Original title: LD Capital: Nervos Network（CKB）：UTXO同构的BTC L2

1. Brief Classification of BTC L2

The rise of BTC L2 is an undeniable narrative in this market cycle. BTC L2 includes at least two aspects: first, off-chain solutions that are not on the BTC main chain but have some connection to it, such as joint mining associated with consensus algorithms or asset bridging. Second, the ability to provide some capabilities stronger than the BTC main chain itself, mainly including performance optimization, programmability, and privacy. These capabilities may not all be fully realized, and different projects may have different focuses at different stages. At present, most BTC L2 solutions aim to achieve performance optimization and programmability, providing faster application products to enrich the BTC ecosystem.

Currently, there are several categories of Bitcoin L2 solutions, including state channels (e.g., Lightning Network), sidechains (e.g., Liquid, Merlin), Rollups (e.g., Rollkit), client-side validation (e.g., RGB, RGB++, Taro), etc.

According to whether the underlying architecture is isomorphic with BTC, it can also be divided into two major camps:

● UTXO Camp: Derivatives based on the UTXO model, such as Nervos Network;

● EVM Camp: Such as Merlin and B², which are currently popular staking airdrop projects.

This article mainly introduces the product features, ecosystem development, and token economic model of the UTXO isomorphic BTC L2 Nervos Network.

2. Team and Financing

The founding team of Nervos Network has deep experience in the industry for many years.

Chief Architect Jan Xie: He has made contributions to the development of Ethereum clients Ruby-ethereum and pyethereum for a long time, and has also collaborated with Ethereum founder Vitalik Buterin on the development of Casper consensus and sharding technology. In addition, he has also created Cryptape, a company engaged in the development of underlying blockchain platforms and consensus algorithm research.

Co-founder Kevin Wang: He previously worked on enterprise data solutions at IBM Silicon Valley Laboratory and co-founded Launch School, an online school for software engineers. Additionally, Kevin Wang is also a co-founder of Khalani, an intent-driven centralized solver infrastructure.

Co-founder and COO Daniel Lv: Co-founder of Ethereum wallet imToken and former CTO of crypto exchange Yunbi. In addition, Daniel Lv has organized the Ruby China community for 10 years and co-founded ruby-china.org.

In August 2018, Nervos Network completed a $28 million financing round, with participation from Polychain Capital, Sequoia China, Wanxiang Blockchain, Blockchain Capital, among others. On October 16, 2019, Nervos Network completed an ICO on Coinlist, raising $72 million.

3. Core of the Product

Nervos Network went live in November 2019, adopting the PoW consensus mechanism and UTXO model, making it isomorphic to Bitcoin. CKB has had significant development and accumulation in security, extending Bitcoin’s programming capabilities, technical expertise, and ecosystem since its inception. Since its establishment, the main development direction of the project has been a high-performance public chain based on POW+UTXO, coinciding with the current trend of BTC L2.

2.1 PoW: Doubling of Hash Rate since Late 2023

The Nervos Network team believes that in terms of decentralization and security, PoW is superior to PoS. It is extremely difficult to forge or reconstruct a PoW chain because it requires recalculating the hash power for each block. Therefore, the underlying mechanism adopted by Nervos Network is PoW, which is completely permissionless, allowing users to participate in block production simply by purchasing mining machines and electricity.

Nervos Network’s mining algorithm is Eaglesong, with common ASIC miners such as Antminer K7, Goldshell CK6, Toddminer Como, etc. The graph below shows the growth of Nervos Network’s hash rate. The project’s hash rate experienced a retracement in 2022 but has been growing since the end of 2022, doubling in growth since late 2023, indicating increased investment in mining.

Currently, mining returns for CKB tokens are quite favorable, ranking eighth in mining revenue on f2pool.

2.2 Cell Model: Security and Scalability

Cell is the most basic structure in Nervos that represents a single piece of data. The data contained in a Cell can take many forms, including CKByte, tokens, Javascript code, and even serialized data such as JSON strings. Since there are no restrictions on the types of data included, developers have full flexibility in their choices.

The Cell model treats all digital assets (such as CKB, tokens, and digital collectibles) as the exclusive property and responsibility of their owners. Assets must comply with smart contract rules when participating in transactions, but the assets essentially belong to the user rather than the smart contract. Even the smart contract that defines the token has no authority over the asset. This means that even if an attacker finds a vulnerability in the contract code, they will still not be able to access the asset because it is under the control of the user, increasing asset security.

On this basis, the Cell model adds programmability and supports smart contracts. Specifically, Cell abstracts the nValue field in UTXO, which represents the token value, and divides it into two fields: capacity and data. Data saves the state and can store any data. At the same time, the Cell data structure also contains two fields: LockScript and TypeScript. The former mainly reflects ownership, while the latter can customize many rich functions.

2.3 RGB++ Protocol: Contract Extension and Performance Boost

RGB++ is an extension protocol based on RGB, utilizing one-time seals and client-side validation technology to manage state changes and transaction verification. It maps Bitcoin UTXOs to Nervos CKB Cells through isomorphic binding and uses scripts on CKB and Bitcoin chains to validate the correctness of state computation and the effectiveness of ownership changes.

RGB++ addresses technical challenges faced in the practical implementation of the original RGB protocol and offers more possibilities, such as blockchain-enhanced client validation, transaction folding, shared state among non-interactive contracts, and non-interactive transfers.

Inheriting the core ideas of the RGB protocol, RGB++ adopts different virtual machines and validation schemes, eliminating the need for standalone RGB++ clients. Users only require access to Bitcoin and CKB light nodes to complete all verifications independently. RGB++ brings Turing-complete contract extensions and performance improvements to Bitcoin without using cross-chain bridges, relying instead on native client validation solutions to ensure security and censorship resistance.

2.4 Spore Protocol: Upgraded Ordinals

In mid-March 2024, the JoyID wallet, an ecosystem project of Nervos Network, officially launched the first Spore DOB (Distributed Order Book) Marketplace based on UTXO trading patterns. It has opened trading for the first DOB asset — Unicorn Box. Unicorn Box was a community airdrop, with the current market floor price at 71,800 CKB, representing a 200-fold increase from its initial minting cost of 340 CKB.

DOB (Digital Object) is a crypto asset issued through Spore, the digital object creation protocol on the CKB blockchain. The DOB generated by the Spore protocol cannot be tampered with, is completely stored on the chain, and also establishes an intrinsic link between content and value.

If CKB is regarded as an upgraded version of Bitcoin, then Spore is an upgraded version of Ordinals. Its main features are as follows:

First, it supports multiple content types such as video, audio, text, etc., giving creators more space.

Second, the content is completely stored on the chain and is a complete digital asset. The previous NFT actually only stored the link address on the chain, and most of the specific content was stored off-chain.

Third, generating DOB requires obtaining CKB tokens as “raw materials”. The amount of CKB minted determines the size of the storage space of the DOB on the chain, and burning DOB can retrieve the occupied CKB. This mechanism ensures that holding Spore DOB is equivalent to occupying CKB, thereby reducing the circulation of CKB within the ecosystem.

Fourth, no transaction fees. When minting DOB through the Spore protocol, 1 CKB will be deposited by default during minting. When the network is not congested, 1 CKB is enough to pay the mining fees required for more than 7,000 on-chain transfers, so the handling fee can be waived in subsequent transactions. This can improve user experience and help acquire new users.

Fifth, it can flow freely between different UTXO chains. According to the current plan, the Bitcoin layer asset issuance protocol RGB++ will be launched at the end of March. At that time, DOBs issued on the CKB blockchain can be transferred to the Bitcoin main network through RGB++ Leap, becoming digital objects on the Bitcoin chain.

4. Ecological Development

The Nervos Network ecosystem has begun to take shape, including wallets, cross-chain bridges, DID, DEFI and other projects. However, there are not many well-known projects, and no phenomenal products have yet appeared.

As BTC L2, the main issue is to improve the application level of BTC, a precipitated asset, and activate its liquidity. At this point, Nervos Network is also in its infancy.

According to information from the community, the RGB++ protocol is planned to be launched at the end of March or early April, which will bring more gameplay and enrich the ecosystem.

The ecological project Nervape has just released a whitelist in a snapshot, and its DOBs released in early April will also be directly released on the BTC chain.

Judging from the on-chain data, the number of transactions in the protocol has increased, and there was a huge amount of interactions in early 2024. The number of independent addresses and cells also continues to grow, and the transaction fee income on the chain will increase by the end of 2023. Overall, the data on the chain has grown significantly and the activity has increased.

5. Token Economic Model

5.1 Token Distribution and Release

Currently, the total issued number of CKB tokens is 44.5 billion, the circulation is 43.8 billion, and NervosDAO has 9.4 billion locked.

The initial supply of CKB tokens is 33.6 billion, of which 8.4 billion have been burned. The supply is 25.2 billion, which has been allocated to investors, teams, ecological funds, etc., and all have been unlocked.

CKB is an inflationary token, with inflation coming from two parts:

Firstly, there is mining inflation, all of which is used to reward miners. The inflation rate follows that of BTC, halving every four years until it reaches zero. In the first four years, there was an annual addition of 4.2 billion, which was halved for the first time in November 2023, reducing the issuance to 2.1 billion CKB per year. The second halving is expected to take place in November 2027, reducing the issuance to 1.05 billion CKB per year.

Secondly, there is a fixed annual issuance of 1.344 billion tokens, also known as “secondary issuance.” These tokens will be used for: incentives for miners (state rent from users storing data on the chain); incentives for Nervos DAO depositors (users locking CKB in the DAO); vault funds (based on liquidity CKB not used for data storage), with a portion of the funds deposited into the vault being burned.

The current specific allocation is shown in the figure below. From the figure, it can be seen that there are approximately 5.77 billion CKB tokens in secondary issuance, with 69.5% of tokens being burned, leaving approximately 1.77 billion tokens in circulation.

Based on this calculation, in the next year, CKB will add approximately 2.5 billion tokens, and the annual inflation rate will be approximately 5.7%, which is a medium inflation rate.

5.2 NervosDAO Staking

NervosDAO has about 9.4 billion tokens locked, accounting for about 21% of the total circulation. The average deposit time is about 800 days, which is a long-term currency holding. The current staking yield is not high, only 2.29%, and the attractiveness of staking is limited.

From a historical perspective, during the bull market in 2021, the highest locked position reached approximately 12 billion coins, and has since fallen, with the lowest being around 8 billion coins. Therefore, overall, this part of the position is relatively stable. Since the end of 2023, new stakes have increased. However, judging from the ratio of stake/circulation volume, the overall trend is downward. New users and new tokens are not included in the stake.

5.3 Holdings Distribution

The concentration of CKB token holdings is relatively high, with a total of 270,000 addresses holding CKB on-chain. Among them, the top 100 holding addresses possess 76.93% of the tokens, while the top 10 addresses hold 54.28%. Addresses associated with Binance hold over 32% of the tokens.

Among the top 10 holding addresses, excluding exchange addresses, there are four untagged addresses. Among them, the fourth-largest address began accumulating in May 2023 and has continued to receive transfers, with the latest transfer occurring on March 25, 2024, without participating in staking. The fifth-largest address was created in May 2023, with only one incoming transfer and no participation in staking. The eighth-largest address was created in 2021, with only one incoming transfer, and all tokens are staked. The ninth-largest address was created on March 22, 2024, without participating in staking.

6. Conclusion

Nervos Network is a POW+UTXO homomorphic public chain launched in 2019, now positioned as a BTC L2. The team boasts rich development experience, and the products have innovated in programmability and scalability. Since 2024, concepts such as RGB++ and DOB have been introduced, aligning with the current narrative of BTC L2 development.

The ecosystem is in its early stages, with a reasonably active community. As a BTC L2, the ecosystem’s focus should be on bringing more convenient BTC applications and activating BTC asset liquidity. The RGB++ plan is scheduled to launch at the end of March and beginning of April 2024, and the ecosystem project Nervape plans to issue DOBs on the BTC chain, hoping to drive the development of assets on the BTC chain.

The token CKB is an inflationary token. The initially issued tokens are in full circulation, and inflation occurs annually, coming from two sources: firstly, based on POW inflation, provided as rewards to miners; secondly, from secondary issuance, with a fixed emission each year, a portion of which entering the vault will be burned. The overall annual inflation rate is approximately around 5.7%. Among the top ten user addresses, excluding exchanges, the overall trend is an inflow, with new addresses accumulating CKB tokens since 2023, but without staking.

Overall, Nervos Network has a solid foundation, and key observations include changes in token staking, progress in ecosystem development, scale, and market sentiment.

LD Capital — Established in 2016, LD Capital is one of the earliest global blockchain investment institutions. With a portfolio exceeding 250 investments, they focus on disruptive innovation in Infra, AI, DeFi, GameFi, and the ETH/SOL ecosystems. LD Capital actively seeks to become the lead investor for projects, providing full-stack services including direct investment, AI ecosystem fund and distributed fund to cover all areas of investment.

Cycle Trading — Cycle Trading is a leading liquidity provider, accelerating project growth across all aspects including liquidity provisioning, platform network access, strategic marketing, and business strategy guidance. Their team of nearly 30 highly skilled engineers and economic advisors, with experience at leading institutions like Binance, Jump, and CITIC, leverages expertise in macroeconomics, industry trends, and project design principles to identify promising ventures. Further bolstering the ecosystem, they established Trend Research, a cryptocurrency hedge fund that invests in and fosters promising “dark horse” projects.

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