Thirteen years ago, Satoshi Nakamoto sent his last message to members of the Bitcointalk forum, informing them that there was still much work to be done in terms of DoS. In the years that followed, the Bitcoin community became increasingly aware that there was much work to be done to improve the entire Bitcoin network, not just against DoS attacks.
Recognizing the need for further development and the desire to establish more practical use cases helps foster a thriving environment for the Bitcoin ecosystem. So far, the network has undergone two major technological changes: SegWit and Taproot upgrades. These upgrades are critical for the development of the Bitcoin protocol, especially in supporting the building of its ecosystem applications and decentralized finance.
This article discusses the two main issues currently facing Bitcoin ecosystem projects (decentralization and security) and how Discreet Log Contracts (DLCs) address these issues.
What is the Bitcoin Ecosystem?
The Bitcoin Ecosystem refers to solutions, applications, and digital assets aimed at improving the usability and efficiency of the Bitcoin blockchain. Before discussing the current focus of the Bitcoin ecosystem, let's delve into the historical development of the Bitcoin network.
The Historical Development of the Bitcoin Network
Ancient sages said that every person's life has history, and those who do not learn from history are destined to fail. Indeed, while we may not be the creators of history, we are created by history. To understand our current position, it is necessary to delve deep into the important milestones that have influenced Bitcoin's development.
Since the genesis block of the Bitcoin blockchain was mined on January 3, 2009, Bitcoin has garnered attention from developers and the business world. Over the years, the main activities surrounding Bitcoin have centered around mining and trading, including exchanges, wallets, chips, integrated circuits, and application software.
As digital assets gained popularity, people began exploring more practical use cases on the Bitcoin blockchain. However, they faced technological bottlenecks often associated with the blockchain trilemma. The trilemma refers to the challenge of creating a blockchain network that simultaneously meets the requirements of decentralization, security, and scalability.
Blockchain Trilemma: Source
Among the three, decentralization and security are usually considered to be more essential features. Therefore, the core question of Bitcoin's technological progress is how to improve scalability without sacrificing the decentralization and security of the Bitcoin blockchain.
Let's take a look at the technological upgrades Bitcoin has undergone so far:
Segregated Witness (SegWit) Upgrade
SegWit is the first significant technical upgrade implemented in 2017 for Bitcoin. In simple terms, SegWit is an updated way of storing data on the Bitcoin blockchain, which helps it run faster. It separates Bitcoin transactions into transaction data and witness data:
Transaction data consists of information about the transaction itself, such as the sender and recipient's wallet addresses.
Witness data consists of network signatures that act as certificates of authenticity.
Before implementing SegWit, these two datasets were stored together in new blocks. Separating witness data from transaction data allows each block to contain more transactions and improves the speed and capacity of the Bitcoin blockchain.
Taproot Upgrade
The Taproot upgrade, implemented in 2021, enables the Bitcoin blockchain to batch process multiple signatures and transactions. In the long run, this makes the verification process faster, more private, and more secure. Previously, Bitcoin transactions were individually verified. Depending on the number of users, this could slow down network speed and cause network congestion, resulting in slower verification times and higher fees.
Taproot includes three major Bitcoin Improvement Proposals (BIPs):
BIP 340 (Schnorr Signature) - Introduces the Schnorr signature algorithm specification for signing Bitcoin transactions. Schnorr signatures have higher efficiency, smaller signature sizes, higher security, and signature aggregation capabilities compared to previous versions.
BIP 341 (SegWit v1 and Taproot) - This proposal makes smart contracts indistinguishable from regular transactions externally, thereby enhancing privacy. Additionally, it minimizes transaction sizes, thereby reducing transaction fees.
BIP 342 (Tapscript) - it updates the script language of the Bitcoin network to easily support Schnorr signatures and Taproot.
Current Focus of the Bitcoin Ecosystem
Following two technical upgrades of Bitcoin, the development direction of the Bitcoin ecosystem has focused on developing scaling solutions and asset issuance protocols.
Asset Issuance Protocols
Since early 2023, there has been significant growth in asset issuance protocols on the Bitcoin network. After the significant wealth effect brought by various BRC-20 standard tokens under the Ordinal protocol, more protocols have been introduced to the market, including:
1. Ordinals Protocol
The Ordinals protocol was launched in 2023 and includes the theory of numeration and inscription. The theory of numeration assigns unique identifiers to satoshis (the smallest unit of Bitcoin), while inscription attaches content to unspent transaction outputs (UTXOs). The asset types under the Ordinals protocol are mainly BRC-20 tokens and Ordinal NFTs.
2. Atomicals Protocol
The Atomicals protocol is an asset issuance protocol on the UTXO-based network. It supports various assets, such as fungible tokens using the ARC-20 standard, NFTs, domains, and collections. This protocol, with innovative features, develops a more comprehensive asset issuance protocol compared to the Ordinals protocol. In contrast to the Ordinals protocol, which uses a third-party sorter to sort asset transactions, the Atomicals protocol issues assets using satoshis.
3. Runes Protocol
The Runes protocol is a token protocol based on Bitcoin UTXOs that ensures management and transfer through simple tuples (ID, OUTPUT, AMOUNT) and OP_RETURN operation. Its development aims to address the issue of Ordinals protocol causing numerous "garbage" UTXOs in the issuance of BRC-20 tokens.
4. Taproot Asset Protocol
The Taproot Assets protocol focuses on asset issuance and transfer. It addresses the challenge of efficient issuance and transfer of assets on the Bitcoin network by keeping off-chain operations to avoid wasting block space.
Scaling Solutions
There are two types of Bitcoin scaling solutions: on-chain scaling and off-chain scaling. On-chain scaling aims to improve transaction processing capacity by modifying the block size, as demonstrated by projects like BCH. On the other hand, off-chain development involves creating a second layer transaction network outside of the Bitcoin mainnet, as proven by projects like the Lightning Network.
Challenges faced by current Bitcoin ecosystem projects
Although the aforementioned Bitcoin ecosystem solutions bring unique advantages to the field, they come at the cost of sacrificing decentralization and security - two of the most important characteristics of blockchain. Let's consider the examples of Rootstock and Taproot assets to better understand this.
In Rootstock, securing locked funds involves delegated notaries who are key members of the PowPeg alliance. This alliance is composed of leading blockchain companies known for their strict security standards. However, relying on third-party organizations to manage BTC funds raises significant concerns related to centralization.
The external handling of locking and unlocking funds raises questions about the decentralization principles within the Rootstock ecosystem. It prompts a rigorous examination of the potential impact on overall network resilience, transparency, and independence, calling for a balance between security measures and maintaining the decentralized spirit of blockchain technology. The intersection of security and decentralization is a critical aspect that needs to be carefully considered and continuously evaluated for the sustainable development of the Rootstock platform.
In the case of Taproot assets, they rely on third-party storage indexers to manage assets. Without them, funds could be permanently lost. Therefore, Taproot users must operate their own BTC full nodes or rely on centralized servers for transactions. This makes Taproot one of the most centralized solutions in the Bitcoin ecosystem.
DLC as the ideal solution
DLCs are joint inventors of the Lightning Network, Tadge Dryja, a cryptographic construction invented at MIT, aimed at facilitating conditional payments between parties. Here, parties refer to entities with Bitcoin addresses - users, institutions, smart contracts, etc. DLC enables "Bitcoin escrow contracts" to be directly stored in the participant's wallet for use on other chains.
Essentially, the operation of DLC is similar to a multi-signature wallet - requiring multiple signatures to validate a transaction. But unlike a wallet, DLC itself does not monitor user balances. Instead, it utilizes a proof layer to observe activities and adjudicate transactions.
dlcBTC is a groundbreaking financial tool to be launched in April 2024 by DLC.Link. It will serve as a non-custodial representation of Bitcoin within the Ethereum blockchain ecosystem. This innovative approach addresses the inherent risks associated with third-party custody, providing a decentralized alternative that enhances the security and trust of crypto transactions.
By employing DLC, dlcBTC securely locks Bitcoin on its native chain, ensuring only the depositors have access to the locked funds. The involvement of third-party custodians is eliminated, reducing associated risks such as mismanagement and potential malicious activities. This decentralized approach empowers users to have better control over their assets, aligning with the core principles of blockchain technology.
One of the main features of dlcBTC is its unique payment structure implemented through the DLC vault. In the event of a security vulnerability or a hacker attack, only the depositor can receive the BTC deposit. This design significantly reduces the impact of potential security threats, protects the assets of individual account holders, and enhances the resilience of the DeFi ecosystem.
In conclusion, dlcBTC represents a paradigm shift in trading Bitcoin on the Ethereum blockchain. By integrating the principle of non-custody and leveraging smart contract technology, it enhances the security of Bitcoin holdings and nurtures a more trustless and flexible financial infrastructure, setting new standards for decentralized financial tools in the evolving Bitcoin ecosystem.
Conclusion
In conclusion, the evolution of the Bitcoin ecosystem, marked by significant milestones such as SegWit and Taproot upgrades, reflects the ongoing efforts towards mainstream adoption of Bitcoin. While asset issuance protocols and scaling solutions have made significant progress, concerns about centralization still persist in most projects. DLC has emerged as an ideal solution, with innovative products like dlcBTC as evidence. By securely locking Bitcoin on its native chain and eliminating the need for third-party custody, dlcBTC pioneers a decentralized approach with a unique payment structure, enhancing the security and trust of DeFi. As the landscape evolves, DLC marks a critical step towards a more flexible and trustless financial infrastructure.
