In 2024, there are already hundreds of BTC second-layer projects waiting to be released, but before that, the Bitcoin ecosystem was like a wilderness. Alex Lab, the Bitcoin oracle team, has been building bridges and paving the way in this ecosystem since 2021. After listening to her experience, I can understand the importance of these infrastructures.
Start a business
Rachel worked at Goldman Sachs for nearly ten years. During her work, she found that the traditional financial field was becoming more and more boring, and the things she did were becoming more and more repetitive. She once switched jobs from Goldman Sachs to JP Morgan, but left decisively within a year.
At first, she went through a period of exploration after leaving investment banking. Because she used to do trading or some quantitative trading, she wanted to do something similar. However, she and her partners did some exploration in this direction and found that, This field is very complicated, involving people, machines, and the relationship between exchanges, and they have almost no advantages.
It just so happens that DeFi has a Crypto fever wave in 2021. In China, people may just talk about it, but in the United States, it has become a very mainstream topic.They devoted themselves to the field of DeFi, and her partners responded to her very enthusiastically.
I initially wanted to do DeFi because I had a financial background and mathematical knowledge, and after reading the Uniswap white paper, I thought I could understand these formulas. After looking at some chains including Solona, Avalanche, BNB Chain, etc., I finally chose Stacks because of the following two important considerations:
First, their communication with mainstream institutions on Wall Street is relatively smooth. They believe that if any cryptocurrency can enter the asset framework of mainstream institutions, it must be BTC;
Secondly, the founding teams of Stacks and Alex have known each other for a long time. Stacks had just launched smart contract 2.0 at that time, and there was a huge lack of teams with financial backgrounds to build new DAPPs.
Because of Rachel and the team’s beautiful background and Stacks’ ability to do Smart Contract on Bitcoin, the first round of financing was completed very smoothly. Half a year after its launch, Alex became the largest DeFi platform on Stacks, accounting for more than 90% of its liquidity and trading volume, reaching 99% at its peak.
frustration
When he first started working on Stacks, Alex positioned himself as the DeFi of Stacks. Half a year after its launch, liquidity and transaction volume accounted for more than 90% of Stacks, reaching 99% at the highest. Recently, because of the increase in projects, about It looks like 90% of the time.
When he first joined the Bitcoin ecosystem, Alex believed that it was a market with huge potential and a very high market capitalization. However, for two years, almost no one paid attention to it.On the one hand, those funds that only focus on Ethereum have no understanding of their options. On the other hand, within two months after the mainnet was launched, a series of events caused by Luna and FTX triggered a bear market in the market, which posed huge challenges to Alex, including the sharp shrinkage of Stacks market value, resulting in a decline in liquidity .
This project was initially positioned in the lending field, and the three white papers released were all related to lending. However, in the end they found that the project was difficult to implement - the lending business needed a liquidation mechanism to liquidate positions immediately when asset prices fell to a certain threshold to ensure the safety of user funds. However, with the advent of the bear market, liquidity in the entire market dried up, making lending business extremely difficult, so the product has not been launched so far.
So the team decided to change direction and start developing traditional rigid-demand products, such as Uniswap, AMSwap, Launchpad, etc., but these were actually unplanned.
By the end of 2022, the team felt that the business was almost on the verge of collapse. Although the funds were still sufficient, the total locked value (TVL) had dropped to less than 10 million US dollars, the token price was less than 2 cents, and the transaction volume was extremely low. As a result, they began to consider developing cross-chain and exchanges on the Ethereum Virtual Machine (EVM), hoping to introduce liquidity from other ecosystems to Bitcoin.
In order to achieve cross-chain, we had to build the EVM bridge ourselves. We had no choice but to do it ourselves because the bridge projects originally planned to be developed on Stacks were no longer done.
Until the beginning of 2023, the emergence of Ordinals attracted attention to the Bitcoin ecosystem. The team quickly adjusted its direction and devoted all its efforts to the development of the Bitcoin ecosystem, temporarily shelving the cross-chain project.
Difficulties and Opportunities of Brc-20
By the end of 2022, Ordinals became popular, and until April 2023, Alex maintained a wait-and-see attitude. Because all infrastructure is built on Stacks, compared with Builders of Bitcoin fork chains such as BSV, the transformation speed is slower. In addition, markets such as Unisat have been established, and they have been thinking about the direction. After observation, Alex noticed that Brc-20 has two distinctive characteristics:
One is the preference for centralized solutions;
The second is that liquidity is relatively dispersed - so far, the trading methods of both Brc-20 and Arc-20 are similar to NFT transactions, that is, the seller places an order and the buyer takes the order, which is different from the traditional DeFi that uses automatic Market makers (AMMs) have different methods of ensuring liquidity, resulting in insufficient liquidity and fragmented user experience. Therefore, the Alex team quickly jumped in and began to develop a bridge between Brc-20 and BTC, hoping to map the assets of the primary market to Stacks and provide liquidity by deploying AMM Swap based on Stacks.
However, in the actual operation process, they encountered the previous problem - lack of infrastructure. When mapping Brc-20 assets to Stacks, due to the existence of multiple different off-chain indexes, each index will sometimes produce different outputs, which can easily cause double-spending problems. At that time, Alex’s solution was to manually contact four off-chain indexing service providers, and then manually enter the results after they reached consensus. In communicating with several large and small centralized exchanges, Alex found that everyone has questions and needs about dealing with the double-spending problem of Brc-20, and there is an urgent need for a decentralized solution to find the Source of Truth. Therefore, they plan to develop a reliable, decentralized oracle.
Indexers and oracles
To understand the oracle in Bitcoin, you must first understand the indexer. Satoshi Nakamoto decided not to support smart contracts when designing Bitcoin, which raised a question: How to verify the price of an asset without smart contracts? We can use Apple as an example to explain this. Suppose there are three people. Bruce thinks an apple is worth one dollar, Rachel thinks it is worth two dollars, and Helen thinks it is worth five dollars. These three people have completely different valuations of apples. So how much is this apple worth?
On platforms with smart contracts, such as Ethereum, this issue is decided by the smart contract. The advantage of smart contracts is that they allow both parties to transact without the need for mutual trust or communication. All transactions are automatically processed by the contract to find the Source of Truth.
Bitcoin must rely on indexes when determining transaction prices. Therefore, the accuracy of the index is crucial, and the accuracy of the data should not be determined solely by the influence of the index.Achieving decentralization of index data has become the main direction of the communitys current efforts. Multiple projects and teams, including Unisat, Best in Slot, Dormo, etc., are approaching it from different angles.
In fact, the role of the oracle is to provide a mechanism to verify the correctness of the prices output by different indexes, ensuring that the price data based on transactions is both accurate and reliable. After Domo proposed the Brc-20 standard, the second topic was to promote the decentralization of index data. This includes not only working with Alex to promote the development of on-chain oracles, but also working with Best in Slot to develop open source APIs.
In May 2023, there was a discussion in the community about why it was necessary to develop an oracle, and some people believed that an accuracy of 95% was enough. However, from a financial perspective, 95% accuracy is far from enough.
In fact, there was a previous incident that highlighted the importance of this – a significant deviation of approximately $100 million between Binance’s quote for Ordi tokens and another index. Although this deviation ultimately did not result in actual losses, it did expose potential risks. // Oracle scenarios and incentive challenges
The oracle machine previously used the Push Model, which is similar to Chainlinks design method and transmits all off-chain data to the chain. However, due to the slow processing speed of Stacks and BTC, in order to improve efficiency, Alex recently changed the Push Model to the Pull Model, which means only putting the data that users need on the chain.
There are currently four applications, Bridge, CeFi, Wallet, and Layer 2.
Bridge: Alexs bridge is called X-LINK. Because the assets on the upper layer must be mapped to the second layer, the correctness of the corresponding data must be found, and Oracle is required.
Wallet: Alex is about to be integrated with X-Verse, and oracles will also be used in this process.
CeFi: Currently, many large exchanges have their own indexers or adopt decentralized indexing, while some small exchanges do not have such capabilities, but still need to map Brc-20 assets, so they also need oracles.
Second layer: It is currently rumored that there will be a hundred second layer networks released, and Alex has talked about more than a dozen. These second layers, especially the second layer networks that use the Rollup path, because the off-chain data of the first layer must be rolled up to At the second level, verification is required, and the function of the oracle can exactly meet this need. As for making oracles more decentralized and secure, the generally adopted strategy is to introduce more decentralized nodes. Chainlink’s development path is an obvious example.
In order to make oracles more decentralized and secure, a commonly adopted strategy is to introduce more decentralized nodes. Chainlink’s development path is an obvious example.Currently, the Alex node is operated by itself. In the future, they plan to make the code open source and the software package available for community users to download. By encouraging more users or teams to run nodes, oracles can be decentralized, thereby improving security.
As for how to incentivize these users or teams to participate in and maintain nodes, this is a more complex issue. This is a difficult subject that involves human factors.
Rachel had previously had a more open discussion with Domo about how to quickly reach consensus. Domo said that he needs to reconsider because he is a more cautious person. “I feel that his most important principle is that he cannot have the final say or other people have the final say. We should find consensus. If you tell him anything, How about we do this? He will say to you, Lets see if there is a consensus first.
Therefore, some economic incentive mechanisms may be needed while waiting for consensus to be formed, and appropriate incentive programs will naturally emerge over time.
Disagreement and consensus
Over the past year, this rapidly developing ecosystem has also experienced disagreements and consensus. That is, at Christmas of 2023, Lorenzo, the founder of Unisat, suddenly called and told Rachel: Unisat is preparing to upgrade Ordinals, hoping to help communicate with other indexers and get everyone to agree to the upgrade.
The matter originated from some coding errors or missing functions in Ordinals, which caused it to be unable to recognize certain inscriptions. So, Ordinals founder Casey came up with a solution: Modify Ordinals to recognize the above currently invalid inscriptions, including tracing the inscriptions in the old blocks but treating these new inscriptions as curses and assigning them negative inscription numbers - Of course, you can think of this upgrade as an act of tampering with history, at least block history.
The builders of Brc-20 based on Ordinals are worried about the double spending that the upgrade will bring - compared with Ordinals as an NFT protocol, Brc-20 is a financial system, and they have higher requirements for accuracy.Therefore, Brc-20 founder Domo suggested staying at Ordinals version 0.9 without upgrading. At that time, Domo used the word freeze, but later he said he regretted it because freeze was misleading and should be called pause"(pause). In this way, all the different parties of offline indexing agreed to freeze at version 0.9, and the matter was over.
However, Unisat suddenly decided to upgrade. The reason behind it is very simple. Ordinals upgrade is imminent, and Unisat believes that from a technical perspective, the upgrade is more beneficial to Unisat and the entire ecosystem.
But at that time, everyone felt that this upgrade came too suddenly, and a hasty upgrade might bring serious consequences, so everyone started arguing on Twitter.
At that time, many Chinese friends believed that Unisat was right because they needed to be efficient, upgrade, and iterate their products so that users could have a better experience; while foreigners thought this idea was evil because they felt that this thing was not owned by one company. Open source must be decentralized, and democracy and participation are their core values.
But everyone quickly reached a consensus and made another upgrade. Casey, the founder of Ordinals who has been opposed to Brc-20 for a long time, also extended a helping hand to the Brc-20 community and helped mark where the latest version had been modified at that time. Therefore, the Brc-20 community The functionality of the version can be selectively upgraded.
About Layer 2
Alexs team has listed a Layer 2 list of more than 20 companies, of which their CTO has communicated with about 10 companies. Rachel believes that 5 companies will continue to develop in the next 6 months. It is clear from the development path of Ethereum that the truly successful Layer 2 is mostly driven by funding - developing Layer 2 is one thing, but whether it can form an ecosystem is another.
As far as the Alex team is concerned, it cannot integrate all Layer 2 with one click like the oracles on Ethereum. In contrast, each Layer 2 on Bitcoin claims to have different technical solutions and its own language. From Alexs perspective, the development and labor costs to support them are much higher than similar actions in the Ethereum ecosystem, and the ultimate market impact is unknown.
Therefore, they usually first understand the VCs behind Layer 2. Without strong VC support, they judge that the projects second round of financing will be difficult to succeed. For example, Stacks raised US$150 million the year before last, but this huge investment failed to achieve significant results. At present, only Babylon has strong support.
