Summary

1. The boom of inscriptions from early last year to autumn drove the development of the Bitcoin (BTC) ecosystem in terms of traffic and consensus expansion. However, it also once again exposed issues such as insufficient infrastructure and transaction limitations within the BTC ecosystem. Due to the non-Turing complete nature of the BTC network itself, more complex ecosystem infrastructure and functional products can only be addressed through scaling solutions.
2. The RGB protocol is a client-side validation protocol built on the Bitcoin base layer (LNP/BP) and the Lightning Network. It introduces smart contracts to the Bitcoin ecosystem through the Lightning Network. The design philosophy breaks through previous methods, separating the concepts of contract issuer, state owner, and evolution, saving smart contract data off-chain and verifying it through the client, while using Bitcoin scripts as the ownership control system.
3. Seizing the opportunity presented by the development of the BTC ecosystem, Bitlight Labs has risen rapidly, filling the infrastructure gap by building products based on the RGB protocol and the Lightning Network, fostering the development of the BTC ecosystem. With a significant advantage in the RGB protocol ecosystem, it provides crucial support for the future of the BTC ecosystem.
   

Preface

In recent months, the popularity of inscriptions has promoted the rapid development in the Bitcoin ecosystem. It has also brought to light the longstanding issues within the BTC ecosystem, accelerating its development on the financial front. Firstly, the infrastructure development within the BTC ecosystem remains inadequate, with Bitcoin’s extremely low throughput and high gas fees significantly limiting the issuance and transactions of inscriptions. Secondly, due to Bitcoin’s non-Turing complete nature, running complex logic, such as introducing DeFi to provide more liquidity and participating approaches for existing inscriptions, is not possible within the BTC ecosystem. Therefore, while Bitcoin stands as the most decentralized and secure blockchain, envisioning a narrative with more ecosystem applications and participating approaches is constrained. However, as Bitcoin is not a Turing-complete system, building smart contracts directly on it is not feasible. Hence, attention is directed towards Bitcoin’s scalability solutions, with the mainstream options including the Lightning Network, sidechains, and Bitcoin L2. Among them, the Lightning Network, as Bitcoin’s layer 2 solution embedded in its initial code, aims to provide faster, lower-cost microtransactions while reducing congestion on the blockchain. While primarily addressing Bitcoin’s scalability issues, it also serves as a platform for developers to experiment with new functionalities. RGB, built on the Lightning Network, introduces smart contracts to Bitcoin, bringing more advanced features to the ecosystem. It allows users to create and manage non-fungible tokens (NFTs) and other types of complex assets without compromising the stability and security of the Bitcoin main chain.

This also implies that RGB brings more possibilities to the Bitcoin ecosystem, and Bitlight Labs has attracted our attention. Bitlight Labs is dedicated to unlocking the potential of the Lightning Network ecosystem and has introduced and is developing a range of features, including decentralized, non-custodial wallets, AMM, Launchpad, and more. It has initially built a complete set of DeFi ecosystem functionalities, providing comprehensive infrastructure support for the development of RGB and Lightning Network assets.

Brief Overview of the RGB protocol

The concept of smart contracts originated with Nick Szabo, inspiring generations of innovators. However, the promise of smart contracts as a technological cornerstone for free markets, capitalism, and decentralized governance has never materialized because existing systems claiming to be “smart contract platforms” have failed to provide the features required for the three challenges of smart contracts:

• Scalability
• Sufficient programmability (almost equivalent to a universal Turing machine)
• Decentralization and censorship resistance

Over the past decade, collaborative efforts by cryptographic researchers and cypherpunk thinkers have brought forth new technologies and theoretical foundations to achieve this goal. This includes Peter Todd’s proposals for client verification and single-use seals, as well as Giacomo Zucco’s development of client-validated “colored coins” that can serve as a scalable layer on Bitcoin and the Lightning Network. In this proposal, they combine these ideas with prominent privacy-preserving technologies (such as Blockstream’s confidential transactions enhanced with Bulletproofs++ range proofs) and new concepts developed by the proposers at UBIDECO Institute, including partially replicated state machines, functionally restricted type systems, and registry-based virtual machines, to create a new programmable, secure, privacy-preserving, censorship-resistant, and scalable smart contract system named RGB. Since mid-2019, Dr. Maxim Orlovsky and Pandora Core AG have been the main contributors to this project. Following the standards set by Dr. Orlovsky and Dr. Zucco in 2019 through the Swiss non-profit organization LNP/BP Association, the RGB protocol has received contributions from many contributors and industry institutions, gradually maturing and launching on the mainnet in June 2023.

How It Works

In an RGB contract, all genesis tokens belong to a Bitcoin UTXO (whether pre-existing or temporarily created). To transfer tokens, you need to spend this UTXO. When spending this UTXO, the Bitcoin transaction must include an additional output containing a commitment to a message. This message’s content is the RGB payment information, defining the inputs, where these tokens will be sent (to which UTXO), asset ID, quantity, the transaction spending it, and any other required additional data.

If you have tokens belonging to Bitcoin transaction A’s #1 output, to transfer these tokens, you need to create an RGB transaction and a Bitcoin transaction that spends the #1 output of transaction A, and this Bitcoin transaction commits to the RGB transaction. As seen, the RGB transaction transfers the tokens from Bitcoin transaction A’s #1 output to Bitcoin transaction C’s #2 output (this transaction is not depicted in the diagram), rather than transferring them to Bitcoin transaction B. In most cases, we can expect the #0 output of transaction B to be a change-receiving address, returning the remaining funds to the original owner after deducting miner fees. Additionally, the #1 output is to commit to the RGB transaction to avoid double spending.

Scalability

Thanks to the “client validation” mode and batch processing, RGB efficiently utilizes the blockchain because the majority of data is stored off-chain. Moreover, RGB is compatible with the Lightning Network, allowing you to create Lightning channels for proprietary assets. RGB can also leverage any future Bitcoin scalability solutions. Thanks to the “client validation” mode and batch processing, RGB efficiently utilizes the blockchain because the majority of data is stored off-chain. Moreover, RGB is compatible with the Lightning Network, allowing you to create Lightning channels for proprietary assets. RGB can also leverage any future Bitcoin scalability solutions.

Strong Ownership System

The strong ownership system proposed by the RGB ecosystem means that smart contracts manage an “ownership state” that clearly defines one or more owners. Only these owners can update the contract’s state. The contract defines various rights as a set of actions that can be executed on the contract and categorizes these rights as “public” or “owned,” allocating them using verification logic specific to each right. This design aims to ensure the security and transparency of the contract, allowing only specific contract owners to make critical state updates. Additionally, smart contracts operate with an “ownership state,” having a clearly defined owner (or group of owners). Apart from this owner (or group of owners), no one can update the contract’s state. The contract always defines various rights as a set of operations that can be executed on the contract and categorizes these rights as “public” or “owned,” using verification logic specific to each right.

Programmability

The RGB protocol not only provides the possibility to issue tokens and assets on Bitcoin but also gives issuers the flexibility to write custom issuance contracts. Issuers can define different types of assets and use different validation rules when transferring them. Additionally, RGB can issue more general rights, enabling non-financial use cases (e.g., decentralized identity, publishing certificates).

Privacy Protection

To transfer tokens belonging to a Bitcoin transaction through RGB, you need to initiate a Bitcoin transaction. However, the outputs of RGB transfers do not need to match the outputs of the Bitcoin transaction. In our example, the outputs of the RGB transaction (Bitcoin transaction C’s #2 output) can be unrelated to the Bitcoin transaction (transaction B) committing to this RGB transaction. This means that RGB tokens can be “transferred” from one UTXO to another UTXO without leaving any traces in the Bitcoin transaction graph, significantly enhancing privacy. In this design, Bitcoin UTXOs act as one-time containers for loading RGB assets. To transfer assets, you only need to open a new container and close the old one. The specific payment information of RGB tokens is transmitted off-chain through dedicated communication channels from the payer’s client to the receiver’s client, where the latter verifies that it complies with the rules of the RGB protocol. Consequently, blockchain observers cannot obtain any information about RGB user activity.

Validation Loop

However, validating the received payment information is not sufficient to ensure that the sender truly owns the assets they intend to send you. To guarantee the finality of the received transaction, you must also receive the transaction history of these tokens from the payer, from the current one all the way back to its initial issuance. By verifying the entire transaction history, you can ensure that these assets have not been inflated, and all spending conditions attached to the assets have been satisfied. This design also benefits scalability since you don’t need to validate the entire history of this asset; you only need to verify the part relevant to you. Moreover, the design of not broadcasting transactions to the global ledger enhances privacy because fewer people know your transactions.

Blinding of Outputs

To further enhance privacy, RGB also supports blinding of outputs. This means that when you send a payment request to the payer, you don’t need to disclose the UTXO you use to receive the tokens. Instead, you ask the payer to send the tokens to a hash value, generated by concatenating the target UTXO itself with a randomly blinded output. Consequently, the payer cannot know which UTXO the tokens will be sent to, and exchanges or other service providers cannot determine whether users are withdrawing to UTXOs blacklisted by some regulatory authorities or how these tokens will be spent in the future. It’s essential to note that when tokens are spent, the blinding value must be revealed to the receiver so that they can verify the part related to Bitcoin transactions in the transaction history. This means that when using RGB, you have complete privacy at the moment but the confidentiality of your past financial activities gradually degrades as the tokens are transferred, ultimately approaching the same level of privacy as our Bitcoin transaction history.

Current Situation

Currently, the market widely considers RGB protocol, Taproot, and solutions implemented based on BitVM as mainstream scalability solutions. Most protocols are committed to extending the BTC ecosystem without modifying the overall BTC architecture. Compared to BitVM, which is highly favored by investment institutions but faces challenges due to the current lack of BTC infrastructure, a high implementation difficulty, and a distant and uncertain schedule, the RGB protocol has already started gaining traction, attracting more projects to join its ecosystem construction. Since the RGB protocol is built on top of the Lightning Network, it effectively inherits the advantages of the Lightning Network. Moreover, it supports the implementation of smart contracts through client-side validation technology. In contrast to other inscription protocols and non-native BTC protocols such as Stacks and Rootstock, the RGB protocol not only supports native BTC assets and smart contracts to expand the BTC ecosystem but also accommodates Lightning Network assets and Lapps, constructing a vast BTC ecosystem.

However, the current RGB protocol also faces some challenges:

1. Slow development progress: There are few protocol developers, and as it is developed and maintained by a non-profit organization, financial considerations may impede the overall development progress.
2. Poor compatibility between new and old versions: For instance, if an ecosystem project based on functionality developed in v0.10, it might need to be reworked in v0.11, incurring a high risk cost. However, from the perspective of the protocol itself, these changes are part of an overall update and plan.
3. Insufficient attention from funding and the market: Currently, the BTC ecosystem is mainly focused on the narrative around inscriptions, and RGB protocol aims for a more long-term vision. Therefore, its alignment with the current market enthusiasm is not very deep, and both assets and the market’s attention to the protocol are insufficient.
4. Insufficient data security: All transaction data in the RGB protocol is stored off-chain, and the security of off-chain data storage is provided by the project team. Users can protect their asset security by backing up data, but there is still a possibility of malicious actions by the project team or the client itself.

Bitlight Labs Explained

Bitlight Labs has developed a series of transaction-focused infrastructure around the RGB protocol, primarily divided into two directions: from the RGB protocol to the Lightning Network ecosystem and from BitcoinFi to Lapps. This provides rich products for the entire Bitcoin ecosystem and the RGB protocol ecosystem. Valestin, the founder of Bitlight Labs, mentioned in a previous interview that the decision to fully invest in the RGB ecosystem is based on several key reasons:

1. Robust Technical Foundation: The RGB protocol demonstrates a considerably robust technical foundation at the client and smart contract levels. From the perspective of code and documentation, it is mature technically, requiring further improvement in infrastructure.
2. Bitcoin Lightning Network: The RGB protocol is built on the Bitcoin Lightning Network, theoretically capable of providing transaction speeds of up to 40 million TPS and theoretically achieving zero transaction fees. This enables RGB to meet various payment needs in the future, supporting a larger user base and a more advanced application ecosystem.
3. Leveraging Bitcoin Security: RGB relies on Bitcoin, being one of the most secure payment systems, without the need for modifications or forks to the mainnet. This provides the security foundation for RGB while also supporting a more powerful smart contract system with theoretically unlimited scalability.
4. Industry Support: The RGB protocol has gained support from industry leaders such as Tether CEO Paolo Ardoino. Tether and Bitfinex have early on invested in supporting the development of the RGB ecosystem and directly participated in the development of the underlying code. Tether has announced the issuance of stablecoins based on the RGB protocol, further driving the development of RGB.
5. Mass Adoption Potential: Valestin sees the potential for RGB to achieve mass adoption on Bitcoin. Features like efficient trading assets, client-side fractionalization, and efficient definable smart contracts lead him to believe that the future development is only limited by individual imagination.

Bitlight Labs’ currently launched products include Bitlight Wallet and BitSwap. Two more products are set to be gradually launched in the future (specific details not disclosed), and the focus here will be on the two already released products.

Bitlight Wallet

Bitlight Wallet is the first decentralized, non-custodial wallet for the RGB protocol and Lightning Network. It is currently in the Alpha testing phase and has the following 5 characteristics:

1. Pioneering: The first decentralized non-custodial wallet dedicated to assets on the RGB protocol and the Lightning Network.
2. Multi-platform Design: Fully compatible with various platforms, including PC, iOS, Android, and hardware wallets.
3. Enhanced Security: With a self-custody solution to ensure user security.
4. Support for L1/L2 Cross-Chain: Allows assets to be transferred between the Bitcoin mainnet and the Lightning Network.
5. Asset Compatibility: Will gradually support more types of Bitcoin assets, especially Lightning Network-compatible protocols such as Taproot Assets, Atomicals, and Runes.

BitSwap

BitSwap is the first Automated Market Maker (AMM) Decentralized Exchange (DEX) designed for RGB assets and Lightning Network assets. Currently, Bitlight Labs is the only team developing an AMM DEX based on RGB assets, actively cooperating with Bitfinex and Tether to issue rgb20-usdt assets on the RGB protocol. Therefore, BitSwap will be the first marketplace where users can trade USDT pairs on the RGB protocol. BitSwap combines swap functionality, liquidity provision, and features like Bitlight Wallet, offering users rich functionalities:

• Conducting atomic swaps on-chain using Partially Signed Bitcoin Transactions (PSBT).
• Implementing swaps for Lightning Network assets through Channel and Bifrost.
• Providing independent price-check oracles through Decentralized Oracle Contracts (DLCs).

Roadmap

In the future development, Bitlight Labs will build a series of DeFi ecosystem applications on the RGB protocol, including decentralized stablecoins, lending protocols, LApps, etc. As the market gradually recovers, this ecosystem developed by Bitlight Labs will inject more vitality into the BTC ecosystem.

Conclusion

Whether in terms of market attention or the RGB protocol ecosystem itself, the current sentiment of users in the BTC ecosystem towards Bitlight Labs remains high. There is anticipation that Bitlight Labs’ various products will contribute to the expansion of the RGB and BTC ecosystem. Although the current attention on RGB is relatively low compared to other scaling solutions, its important feature of expanding the ecosystem without modifying the overall BTC architecture positions it as a crucial element in the current development of the BTC ecosystem. It is hoped that there will be more applications on the RGB protocol, adding diversity to the BTC ecosystem. Bitlight Labs keeps pace with the development of the BTC ecosystem. With the distinct features of the RGB protocol, it decisively chose to embrace the RGB protocol and developed a series of ecosystem applications on it, quickly seizing the initiative. This not only fills some infrastructure gaps in the RGB protocol but also promotes the development of the BTC ecosystem, providing more liquidity for RGB assets and Lightning Network assets. Currently, there are few ecosystem products on the RGB protocol, so Bitlight Labs is undoubtedly a valuable addition, possessing a significant first-mover advantage. Eureka Partners consistently views the BTC ecosystem as one of the essential strategic investment tracks. The expectation is that, with the support of protocols and products tested over time and practice, such as RGB, the BTC ecosystem will bring better infrastructure and user experiences. We look forward to the next chapter in the BTC ecosystem.

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