2024 Bitcoin Outlook: Ecosystem Beyond ETFs

Key Takeaways

• The focus of the current market is heavily on the potential approval of a Bitcoin spot ETF, yet the developments within the Bitcoin ecosystem are often overlooked.

• Looking ahead to 2024, it's important to see Bitcoin in a broader perspective beyond just an asset, considering it as 1) a neutral database platform, 2) a core layer supporting scalability solutions, and 3) large-scale economic security. In line with this, this article will highlight Ordinals, a range of scalability solutions, and the Babylon Chain.

1. 2024: The Year of Bitcoin

Source: Bloomberg

As we approach the end of 2023, a pivotal event is on the horizon for the financial markets: the anticipated approval of the inaugural Bitcoin spot ETF. While the actual approval of the ETF remains uncertain, recent developments, such as the court favoring Grayscale over the SEC in the Grayscale's request to convert GBTC to a spot ETF and the final deadlines for spot ETF approvals for 21shares and Ark Invest, along with the third deadlines for major asset managers like BlackRock, VanEck, and Fidelity, all converging in January, lead many to anticipate the approval of the first Bitcoin spot ETF by January 2024. From an asset perspective, the listing of a Bitcoin spot ETF would be a monumental event, allowing more market participants to gain exposure to BTC and potentially bringing a significantly larger scale of funds into the Bitcoin ecosystem.

Despite this, there's an aspect of Bitcoin that's often overlooked in the broader financial conversation: the network's ecosystem and technological advancements. While the external asset markets are abuzz with discussions on Bitcoin ETFs, a flurry of activity and innovation is taking place within the Bitcoin network, largely unnoticed by the wider market. For Bitcoin's legitimacy as an asset, maintaining the network's security is essential, and this hinges on the development of a long-term sustainable ecosystem. Thus, this article aims to shed light on the exciting developments currently unfolding in the Bitcoin ecosystem and what areas deserve special attention in 2024.

2. Ordinals & BRC-20: Opening New Horizons in the Bitcoin Network

2.1 The Impact of Bitcoin Ordinals

In 2023, one of the most significant developments in the Bitcoin network was undoubtedly the introduction of Ordinals. Ordinals allow for the inscription of various types of data onto Bitcoin's smallest unit, the satoshi (sats), effectively turning them into NFTs on the Bitcoin network. Since Casey Rodarmor introduced the Ordinals Protocol in January 2022, activity on the Bitcoin network has surged. The generation of meaningful transaction fees is crucial for the sustainability of the Bitcoin network, and Ordinals have shown great potential in this regard throughout 2023.

To understand the significant impact of Ordinals on the Bitcoin network, let's examine some key metrics. First, the average block size in Bitcoin has substantially increased. As we'll explore below, the Segwit upgrade allowed Bitcoin blocks to reach up to 4MB. The average block size, which used to be around 1.1MB, has increased to an average of 1.7MB due to the storage of various files through Ordinals.

The number of transactions on the Bitcoin network has also increased significantly, particularly due to the BRC-20 standard, which we will discuss below. Many users have been inscribing texts related to the BRC-20 standard onto sats, leading to an average increase in transaction numbers by about 1.5 times.

Although the space in Bitcoin network blocks is limited, the popularity of Ordinals and the resultant spike in transaction numbers naturally led to an increase in transaction fees. Before the Ordinals became popular, transaction fees ranged from 8 to 40 BTC, but during the peak of BRC-20's popularity following the launch of Ordinals, daily transaction fees reached as high as 635 BTC. While these fees have decreased since then, they are rising again towards the end of the year due to increased activity related to Ordinals.

2.2 Ordinals: Enabling True NFTs on the Bitcoin Network

2.2.1 The Genesis of Ordinals

The journey of Ordinals traces back to December 2022. On December 14, 2022, Casey Rodarmor marked the beginning of this new era by inscribing a pixel art file featuring a black skull on a white background onto the 1,252,201,400,444,387th satoshi, creating the first inscription. Thanks to the limitless possibilities of Ordinals, 2023 witnessed a series of innovative experiments and technical advancements on the Bitcoin network. Significant milestones include:

• January 21, 2023: The debut of the first NFT collection, Bitcoin Shrooms (Sotheby's announced on December 6, 2023, its intention to auction Bitcoin Shrooms, marking the first sale of Ordinals).

• February 2, 2023: The introduction of Taproot Wizards, the first collection to reach almost 4MB in size.

• February 22, 2023: Launch of Sats names, linking Bitcoin wallet addresses to human-readable characters.

• March 8, 2023: Domo released the BRC-20 token standard.

• March 16, 2023: Minting of the renowned NFT project, DeGods, in Ordinals format.

• March 21, 2023: The launch of MagicEden's Bitcoin NFT marketplace.

• June 10, 2023: The emergence of the Recursive Inscription concept.

2.2.2 Understanding Ordinals

So, what is the underlying principle of Ordinals? They became feasible due to previous upgrades in the Bitcoin network, namely SegWit and Taproot. SegWit separated Bitcoin's data into transaction data and witness data, introducing virtual bytes to allow more data in Bitcoin blocks. Taproot further enhanced this by upgrading Bitcoin's script language to tapscript, enabling more complex transactions. Consequently, Ordinals utilize these advancements to inscribe various types of files (images, text, videos, audio, etc.) onto sats.

Ordinals, storing digital files directly on the Bitcoin blockchain, can be seen as a more authentic form of NFTs compared to those on Ethereum. While Ethereum NFTs are transferred and traded on the blockchain, the associated files are often stored on centralized servers like AWS or decentralized protocols like IPFS or Arweave. This means that Bitcoin Ordinals rely entirely on the security of the Bitcoin network, whereas the security of Ethereum NFTs does not solely depend on the Ethereum network. Elon Musk, in a recent appearance on the “Joe Rogan Experience” podcast, although not specifically mentioning Ordinals, critiqued the absence of file storage on the blockchain in Ethereum and other blockchains' NFTs, drawing attention and acclaim from the Ordinals community.

2.3 The Surge of BRC-20

2.3.1 The BRC-20 Standard

Among various initiatives within Bitcoin Ordinals, the BRC-20 standard stands out as a particularly hot topic. Proposed by domo on March 8, 2023, BRC-20 aims to implement Fungible Tokens (FT) on the Bitcoin network, akin to Ethereum's ERC-20 tokens. While Ordinals have been primarily associated with authentic NFTs, the introduction of BRC-20, a token standard based on Ordinals, brings the concept of fungible tokens.

BRC-20 tokens are created by inscribing texts in a specific format (JSON) onto sats using Ordinals. There are three main functions in BRC-20: Deploy, Mint, and Transfer. To deploy a BRC-20 token, one needs to inscribe text onto sats following the Deploy format. This includes specifying the token standard (”p”: “brc-20”), the operation (”op”: “deploy”), the ticker of the token (”tick”: “ordi”), its maximum quantity (”max”: “21000000”), and the limit per minting (”lim”: “1000”).

Once a token is deployed, anyone can mint it by inscribing text compatible with the Mint function onto sats. In the above example, up to 1,000 ordi tokens can be issued in a single transaction. To transfer ordi tokens to another address, one would inscribe text according to the Transfer function onto sats and then send those sats to the desired address.

2.3.2 The Impact of BRC-20

With its straightforward and intuitive mechanism, the BRC-20 token has revitalized the otherwise quiet Bitcoin network, drawing intense interest not only within the Ordinals ecosystem but across the entire Bitcoin network. The first BRC-20 token, ordi, saw its value soar from $0.1 to as high as $61, ranking 66th in market capitalization among all tokens as of December 12, 2023.

The dominance of BRC-20 within Ordinals is overwhelming. Analyzing the types of files recorded through Ordinals reveals that, excluding the period when images were predominant before BRC-20's emergence, most of the inscriptions are text files, a trend largely attributed to BRC-20. This indicates that BRC-20's significance extends beyond just Ordinals, representing a substantial portion of activities within the entire Bitcoin network, as evidenced by statistical data.

2.4 The Evolution of the BRC-20 Ecosystem

2.4.1 Limitations of BRC-20

An interesting point is that despite BRC-20 showing significant activity within the Bitcoin network, there was a rapid decline and subsequent recovery in its activity in October 2023. Following OKX exchange's launch of the Ordinals marketplace and the listing of the ordi token for trading, Binance also announced on November 7, 2023, the listing of ordi, indicating sustained interest in BRC-20. However, for further growth of the BRC-20 token ecosystem, more technological advancements are necessary.

The distribution, issuance, and transfer processes of BRC-20 tokens are distinctly different from those of ERC-20 tokens. Firstly, the balance of ERC-20 tokens is managed on-chain in smart contracts and is easily verifiable, whereas BRC-20 token balances depend on centralized off-chain services (indexers) due to their JSON data format recorded across numerous sats, requiring indexing for balance retrieval.

For example, even if 30 sats with texts issuing 1,000 ordi tokens are found in user A's wallet, the actual number of ordi tokens they hold might not be 30,000 if they have previously transferred sats containing ordi token transfer texts. This complexity in determining BRC-20 token balances necessitates the use of a third-party indexer.

Secondly, BRC-20 functionality is more limited compared to ERC-20 tokens. Ethereum's ecosystem has grown significantly around ETH and various ERC-20 tokens, which as smart contracts, offer a range of functionalities beyond issuance and transfer, like burning, blacklisting, and voting. In contrast, BRC-20 tokens can only be deployed, minted, and transferred, with their issuance often being quickly completed by bots after deployment due to the lack of programmable processes. These limitations explain why BRC-20 tokens, despite being around for over nine months, are primarily used as meme coins.

2.4.2 The ORC-20 Standard

The BRC-20 standard has several limitations, and numerous efforts have been made to improve upon these. A notable example is the ORC-20 token standard. ORC-20 was proposed to address the shortcomings of BRC-20, offering backward compatibility. BRC-20 had limitations such as the inability to change the total supply or the maximum number of tokens per mint after deployment, a four-character limit for token tickers, and a dependency on centralized indexers for balance checks, which increased the risk of double-spending.

ORC-20 introduces various modifications. Firstly, it allows for the free setting of token tickers during the deployment phase and includes an inscription number in the ID for token identification. Secondly, it changes BRC-20's Transfer process by splitting it into two Send stages, adding a step to send the remaining balance back to oneself after a token transfer. This mimics Bitcoin's utxo model and helps mitigate the risk of double-spending. Lastly, it incorporates an Upgrade feature, enabling changes in total supply and maximum tokens per mint, thereby allowing for diverse tokenomics functions. Further expanding on ORC-20, the ORC-Cash standard has also been proposed, which simplifies usage and adds functions like Airdrop, Vote, Sell, Lock, Swap, and Burn.

Source: Dune(@ordinalstats)

Although ORC-20 improved many aspects of BRC-20, it was briefly popular before falling out of use. BRC-20 remains the most widely used Bitcoin Ordinals-based token standard, and surpassing its market size and social consensus seems challenging in the short term.

2.4.3 Bitcoin Oracle

To mitigate the reliance of BRC-20 on centralized indexers, Alex, a DeFi protocol in the Stacks ecosystem, introduced the Bitcoin Oracle in collaboration with key players in the Ordinals ecosystem like domo, OKX, Hiro, and Unisat. Bitcoin Oracle aims to reduce risks associated with centralized indexers by relying on multiple indexers. It records consensus from multiple off-chain indexers on the Stacks blockchain, building a more secure global BRC-20 ledger.

2.4.4 Expectations for BRC-20 in 2024

Currently, the ordi token holds symbolic value as the first BRC-20 token, but most other BRC-20 tokens remain at meme coin level. However, various contributors like wallets, marketplaces, DeFi protocols, and DAOs are continuously contributing to the evolution of the BRC-20 ecosystem, making it more than just a meme market. Services like Multibit, which bridge BRC-20 tokens to EVM networks, have also gained significant attention. It's worth watching whether the BRC-20 ecosystem can transcend mere memes and achieve more substantial outcomes in 2024.

2.5 Looking Ahead

2.5.1 Recursive Inscriptions

Not only the BRC-20 use case of Ordinals but also Ordinals itself has its limitations. The primary issue is the capacity constraint. Despite the SegWit and Taproot upgrades enabling various files to be recorded on the Bitcoin block, Ordinals supports only up to 4MB, a significant bottleneck in expanding the Ordinals ecosystem. To overcome this, the concept of "Recursive Inscriptions" was introduced in June 2023.

Recursive Inscriptions allow one inscription to refer to data contained in another inscription using a simple code ‘/-/content/:inscription_id’. For instance, consider creating a 10,000 PFP NFT collection on the Bitcoin network via Ordinals. Even with efficient compression, uploading 10,000 files of 2500x2500px (~230 kb each) would incur over $1M in costs. However, with Recursive Inscriptions, you can upload just the image files of specific traits for the PFPs on the Bitcoin network and combine these using HTML code to form the 10,000 PFPs, significantly reducing costs and storage requirements.

Recursive Inscriptions are not supported at the on-chain protocol level but are visualized through explorers like ordinals.com when reading the data. This innovation addresses the limitations of storage space and high costs previously associated with Ordinals. The OrdinalsBot team demonstrated the use of Recursive Inscriptions in Ordinals NFTs, with examples showing very small file sizes, such as 621 bytes. Prominent collections using Recursive Inscriptions include Bitcoin Apes and Onchain Monkey. Additionally, the Luminex team has introduced the BRC-69 standard and a platform to simplify the minting of Ordinals NFTs using Recursive Inscriptions.

2.5.2 Diverse Experiments within the Ordinals Ecosystem

The Ordinals ecosystem is continually enhanced with various features and services. One such addition is the Parent-child inscription, enabling inscriptions to have a parent-child relationship. This feature helps determine which collection an inscription belongs to or identify its creator. The ecosystem also includes exchanges like Magisat, where rare Satoshis (sats) are traded. Since the sats that record files have unique numbers, their rarity varies, allowing users to trade specific sats.

Although the Ordinals ecosystem is growing, it remains smaller compared to the Ethereum ecosystem. Ethereum's NFT trading volume last year was around 5.5M ETH, while the 10-month-old Ordinals market has only reached a total volume of $864M, including BRC-20 trades. However, the entrance of major NFT marketplaces like Magic Eden and cryptocurrency exchanges like OKX into Ordinals trading has brought more users. We can expect more user-friendly services based on Ordinals in the future.

Source: ord.io

Beyond merely recording digital files on Satoshis, Ordinals' potential is vast. Nicholas Carlini recorded the 1993 3D video game DOOM on Satoshis, and playing the game is possible by searching the 466th inscription on the Ordinals explorer. Various games recorded as Ordinals are playable. Furthermore, the introduction of Recursive Inscriptions allows for recording data over 4MB, paving the way for more complex 3D games on the Bitcoin network.

The data storage approach of Ordinals also opens possibilities in infrastructure. A prime example is the sovereign rollup concept developed by the Celestia team with Rollkit, allowing off-chain computation while storing transaction data on a specific blockchain. Bitcoin sovereign rollups store data on the Bitcoin network via Taproot transactions, benefiting from the network's security. Rollkit facilitates deploying such sovereign rollups, and a demo showcasing an EVM rollup on the Bitcoin network was released.

2.5.3 Final Thoughts

In summary, Ordinals' impact on the Bitcoin network and its ecosystem growth in 2023 was significant. Transaction fees generated by Ordinals until December 12, 2023, amounted to approximately 3524 BTC ($150M), a substantial portion of Bitcoin's transaction fees. The famous Ordinals project Taproot Wizards raised $7.5M in seed funding, and Sotheby's planned to auction Bitcoin Shrooms, the first Ordinals PFP collection. Ordinals' position is increasingly solidifying.

However, not everyone in the Bitcoin community welcomes Ordinals. Bitcoin developer and Ocean mining pool co-founder Luke Dashjr labeled Ordinals as spam that exploits Bitcoin vulnerabilities, calling for filtering and vulnerability fixes. Personally, while Bitcoin's economic significance lies in supporting the asset 'Bitcoin' due to its high security and decentralization, it's crucial to remember that this is possible because the Bitcoin network is the world's most secure database. Miners' sustainability, vital for the network's security, depends on economic incentives. In 2024, more exciting activities in the Ordinals ecosystem are anticipated, contributing to the long-term sustainability of the Bitcoin network.

3. Bitcoin Scalability Solutions to Watch in 2024

3.1 Classification of Solutions Based on Verification Methods

In 2023, while Ordinals and BRC-20 gained significant attention and increased activity within the Bitcoin network, there was also a surge in transaction fees, a downside of the network's growing popularity. Fundamentally, the Bitcoin network aims for high security and decentralization, inherently limiting its scalability due to the blockchain trilemma. The network is capable of around 7 transactions per second (tps), and last year, it averaged about 4.3 real tps. Although scalability is not the primary value of the Bitcoin network, efforts to improve it have been ongoing.

Similar to how rollup networks have enhanced Ethereum's scalability, projects aiming to boost Bitcoin's scalability also consider how to utilize BTC or depend on the Bitcoin network's security. The key is verifying the legitimacy of transactions from the scalability solution back to the Bitcoin network. For example, in a hypothetical 'Fast BTC network', if user A wants to transfer 3 BTC to the Bitcoin network, the transaction's validity must be correctly verified to prevent potential fund theft.

Current Bitcoin scalability solutions can be categorized based on their transaction verification methods:

• Third-party Trust - Trusting a third party to verify and process BTC deposits and withdrawals. Users must fully trust the third party when using these scalability solutions. Examples include the Liquid Network and WBTC.

• Proof Systems - Scalability solutions where fraud or validity proofs of transactions are verified on Bitcoin's on-chain. However, Bitcoin's network currently lacks the capability to verify such proofs.

• Merged Mining - Bitcoin miners participate in mining sidechains without reducing their mining efficiency. In this method, trust is placed in the miners participating in merged mining. An example is Drivechain (specifically using 'Blind Merged Mining').

• State Channels - Two parties freeze funds in a multi-signature wallet on the Bitcoin network, conduct transactions off-chain, and record only the final result on the network. The Lightning Network is an example of this.

• Introducing PoS Consensus Algorithm - Adopting a PoS validator set for verifying BTC deposits and withdrawals. An example is the Spiderchain concept.

Let's now examine Bitcoin scalability solutions worth watching in 2024.

3.2 The Growing Lightning Network

3.2.1 Overview of the Lightning Network

The Lightning Network is a prominent scalability solution for the Bitcoin network, enabling users to transfer small amounts quickly and with low fees. It consists of numerous peer-to-peer (p2p) trading channels established between two nodes, where transactions can occur through multiple channels between two nodes, a process known as routing. These transactions are secured using Hashed Timelock Contracts (HTLC), allowing for safe transactions without trusting intermediary routing nodes, who earn small fees for facilitating transactions.

To open a Lightning channel, two nodes must create a 2-of-2 multisig address on the Bitcoin network and deposit BTC into it. Multisig requires multiple signatures for a transaction, allowing two nodes to open and close the channel based on mutual agreement. While the channel is open, both nodes can freely exchange funds within the limits of the BTC deposited in the multisig address. Since most transactions within the Lightning Network are not recorded on the Bitcoin blockchain each time they occur, they are fast and incur lower fees.

3.2.2 Key Statistics of the Lightning Network

Since 2018, the BTC capacity and the number of nodes in the Lightning Network have rapidly increased, but there was a stagnation in 2023. The reasons for this stagnation include the bear market, which reduced the incentive for nodes to operate due to decreased transaction fees, and the rise of custodial services, which made it easier for users to engage with the network without running their own nodes.

Source: River

Despite this stagnation in BTC capacity and node count, the number of transactions on the Lightning Network has exploded. According to River, the number of transactions increased by 1,212% compared to August 2021, processing an average of 213k transactions daily in August 2023.

3.2.3 Integration of the Lightning Network in Gaming and Social Media

The Lightning Network's significant growth can be attributed to its integration into gaming and social media. With extremely low transaction fees (around $0.0003), it's well-suited for sectors like gaming and social media, where low-value transactions are frequent. For instance, Nostr, a decentralized social media protocol backed by Jack Dorsey, uses the Lightning Network for a tipping feature called Zap, which has seen over 2 million uses.

In gaming, the Lightning Network is often used for purposes other than user-to-user transactions, such as rewarding players in hyper-casual games with small amounts of Bitcoin. This system boosts user retention, thereby potentially increasing ad revenue, a crucial income source for these games. Games utilizing the Lightning Network infrastructure provided by Zebedee have shown impressive metrics. For instance, Square Enix's Ludo Zenith saw an 82% increase in ARPDAU, and Viker Games' Wheel of Trivia saw a 177% increase. Data analyzed by River, a Bitcoin service provider, indicates that THNDR Gaming contributed 3% to the increase in Lightning Network transactions from February 2022 to August 2023.

3.2.4 Taproot Assets

Apart from its explosive growth, another factor bolstering the Lightning Network's growth prospects in 2024 is the Taproot Assets protocol (formerly known as the Taro protocol). In October 2023, Lightning Labs launched the Taproot Assets protocol on the mainnet. This protocol uses MS-SMT and Taptweak to define asset issuance and ownership, allowing the launch of non-BTC tokens on the Bitcoin network. Assets issued on the Bitcoin network can be traded inexpensively on the Lightning Network, potentially benefiting Bitcoin's network sustainability due to the transaction fees generated from trading diverse assets.

Although the Taproot Assets protocol is relatively new and has not garnered significant attention yet, by December 12, 2023, a total of 64,668 assets had been issued. Services like NostrAssets have begun to emerge, allowing easy trading and issuance of Taproot Assets. It's anticipated that institutions expressing interest in issuing synthetic assets or stablecoins using the Taproot Assets protocol will significantly boost the Bitcoin and Lightning Networks.

3.2.5 Future Directions for the Lightning Network

Despite the Lightning Network's rapid growth, its real TPS is still lower than the Bitcoin main network. For broader adoption, several improvements are necessary.

Firstly, there's a need to simplify the technical complexities of operating non-custodial Lightning nodes. Currently, most Lightning services are custodial. Running a personal Lightning node involves liquidity management, maintaining uptime, routing, and data backup. Managing liquidity is crucial; improper management can lead to transaction failures. For example, if A and B each deposit 1 BTC in a multisig address to open a Lightning channel, they can't transact more than 2 BTC in one direction. Offline nodes also lead to transaction failures, a common issue in the network. Services like Blockstream's Greenlight can mitigate these problems. Lightning Service Providers (LSP) can provide liquidity to nodes lacking it and offer additional services like routing and data backup.

Beyond technical aspects, increasing real-world applications of the Lightning Network is vital. In September 2021, El Salvador's government declared Bitcoin as legal tender, supporting the Lightning Network-enabled wallet Chivo. Since then, companies like Square's Cash App, Robinhood, and Shopify have also supported the Lightning Network. As seen with the recent integration in some games and social media for microtransactions, it's expected that more services will adopt Lightning Network payments, increasing real-life usage opportunities. The continued support from various services and the network's growth trajectory indicate an increasing presence of the Lightning Network in everyday life.

3.3 The Debate Around Drivechain

Aside from the Lightning Network, what other efforts are there to improve Bitcoin's scalability? In 2023, there was a heated debate on Twitter about Drivechain, a concept first introduced in 2015, with related proposals including BIP300 and BIP301. Drivechain is a Bitcoin network sidechain secured through 'Blind Merged Mining (BMM)', a method that allows Bitcoin miners to mine other PoW networks simultaneously without running the software of those networks.

Drivechain offers fast scalability and the ability to deploy smart contracts not supported by Bitcoin. Additionally, Bitcoin miners can earn extra fees by participating in Drivechain's security maintenance, potentially aiding the Bitcoin network's long-term sustainability. However, there was controversy in the Bitcoin community in 2023 about Drivechain. Critics argue that introducing Drivechain would require upgrades to Bitcoin's core, potentially unbalancing Bitcoin's economy, risk of adding 'shitcoins', and risks in the peg-out process from Drivechain back to Bitcoin. Despite these concerns, BMM represents a new concept that could improve current Merged Mining issues. The future developments and movements in the Drivechain community are worth monitoring.

3.4 The Emergence of Spiderchain

Amid the Drivechain debate, Botanix Labs introduced a new concept called Spiderchain. Like Drivechain, Spiderchain is a Bitcoin network sidechain, but it uses a Proof of Stake (PoS) mechanism and supports the Ethereum Virtual Machine (EVM). Spiderchain's security is maintained by orchestrators who stake BTC and risk being slashed for malicious actions.

For users to transfer BTC from the Bitcoin network to Spiderchain, a new multisig address is created and managed by a randomly selected group of 100 orchestrators. Unlike Drivechain, Spiderchain does not require upgrades to Bitcoin's core. However, its security level is tied to the economic scale of the staked BTC. Spiderchain, actively developed as a product by Botanix, plans to launch its mainnet in April 2024, making it a concept worth following.

3.5 Looking Ahead

There are many ongoing efforts to improve Bitcoin's scalability, especially with the growth of modular blockchain ecosystems in Ethereum and Cosmos. These include attempts to use the Bitcoin network as a Data Availability (DA) layer for Sovereign Rollups. While past research explored scaling solutions like zk rollups on Bitcoin, these required a soft fork upgrade to verify zero-knowledge proofs on the Bitcoin network. In contrast, recent Sovereign Rollup proposals utilize Bitcoin Ordinals to store data, allowing transaction validity to be independently verified by sovereign rollup nodes without needing Bitcoin core upgrades.

Chainway has released a Bitcoin DA adapter, enabling Sovereign Labs' SDK to use the Bitcoin network as a DA layer. Similarly, Kasar Labs and Taproot Wizard collaborated on a Bitcoin DA adapter, and StarkNet's RaaS project Madara allows Bitcoin network use as a DA layer. Rollkit, developed by the Celestia team, also supports Sovereign Rollups using the Bitcoin network as a DA layer. While the small block size of the Bitcoin network might limit scalability, these innovations offer interesting experiments in improving scalability based on Bitcoin's robust security.

In October 2023, Robin Linus, a Bitcoin researcher and core contributor to ZeroSync, published the BitVM whitepaper. BitVM enables smart contracts with off-chain computation and doesn't require Bitcoin network core upgrades. Its transaction validity is verified similarly to optimistic rollups.

Historically, Bitcoin's technical advancements have lagged behind ecosystems like Ethereum, but there's growing interest in leveraging Bitcoin's strong security for more than just decentralized currency. These ongoing efforts to build scalability solutions on top of Bitcoin network promise a future where Bitcoin maintains its strong security and value proposition, with the Lightning Network handling transfers/payments and other activities happening on scalability solutions like Sovereign Rollups.

4. Babylon Chain: Leveraging Bitcoin's Security

Source: Babylon

4.1 Overview of Babylon Chain

Babylon Chain has been a project of interest from its early stages, and recently it secured an $18 million investment led by Polychain Capital and Hack VC. It's a project within the Bitcoin ecosystem worth watching in 2024.

Bitcoin, as the first blockchain network, has never lost its position as the market cap leader. Its strong community, security, and liquidity are aspects many services have sought to leverage. However, leveraging the Bitcoin network has been challenging due to its inability to natively support smart contracts, making this a kind of 'holy grail' in the blockchain ecosystem. Babylon Chain is an innovative protocol that rises to this challenge.

Babylon Chain aims to allow other blockchain services to leverage Bitcoin's robust security, offering two services: 1) Bitcoin timestamping and 2) Bitcoin staking.

4.2 Bitcoin Timestamping

Bitcoin timestamping, a service initially supported by Babylon Chain, enables PoS networks to record checkpoints on the Bitcoin network, thereby safeguarding against long-range attacks.

4.2.1 Long-Range Attacks

Long-range attacks are a significant security threat in PoS networks. While slashing is an advantage of PoS over PoW networks, it becomes ineffective in long-range attacks where an attacker unbonds their stake from the canonical chain and creates a malicious fork from a past block. The attacker can generate blocks on this fork because they still have staking rights in the past. However, since they have unbonded their stake from the canonical chain, they cannot be penalized there. Actually, long-range attacks are challenging because the attacker must generate many blocks, often relying on methods like Simple, Posterior Corruption, and Staking Bleeding. For more detailed explanations, reading Evangelos Deirmentzoglou's article is recommended.

Nodes continuously online on the canonical chain are not significantly affected by long-range attacks, as they have been tracking the chain from the past. However, new or long-offline nodes might struggle to distinguish between the canonical and forked chains, creating a security vulnerability.

A simple countermeasure to long-range attacks is introducing a staking unbonding period, allowing for slashing of attackers who immediately attack after unbonding and enabling network participants to establish social consensus on the canonical chain during this period. However, as social consensus ultimately relies on participant belief, PoS networks need a fundamental protocol to counter long-range attacks.

4.2.2 Bitcoin Timestamping

Babylon Chain enables PoS networks to periodically record checkpoints on the Bitcoin network. Even in the event of a long-range attack, previously recorded valid block checkpoints on the Bitcoin network can be used to identify the canonical chain, significantly reducing the unbonding period.

To efficiently record checkpoints on the Bitcoin network, Babylon Chain first aggregates checkpoints from multiple PoS networks and then records them simultaneously on Bitcoin. Using the OP_RETURN opcode, it can record arbitrary data up to 80 bytes on the Bitcoin network.

In addition to dramatically reducing the unbonding period and improving user experience, Bitcoin timestamping via Babylon Chain offers various advantages, such as censorship resistance and protection of critical transactions.

4.2.3 Ecosystem

Although the Babylon Chain is currently in a testnet phase, numerous networks based on the Cosmos SDK are experimenting with Bitcoin timestamping through the testnet. Projects that have adopted timestamping can leverage the security of the Bitcoin network to shorten unbonding periods and utilize robust security. Below is a list of notable Cosmos ecosystem projects integrating Bitcoin timestamping:

• Archway - Focuses on building a developer ecosystem through incentives.

• Agoric - Allows deployment of smart contracts using JavaScript.

• XPLA - A network for digital media content developed by the renowned Korean game studio Com2us.

• Akash - A decentralized cloud infrastructure network.

• Stride - A liquid staking platform in the Cosmos ecosystem.

• Stargaze - A leading NFT specialized app chain in the Cosmos ecosystem.

• Secret Network - A privacy app chain within the Cosmos ecosystem.

• Kava Network - A Cosmos app chain offering an Ethereum development environment.

• Kyve - Provides various data services including data lakes and pipelines.

• Evmos - An EVM-based app chain in the Cosmos ecosystem.

4.3 Bitcoin Staking

This service allows BTC holders to lock their BTC in self-custody, participate as validators in other PoS services, and earn rewards without needing to trust a third party or bridge their BTC to other networks. Using the Babylon Chain, PoS services can borrow the economic security of BTC, a major market cap asset, making security bootstrapping easier. Except for staking occurring only once, Babylon Chain’s vision aligns closely with EigenLayer’s restaking protocol in the Ethereum ecosystem, potentially exposing PoS services and validators to the vast market cap of ~$800B.

Bitcoin staking starts with the staker sending a ‘staking tx’ to the Bitcoin network, with BTC deposited in a self-custody vault. Stakers can then begin validating for PoS services and earn rewards. BTC withdrawal is possible only with the staker’s private key. If a validator acts maliciously, Babylon Chain can publicly expose this private key, allowing anyone to send a ‘slashing tx’ to burn the BTC.

Like EigenLayer, which garnered significant attention in the Ethereum ecosystem for its restaking, Babylon Chain is expected to attract immense interest in the Bitcoin ecosystem. Since BTC, unlike ETH, lacks native investment methods in the Bitcoin network that generate interest, Babylon Chain’s Bitcoin staking service is anticipated to effectively utilize the massive liquidity of BTC.

5. Looking Ahead

Most blockchain innovations have occurred outside of Bitcoin. Ethereum has been the iconic ecosystem of continual innovation, with recent developments also in alternative Layer 1 networks like Solana and Polygon, backed by significant capital and a thriving developer community. In contrast, the Bitcoin network has been somewhat neglected in technological innovation due to conservative governance and the limited scope of Bitcoin xcript, which is Turing incomplete.

However, efforts to leverage Bitcoin's liquidity and security have been ongoing since 2008 and have blossomed in 2023. Developments like SegWit and Taproot, which enabled Ordinals, and modular blockchain technology for using the Bitcoin network as a DA layer, including projects like EigenLayer and Babylon Chain, are experimenting within the Bitcoin network. Bitcoin can no longer be deemed a dull blockchain, and in 2024, it may become the most ecologically significant network to watch, surpassing other protocols.

The vibrant development of the Bitcoin ecosystem is crucial for maintaining the value of Bitcoin by increasing miner incentives. This aspect is often overlooked due to the overshadowing impact of events like the Bitcoin spot ETF. Looking ahead to 2024, it's recommended to perceive Bitcoin in a broader context: as a neutral database, a foundational base layer for scalability solutions, and a network characterized by substantial economic security. This expanded perspective is anticipated to deepen our comprehension of the Bitcoin network's multifaceted nature.

Thanks to Kate for designing the graphics for this article.