Introduction

The rise of Ordinals and the frenzy of BRC-20 tokens have once again sparked intense discussions in the crypto community about Bitcoin’s scaling issues. A founder of an investment institution stated that by 2024, at least 10 Bitcoin Layer2 networks are expected to launch. As more Bitcoin scaling projects go live, whether Bitcoin’s narrative can evolve from asset issuance to more advanced programming capabilities and a smart contract ecosystem warrants close attention. In the short term, protocols represented by Ordinals, with their straightforward asset issuance method, have won the favor of many crypto investors. In the long run, BitVM, aimed at introducing more programmability and flexibility to Bitcoin, brings more possibilities to the table. When comparing Bitcoin’s market value and ecosystem liquidity with other public blockchains, Bitcoin Layer2 still has considerable room for growth. As developers, trading platforms, and fund investors invest more resources in this area, the Bitcoin ecosystem is expected to further expand, potentially leading to a new surge in BTC prices. Scalability is a performance issue that needs to be urgently addressed by public blockchains.

Bitcoin processes an average of 7 transactions per second, while the Ethereum network handles about 30 transactions per second. The number of users on these two blockchains has increased over time, and the transaction processing speeds of Bitcoin and Ethereum can no longer meet user demands. Particularly, the launch of the Ordinals protocol and the creation of the BRC-20 token standard have opened up a new narrative in Bitcoin asset issuance, with the $ORDI token’s meteoric rise shaping the inscription track and transmitting its popularity to other public blockchains. While sparking a craze in the secondary market, the prevalence of various inscription protocols has also caused disputes between core developers and the community. Inscriptions essentially involve embedding images or other data into the Bitcoin blockchain using a trick in Bitcoin’s script. The emergence of a large number of inscriptions has led to network congestion, space wastage, and high Gas fees for Bitcoin. Some Bitcoin enthusiasts vehemently oppose inscriptions. Bitcoin Core developer Luke Dashjr is also against inscriptions, even stating on social media that “inscriptions are exploiting a loophole in Bitcoin Core to send spam to the blockchain” and “inscriptions will cease to exist after the loophole is fixed.” These views have sparked discussions in the industry about who is leading the direction of Bitcoin’s development.

As the discussion deepens, the view advocating for a rational discussion begins to dominate: the prosperity of inscriptions is a choice of the market and users, and no one should or can stop the development of inscriptions. However, with the surge in demand for block space due to inscriptions leading to severe network congestion, Bitcoin scaling solutions have once again garnered attention.

Source: https://twitter.com/adam3us/status/1736148203001553125

Bitcoin’s Two Major Upgrades

The open-source Bitcoin system provides a low barrier to entry for individuals to issue assets. The concept of using Bitcoin for asset issuance dates back to the Colored Coins in 2012, followed by the Inscriptions craze in 2023, which swept the entire cryptocurrency industry.

From a historical perspective, Bitcoin has undergone two major upgrades to date: Segwit (Segregated Witness) and Taproot. The Taproot upgrade was first proposed by Bitcoin Core developer Gregory Maxwell in 2018 and went live in November 2021. It removed the limitation on the amount of data in the witness part – the specific size of the data is subject to the maximum 4MB block limit of the segregated area. Additionally, developers can write more advanced scripts in the segregated witness part.

Taproot has had an impact on the development of the Bitcoin ecosystem.

On one hand, the Taro protocol, based on the Taproot upgrade, brought the USDC stablecoin into the Lightning Network, significantly expanding its use cases. Through exploration in Taproot and the Taro protocol, the Lightning Labs team made complex transactions, such as multi-signature transactions and time-locked transactions, appear as standard Bitcoin transactions. This enabled users to issue and transfer synthetic assets on Bitcoin, including Tokens and NFTs, among other operations. The development team aims to transform Bitcoin into a scalable multi-asset network. On October 18, 2023, Lightning Labs released the alpha version of Taproot Assets on the mainnet. With Taproot Assets, assets can be deposited into Lightning Network channels and interoperate with the broader Lightning Network.

On the other hand, the Taproot upgrade also gave rise to a core hot topic in the Bitcoin ecosystem over the past year – Ordinals. Ordinals were proposed by Bitcoin core developer Casey Rodarmor as a Bitcoin Improvement Proposal (BIP). As of January 1, 2024, there are nearly 52 million Ordinals inscriptions, which experienced a surge in engravings between April–June and July–September of last year. Although there was a decline between September and October, the entire inscription market has rebounded, regaining its previous heat.

Source: Bitcoin Ordinal Dashboard (BRC-20)

Ordinal aims to associate any feature (inscription) with a single satoshi and allows for the tracking and transfer of individual satoshis. Its introduction has expanded Bitcoin’s use beyond just being a store of value and a medium for payments, breaking the monotony of the Bitcoin ecosystem. Despite being a relatively new concept, the community has already seen the emergence of multiple forked protocols and various token standards around Ordinals, such as the Stamps protocol.

The popularity of inscriptions has spread from Bitcoin to other public blockchains, sparking explosive growth in tokenized inscription activities on other chains. Consequently, a multitude of inscription projects and token standards have emerged rapidly. Many public blockchains have subsequently established their own inscription markets, accompanied by characteristic inscriptions and Meme projects specific to these chains. The advent of these inscriptions has also spurred developers to address the needs and visions for building within the Bitcoin ecosystem. Similar to Ethereum’s introduction of solutions like Rollups and side chains for scalability, the Bitcoin ecosystem has also developed various scaling solutions aimed at addressing Bitcoin’s scalability issues.

Classification of Bitcoin Scaling Plans

According to the classification by the cryptocurrency investment firm LD Capital, the main scaling plans for Bitcoin can be categorized into three types: on-chain scaling, off-chain state channels, and sidechain solutions. Among these, on-chain scaling is a Layer 1 solution, which requires the support of core developers and the community and is more challenging to implement. Therefore, more feasible and practical are the construction of off-chain state channels and sidechain solutions, with the latter occupying a dominant position in the market.

It’s noteworthy that Ethereum Rollups are becoming increasingly popular and have emerged as a mainstream scaling solution. These solutions aim to transfer the computation and storage of Ethereum mainnet transactions to Layer 2 for processing. After transactions are executed on the Rollup chain, the data is aggregated and transmitted back to the main chain for validation. Influenced by Ethereum’s scaling strategies, Rollup solutions are also being incorporated into the Bitcoin ecosystem, with plans like ZK Rollups and Sovereign Rollups, leveraging the security of Bitcoin’s PoW consensus, starting to gain attention.

Currently, the Bitcoin scaling solutions that merit significant attention not only include well-established projects like Lightning Network, Stacks, and Rootstock, which have been developing for many years, but also other Bitcoin Layer 2 projects like Rollkit and BitVM.

Lightning Network: The Orthodox Solution for Bitcoin

The Lightning Network is currently the most influential scaling solution in the Bitcoin ecosystem.

The concept of the “Lightning Network” was proposed as early as 2015 by Joseph Poon and Thaddeus Dryja. Its core idea involves establishing a payment channel between two users, allowing them to conduct unlimited transactions within the channel, with only the final settlement transaction being recorded on Bitcoin. The Lightning Network operates using technologies such as multi-signature wallets, smart contracts, and Hash Time-Locked Contracts (HTLC) to ensure secure and reliable payments. Users can open, close, or reconfigure their payment channels at any time, offering flexible management of their funds. This technology effectively resolves the issue of large-scale microtransactions in Bitcoin and provides faster transaction processing speeds.

Since 2021, the foundational data of the Lightning Network has been steadily growing. As of January 2024, the total Bitcoin capacity accumulated in all Lightning Network channels is approximately 5,100 bitcoins. Additionally, the latest data shows that the Lightning Network currently has over 14,600 nodes and about 60,600 channels, slightly less than at the beginning of 2022, but still at a high level.

The direct benefit of the growth in Bitcoin capacity in Lightning Network channels is that it increases the maximum amount that can be paid in a single Lightning Network transaction. According to statistics and forecasts by Arcane Research, in the summer of 2021, there were over 100,000 users worldwide using Lightning payments. By March 2022, this number had risen to over 80 million people using the Lightning Network on installed applications, such as Cash APP. From the Lightning Network ecosystem map organized by institutions, it is evident that the Lightning Network ecosystem has begun to take shape. The types of applications it covers include node and liquidity services, payment infrastructure and merchant solutions, wallets/banks, finance and trade, as well as vertical domains such as gaming, podcasts, streaming media, and social applications.

Stacks: Unlocking the Bitcoin Economy

In the race to build Bitcoin’s Layer 2 network, Stacks, which launched its Stacks 2.0 mainnet in January 2021, is in a leading position.

Stacks is a Bitcoin smart contract layer aimed at enabling smart contracts to use Bitcoin as an asset and settle transactions trustlessly on the Bitcoin blockchain. This expands the utility of Bitcoin and adds vitality to the Bitcoin economy. By adopting the Proof of Transfer (PoX) consensus mechanism on the basis of Bitcoin’s security, Stacks implements smart contracts and decentralized applications using the Clarity language. It locks Bitcoin for mining and enhances its functions as a Bitcoin Layer 2 solution, including rapid transaction processing and ensuring the finality of Bitcoin transactions.

According to the 2024 roadmap disclosed by the development team, Stacks will launch the Stacks Nakamoto (codenamed Neon) upgrade plan before the next Bitcoin halving. This upgrade will bring rapid (5 seconds) block speeds to Stacks and will also introduce an asset sBTC, supported 1:1 with Bitcoin, “making it closer to a Bitcoin L2.” The team has already completed the code writing.

According to data from DefiLlama, the current Total Value Locked (TVL) on the Stacks blockchain is $54.42M. Compared to Ethereum and other public blockchain ecosystems, Stacks has significant room for growth in terms of TVL and active users.

Among them, the DeFi service platform ALEX, which has the largest share of locked assets in the Stacks ecosystem (accounting for up to 80%), includes product components such as launching tokens for projects, fixed-rating and fixed-term no-liquidation-risk lending, AMM mechanism DEX, and earning interest on deposited tokens. In December 2023, ALEX announced the launch of the Alpha version of its Bitcoin oracle, expected to complete testing by the end of the first quarter of 2024.

Source: https://twitter.com/muneeb/status/1456007656305479684

Rollkit: The First Bitcoin Sovereign Rollup Project

Rollkit, the first Bitcoin Sovereign Rollup project, represents a significant development in the realm of Bitcoin Rollups, distinguished by its unique approach. Unlike other Rollup solutions, a Sovereign Rollup utilizes only a single layer of the blockchain as the data availability layer. This method does not require smart contracts or a settlement layer for Rollup verification, allowing it to operate independently from a primary blockchain layer. Sovereign Rollups have the capability to define their own transaction verification and settlement rules, offering enhanced scalability and flexibility.

Rollkit was initially developed by Celestia Labs in 2021 and has since become an independent entity. It serves as a modular framework for Rollups, where developers can incorporate their own execution layers and data availability layers. As explained by Nick White, the co-founder and COO of Celestia, Rollkit is compatible with the ABCI (Application Blockchain Interface), meaning that any Cosmos SDK application or execution environment compatible with ABCI can also integrate with Rollkit.

In March 2023, Rollkit announced its support for Bitcoin Sovereign Rollup, allowing Rollkit Rollups to utilize Bitcoin’s data availability. This integration aims to reduce the costs associated with deploying and maintaining a blockchain. However, following the announcement of integrating Bitcoin’s data availability layer, there has been limited information released about Rollkit’s development progress, which warrants further attention moving forward.

BitVM: Programmability and Infinite Scalability for Bitcoin

The year 2023 marks a pivotal moment in the innovative trajectory of Bitcoin’s development.

In October of the previous year, Robin Linus, the founder of ZeroSync, published a white paper introducing BitVM, a new computational paradigm. BitVM, which stands for “Bitcoin Virtual Machine,” is essentially a secure and isolated domain that allows the execution of any program or smart contract.

More specifically, BitVM enables the expression of Turing-complete Bitcoin contracts without altering the consensus rules of the Bitcoin network. It can execute any computable function and perform offline computations without leaving any trace on the blockchain. BitVM can be thought of as a virtual sandbox where programs can be simulated and their results verified, all without burdening the main Bitcoin network.

This innovative design allows Bitcoin to embrace a broader range of use cases and potential innovations without directly modifying its core protocol. As such, BitVM quickly sparked discussions among Bitcoin developers about the design and evolution of Bitcoin.

However, BitVM is still in its early stages, and how it will materialize in the future requires further exploration and experimentation by the community.

Conclusion and Outlook

As the foundational layer of the cryptocurrency industry, the development and evolution of Bitcoin significantly impact the entire sector. This is particularly evident with the rise of Mingwen and the BRC-20 protocol, leading to increased discussions about Bitcoin scaling.

Apart from the projects mentioned earlier, numerous Bitcoin Layer 2 projects are either in preparation or have already launched. Examples include Dovi, DFS Network, BEVM, MAP Protocol, B² Network, and BeL2. In December 2023, Jademont, the founder of Waterdrip Capital, indicated that “at least 10 Bitcoin Layer 2 networks will be launched in the coming year (2024).” With the approaching Bitcoin halving, it’s foreseeable that these Layer 2 projects focused on the Bitcoin ecosystem will seize the opportunity to launch and enter a new phase of development.

Upon reviewing Bitcoin scaling solutions, it’s clear that these projects primarily revolve around three core issues. The first category, represented by the Lightning Network, explores how to enhance network efficiency and reduce transaction costs without compromising security. The second category, represented by the Ordinals and Atomicals protocols, focuses on the issuance of native assets on the Bitcoin network. The third category, exemplified by BitVM, explores how to address advanced programming and native applications on the Bitcoin network despite its Turing incompleteness.

Projects centered around the Lightning Network have the longest development timeline, accumulating extensive consensus, financial, and technical resources. They are most likely to expand Bitcoin to a broader audience. Emerging asset issuance protocols, such as Mingwen, captivate a large number of crypto investors with their wealth effect and rapid technological iteration, attracting more resources into this niche and building their ecosystem. Introducing smart contracts and advanced programming capabilities into the Bitcoin ecosystem might be the key driver for Bitcoin’s next significant valuation leap.

However, the entire Bitcoin scaling ecosystem is still in its early stages of development and exploration.

Compared with Ethereum’s ecosystem, which currently has a Total Value Locked (TVL) of approximately 28 billion USD, the Bitcoin ecosystem’s TVL stands at around 360 million USD. Yet, Bitcoin’s market cap is three times that of Ethereum’s, indicating substantial growth potential for many Bitcoin scaling solutions. As investment institutions, developers, and trading platforms continue to inject new liquidity and resources, we can expect to see an accelerated scaling of the Bitcoin ecosystem, bringing new value to BTC.