the key - of course, the input (transfer initiator) and output (transfer recipient) of a certain transfer of Bitcoin may be composed of multiple historical UTXOs, similar to the patchwork of banknotes of different denominations. One of the benefits of this is that all transfer transactions are from the perspective of BTC circulation, and different UTXOs can be traded in parallel because UTXOs are strictly distinguished. It can also be understood this way: the UTXO mechanism records the circulation of all parts of BTC (the smallest unit is "sats"). It can be imagined that each sats is a coin, and each circulation obtains a signature to record the rotation process. Compared with Ethereum, UTXO is the most distinctive data model of Bitcoin, so Bitcoin L2 is expected to present an ecological model different from that of Ethereum.
The upgrade further enhances the development potential of the Bitcoin ecosystem. As we all know, the Bitcoin Taproot upgrade is the most important upgrade since the activation of Segregated Witness (SegWit). Taproot aims to further improve the privacy and efficiency of the network. The most significant change in the Taproot upgrade is that it allows multiple complex signatures (such as multi-signature wallets) to be aggregated and verified together instead of individually. By aggregating signatures, the network performs faster, has lower fees, and saves block space. Taproot provides a new way to perform Bitcoin transactions by enhancing user privacy and flexibility, which will greatly improve the scalability of Bitcoin.
As the Ordinals protocol gave birth to applications such as inscriptions and runes, it further promoted the development of the Bitcoin ecosystem. As of May 6, the TVL of the Ethereum ecosystem exceeded 96 billion US dollars. The Bitcoin ecosystem has experienced rapid development in the past year, and the TVL has reached 1.2 billion US dollars. There is no doubt that compared with Ethereum, the development of the Bitcoin ecosystem is still in its early stages.
2.2 Ordinals Protocol Further Explores New Possibilities of UTXO
Referring to the development of Ethereum Layer2, Bitcoin L2 also has different technical routes. As we all know, Bitcoin does not have the smart contract capabilities of Ethereum. Therefore, some technical routes of Bitcoin's second-layer network include state channels (such as lightning network, etc.), side chains, Rollup, etc. Most of these routes rely more on L2 to realize the expansion capabilities of smart contracts, and realize asset cross-connection between the Bitcoin main chain and L2 through cross-chain bridges. This can be said to belong to the category of side chains. A core issue of side chains is how the side chains and the main chain achieve consensus and shared security, and how to connect to the UTXO of the Bitcoin main chain is an unavoidable link. The recent rise of Ordinals applications such as inscriptions and runes provides a possibility for building applications based on UTXO. Based on the UTXO architecture application, its security is naturally shared with the main chain. This model also brings a lot of expectations to the market. It is possible to build an ecological model different from that of Ethereum L2, which is also the expectation of the market.
Under the UTXO model, the circulation of each BTC (sats, the smallest unit of Bitcoin) is traceable and non-homogeneous (perhaps this is the earliest NFT), which provides a basis for the development of the Ordinals protocol and the BRC-20 ecosystem. In December 2022, Bitcoin developer Casey Rodarmor released an open source software ORD that runs on the Bitcoin Core full node. In simple terms, the software allows users to enter any information on the Bitcoin blockchain, such as a string of text or an image, and then bind the uploaded information to a specific Satoshi, and finally get a Satoshi with some information, which is the so-called Bitcoin NFT. To put it more clearly, the Ordinals protocol is divided into two parts: Ordinals and Inscription. Ordinals is essentially a scheme for numbering the smallest unit of Bitcoin, Satoshi sats (1 BTC = 100000000 sats), and allows individual Satoshi to be tracked and transferred. Here, Satoshi are numbered in the order of mining and transferred from transaction input to transaction output in a first-in-first-out order. When each satoshi is numbered, a piece of content can be written into the "witness isolation zone" of the transaction, and this piece of content will also be assigned to the first satoshi of the transaction output. This writing process is called inscribe, and the written content is called Inscription. The inscription here can be a picture, text, audio and video, or even code. In theory, as long as the size does not exceed the 4MB upper limit of the Bitcoin block, the inscription can be completed. Therefore, Inscription is very similar to NFT in terms of expression, and Ordinals is a protocol that allows people to mint NFTs on the Bitcoin network similar to Ethereum.
Ordinals protocol can not only be used to issue NFTs, but also can be used to issue tokens when inscriptions are attached in JSON data format. After further exploring the potential of UTXO, new asset protocols such as BRC-20 were created, which promoted the development of inscriptions, runes and other applications. Since the emergence of BRC-20, transactions on the Bitcoin chain have accounted for a certain proportion, which indicates the development potential of the unique Bitcoin Layer2 ecosystem.
3. What kind of ecological applications should UTXO generate?
3.1. Ordinals Protocol Gives Birth to Inscriptions and Rune Ecosystem
BRC-20 originated from a community experiment and is an attempt at Bitcoin ecology. On March 9, 2023, Twitter user domodata published the BRC-20 standard, which he called an "interesting and experimental standard", on gitbook. It is based on the Ordinals protocol and can set the inscription to JSON data format to deploy, mint and transfer tokens. In short, damodata believes that the Ordinals protocol can not only be used to issue NFTs, but also can be used to issue tokens when the inscription is attached in JSON data format. Therefore, the BRC-20 token can be understood as a variant of the Ordinals NFT. The inscription on the NFT is a picture, but the inscription on the BRC-20 is a unified JSON format text data. BRC-20 mainly provides three standards for the issuance of homogeneous tokens on the Bitcoin network, including the deployment (deploy), minting (Mint) and transfer (Transfer) of the BRC-20 token. Developers can complete the creation and issuance of BRC-20 tokens by following this standard. In the gitbook homepage, domodata also gives examples of deployment, casting, and transfer.
The BRC-20 standard has promoted the rapid development of inscriptions. After all, the potential of Bitcoin blocks and UTXO is rarely explored in depth. This is an interesting experiment based on Bitcoin UTXO and has been sought after by the community and users.
The inscription based on BRC-20 is an exploration of the potential of Bitcoin UTXO, focusing on NFT assets. Naturally, the asset protocol of homogenous tokens (FT) will also become a new direction. At 8:09 on April 20, 2024, BTC successfully completed the fourth halving at block height 840000, and the mining reward of each block of the Bitcoin network was halved from 6.25 BTC to 3.125 BTC. At the same time, Bitcoin Runes was officially launched at block height 840000. Runes are improved on the basis of inscriptions, and assets are more flexibly deployed directly in Bitcoin UTXO, that is, homogenous tokens are issued based on UTXO on the Bitcoin network. Figuratively speaking, it is similar to an etching technology, just like the Chinese "Runes" expresses. The token assets deployed by the Runes protocol intuitively record information on the Bitcoin chain: that is, written into the OP-RETURN field of Bitcoin UTXO (unspent output).
The launch of Rune has led to a rapid increase in Bitcoin chain fees. Since its launch at 8:09 on April 20, the Bitcoin chain fees generated by Rune activities accounted for 57.7% of the total fees on that day, while previously the Bitcoin chain fees were mainly traditional Bitcoin transfers. For block 840000, the fees generated were 37.626 BTC, which is 10 times more than the mining incentive (3.125 BTC)! It is highly sought after by the market.
Rune has obviously gone a step further, with significant improvements in design, issuance and compatibility, and is fully prepared to be compatible with homogeneous tokens, docking bridges, and DeFi applications.
3.2 Evolution of UTXO: Nervos (CKB) Cell Model
Bitcoin does not have the familiar account balance model, but uses UTXO (Unspent Transaction Output) to express the transaction flow of Bitcoin. For example, when a user receives 100 BTC from others, a 100BTC UTXO is formed, which is equivalent to treating the 100BTC as a box and adding a lock that can only be unlocked by the user's private key. In fact, the 100BTC may be composed of several other locked UTXO boxes (for example, 4 25BTC UTXO boxes, or other combinations), that is, the result of each operation forms an unspent output (UTXO); instead of just updating the (digital) status of the balance like the account balance model. But at the same time, Bitcoin UTXO can only store the value of the Bitcoin it "contains", and cannot store more data, nor does it have more scalability.
Nervos CKB inherits the architecture of Bitcoin UTXO and creates the Cell Model, a general UTXO model as state storage that maintains the simplicity and consistency of UTXO. In CKB, all states are stored in Cells, calculations are done off-chain, and transactions are verified and uploaded to the chain by nodes. Cell represents the basic data storage unit in Nervos. Unlike Bitcoin UTXO, it can contain various data types, such as CKByte, Token, JavaScript code, or serialized data such as JSON strings. This richer data type broadens the capabilities of Cell and expands UTXO - such as implementing smart contracts (even customized smart contracts, such as issuing NFT tokens, limiting the supply of tokens, and formulating usage conditions that meet unique needs).
Also inspired by the Bitcoin UTXO model, the Cell model defines the behavior of each Cell within the Nervos CKB, as well as the process of updating the data it contains. Like Bitcoin UTXO, Cells are immutable once formed: once Cells are added to the chain, no changes can be made. Updating the data within a Cell requires a process called "spending" - similar to how Bitcoin UTXO transfers "spend". A new Cell is created with the updated data, which is then added to the chain - similar to the formation of a new Bitcoin UTXO (output for spending). Similarly, each Cell can only be spent once.
In short, we can simply understand that Cell is like a smarter UTXO. Bitcoin UTXO is a box containing a paper ledger, and Cell replaces the ledger in the box with an Excel electronic document.
It is important to note that the Cell model separates the computation and verification of smart contract execution. Computation occurs off-chain, generating new data, and the updated data is verified on-chain by network nodes. In the Cell model, smart contract execution is parallel, i.e. each transaction runs independently in its own virtual machine, and multiple virtual machines run simultaneously. Transactions in the Cell model are highly flexible and efficient, and multiple smart contract operations can be batched into a single transaction, minimizing transaction and processing fees.
The above-mentioned mode of off-chain calculation and consensus result on-chain is relatively popular. For example, RGB is a popular protocol in the BTC extension protocol, that is, off-chain calculation is performed and the results of consensus transactions are submitted to the Bitcoin chain. This protocol is essentially similar to the Lightning Network. On this basis, the RGB++ protocol was born, which uses one-time seals and client verification technology to manage state changes and transaction verification. It maps Bitcoin UTXO isomorphic bindings to the Cell of Nervos CKB, and uses script constraints on the CKB chain and the Bitcoin chain to verify the correctness of state calculations and the validity of ownership changes - the benefit of this is that the characteristics of UTXO can be seamlessly connected between Bitcoin and Nervos CKB. RGB++ not only realizes enhanced client verification, transaction merging, shared status, etc., but also brings Turing-complete contract extensions and performance extensions to Bitcoin without cross-chain and without loss of security.
3.3. Can a special UTXO create a special Bitcoin ecosystem?
There was a time when Bitcoin UTXO and Ethereum ’s ERC20 seemed to have a difference between classic and modern. UTXO is the root of Bitcoin’s security and reliability (anti-double spending, traceability, etc.), but its scalability issues limit the development of Bitcoin’s ecosystem, and it cannot yet achieve the same rich ecological scenarios as Ethereum’s DeFi, NFT, and Metaverse.
But if we think about it the other way around, will the uniqueness of UTXO also give rise to a different ecological world? The deep mining of Bitcoin UTXO by inscriptions and runes makes it possible to deploy assets based on UTXO, and the upgrade of UTXO by Nervos CKB further liberates computing power. These indicate the different application potential of UTXO, which seems to be more interesting and has become a new expectation of the industry.
Looking at the development of Ethereum, from the ERC20 standard that gave birth to ICO, to the development of AMM that provided the driving force for DeFi , to the emergence of NFT and the metaverse, its ecological paradigm has gradually become fuller. However, this process was not achieved overnight, and there were many twists and turns in the middle.
Bitcoin's recent innovations have received a certain amount of market attention from the beginning, which is a good phenomenon, indicating that the market has great expectations and confidence in the potential of UTXO. However, the heat comes quickly and cools down quickly. After the appearance of runes, the popularity of inscriptions naturally decreases. At present, both inscriptions and runes are still in the stage of "minting". Minting is just the beginning, and how to develop applications and enrich the ecology later is more important. The situation of Nervos CKB is similar. The current ecological application can be said to be a simple "copy" of the Ethereum ecology.
We believe that the characteristics of UTXO have the potential to inspire different ecological paradigms, and we look forward to the emergence of such a "stunning" paradigm soon.
