Learn about Bitcoin's new technology innovations in this article, involving Layer 2, smart contracts, mining, and privacy

Note: The original author is Lucas Nuzzi, director of technical research at Digital Asset Research. This article tells us the truth: Bitcoin is generally a set of evolving protocols. It is not a static technology.

Bitcoin has made great progress in the past 10 years. Compared with its first-generation software, the quality and reliability of the current Bitcoin protocol has been significantly improved. Bitcoin quickly and organically attracts a large number of developers, allowing them to invest a lot of time in improving most of their underlying code base.

However, Bitcoin is still that Bitcoin. Just like the Constitution, the core consensus rules that define its monetary attributes, such as algorithmic inflation and hard-coded supply, remain unchanged. Time and time again, factions have tried to change these core attributes, but all attempts to control so far have failed. This is usually a painful process, but it highlights and consolidates two major advantages of Bitcoin:

  1. No single entity can influence the development of Bitcoin;
  2. Lack of central control to protect Bitcoin's currency attributes;

Interestingly, these rules have attracted cypherpunk and institutional investors, making Bitcoin an unprecedented currency. However, these rules also make Bitcoin's software development more challenging than any other digital asset.

In essence, Bitcoin's structure has given developers a limited toolkit so that they will not violate Bitcoin's monetary policy and face too much danger if they change too quickly.

This means that Bitcoin innovation requires creativity and patience, and perhaps more importantly, self-minimization . After all, the basic rules in Bitcoin's construction are fundamentally prior to technology . This is why Silicon Valley has a hard time understanding Bitcoin's value proposition. It is not just a technology, financial instrument or consumer application. It is a complete currency system supported by technology. Changing the structure of Bitcoin requires a quasi-political process, which may violate Bitcoin's monetary attributes. Therefore, technological innovation is implemented as a module.

As often pointed out, Bitcoin's modular innovation approach is similar to the evolution of the Internet Protocol Suite, where different protocol layers are dedicated to specific functions. For example, e-mail is handled by SMTP, files are handled by FTP, web pages are handled by HTTP, user addresses are handled by IP, and data packet routing is handled by TCP. Each of these agreements has undergone continuous development over the years.

In an article on emerging Bitcoin technology stacks by Spencer Bogart, he made the point that we are now witnessing the rise of the Bitcoin protocol suite. It turns out that the inflexibility of Bitcoin's core layer has produced multiple protocols specifically applied to various applications, such as the Lightning Network BOLT standard for payment channels. This innovation is both dynamic and (relatively) secure. Yes, because this modular approach minimizes systemic currency risk.

With so many things happening on many layers of the Bitcoin technology stack, tracking emerging solutions can be very difficult. The chart below attempts to draw out all the relatively new plans and shows a more complete picture of the Bitcoin technology stack. It is not exhaustive and the article does not express any endorsement of specific initiatives. What is impressive, however, is that innovation is being pushed forward across the board, from a layer 2 solution to the rise of smart contract solutions:


First, Layer 2 technology

There has been a lot of discussion about Lightning Network adoption recently, which is Bitcoin's most prominent layer 2 technology. Critics often point out that the number of locked channels and the total number of BTC in the Lightning Network has decreased significantly. Then, they often use these two metrics to evaluate LN user adoption. Although the community has very much agreed with these indicators, it must be pointed out that, given the way the Lightning Network works under the hood, these indicators are actually fundamentally flawed.

One of the most underrated advantages of the Lightning Network is its straightforward privacy properties. Since the Lightning Network does not rely on global validation of all state changes (ie its own blockchain), users can use private technology for additional transactions and network overlays such as Tor. At this point, we can evaluate the private usage of the Lightning Network by analyzing the number of open transactions on the on-chain channel and comparing it with the number of public channels off the chain. According to Christian Decker's estimates, about 41% of Lightning Network's channels are private:


Source: Christian Decker

The activities occurring in these channels cannot be captured by the popular Lightning web browser. Therefore, the increase in the private use of the Lightning Network will lead to a decrease in the amount of public data, which will lead observers to draw the wrong conclusion: The use of the Lightning Network is declining.

Although Lightning Network must overcome a number of usability obstacles for it to be widely adopted, we must stop using misleading indicators to make assertions about the current state of the network.

As Decker pointed out in a speech at a recent Lightning Network conference in Berlin, the above estimates of private channels vs. public channels are also flawed because the use of Schnor signatures will make channel open transactions indistinguishable from regular transactions.

WhatSat is another interesting development in the privacy field of layer 2 which is a confidential information system located on the Lightning Network. This project is a modification of Lightning deamon, which allows relayers of private information (communications connected to the communication entity) to obtain service compensation through small payments. This decentralized, anti-censorship and spam-proof chat application is driven by the innovation of LND itself, such as the recent improvement of lightning-onion , which is Lightning Network's own onion routing protocol.

The growth of Lapp (or Lightning Network Application) proves the widespread applicability of these innovations in consumer applications, from a Lightning Network-driven cloud computing VPS to an image hosting service that shares advertising revenue through micro-transactions. These are Lightning Innovation on web layer 2. More generally, we define Layer 2 as a set of applications that use the bottom layer of Bitcoin as a court of law. They use the bottom layer of Bitcoin to reconcile external events so that disputes are resolved. Therefore, the topic of data anchoring on the Bitcoin blockchain has become more extensive.For example, companies such as Microsoft have created a decentralized identity system on Bitcoin. These new solutions increase the demand for on-chain reconciliation and contribute to the long-term development of the Bitcoin fee market.

Second, smart contracts

There are also projects that attempt to bring expressive smart contract capabilities back to Bitcoin in a secure and responsible manner. This is a significant development, as some of the original opcodes (operations that determine what Bitcoin can calculate) in the Bitcoin protocol have been removed since 2010. Earlier, a series of terrible vulnerabilities were discovered, which caused Satoshi Nakamoto to disable some features of the Bitcoin programming language Script.

For many years, it has been very clear that with highly expressive smart contract functions, there will be some non-trivial security risks. The general rule of thumb is that the more features you introduce into a virtual machine (a collective verification mechanism that handles opcode opcodes), the more unpredictable its program will be. Recently, however, we have seen a new approach to the Bitcoin smart contract architecture that minimizes unpredictability but also provides a lot of functionality.

A new design of the Bitcoin smart contract known as the Merkelized Abstract Syntax Tree (MAST) has sparked a new wave of technology, trying to make a trade-off between security and functionality.

The most prominent one is Taproot , which is an elegant implementation of the MAST structure, which enables the entire application to be represented as a Merkle tree, with each branch of the tree representing a different execution result. Appearing with Taproot, there is also a programming language called Tapscript, which makes it easier to represent the spending conditions associated with each branch of the Merkle tree.

Another interesting innovation that has recently reappeared is a new architecture that can be used to enforce covenants or spending conditions in Bitcoin transactions.

Covenants were originally an idea experiment proposed by Greg Maxwell in 2013 as a way to limit how balances are used (even if their custody rights have changed). Although this idea has been around for almost seven years, the covenant was not achievable until Taproot arrived. Now a new opcode called OP_CHECKTEMPLATEVERIFY (formerly OP_SECURETHEBAG) is using this new technology to potentially enable covenants to be securely implemented in Bitcoin.

At first glance, covenants are very useful in lending (and perhaps bitcoin derivatives) as they create policies similar to recovering payments and attaching to specific BTC balances. But their potential impact on Bitcoin availability goes far beyond borrowing . A covenant can allow the implementation of applications such as Bitcoin vaults. In the case of hosting, the Bitcoin vault provides something equivalent to a second private key, allowing a hacker to “freeze” stolen funds . There are many other applications of this technology, such as non-interactive payment channels , Congestion Controlled Transaction , and CoinJoin , which is indeed worth presenting in a separate article. For more information, you can check out Jeremy Rubin's draft BIP .

It is worth noting that the Schnorr signature is the technical base that makes these new methods of smart contracts possible. After activating Schnorr signatures, Bitcoin can use even more exciting cutting-edge technologies, such as Scriptless Scripts , which allow fully private and scalable Bitcoin smart contracts to be represented as digital signatures (instead of Opcode). Similarly, the Discreet Log contract also adopts the idea of ​​expressing the execution result of the smart contract as a digital signature to obtain better privacy and scalability. In summary, these new methods may enable new smart contract applications to be built on top of Bitcoin, with Schnorr signatures as its foundation.

Third, mining

We have also made some interesting developments in mining protocols, especially for those pool members. Although the centralization of Bitcoin mining is often exaggerated, there is indeed a problem of excessive power of mining pool operators, which can be further dispersed. Specifically, the current mining pool operator can decide which transactions the block they mine contains, which gives them considerable power. Over time, some operators have abused this power to review transactions, mine empty blocks, and redistribute hash output to other networks without authorization from members.

Thankfully, some technologies are trying to disrupt this power structure. One of the most significant changes in bitcoin mining is that the Stratum protocol (the most popular mining protocol) has ushered in version 2.0, which is a completely overhauled mining protocol that implements BetterHash and makes part of the mining pool ( (Miners) can decide for themselves the composition of the blocks they mine. In addition, Stratum V2 also implements some optimizations and allows pool components to better communicate and coordinate.

Mining is another interesting development that helps improve stability and has rekindled interest in computing power and difficulty derivatives. These methods are particularly useful for mining operations where you want to hedge against fluctuations in computing power and difficulty adjustments. Although these derivatives have not yet entered the usable phase, this marks an interesting evolution in the industrialization of Bitcoin mining.

Fourth, privacy

Although Bitcoin's privacy may continue to be an art rather than a science, there are some interesting innovations in this area that are worth emphasizing.

Before we delve into specific privacy innovation protocols, it is important to emphasize that the biggest obstacle to the privacy transactions of digital assets is that most solutions are half-baked. Privacy assets that focus on the privacy of transaction graphs tend to ignore network-level privacy and vice versa. Both of these carriers lack maturity and utilization, which makes it easier to de-anonymize transactions through statistical tracking analysis at the P2P network layer or the blockchain layer.


Thankfully, several projects have achieved breakthroughs in both areas.

When it comes to transaction graph privacy, solutions like P2EP and CheckTemplateVerify are interesting because privacy becomes a by-product of efficiency . As a new approach to CoinJoin, these solutions increase the adoption of privacy transactions by users who are simply motivated to reduce transaction costs.

If lower transaction fees become an incentive and lead to an increase in the anonymous set of Bitcoins (that is, the percentage of UTXO output by CoinJoin), the de-anonymization work through statistical cluster analysis will become more subjective. Some blockchain analysis companies have been able to trick law enforcement agencies into believing that UTXO belongs to a specified probability for a particular user, but the underlying model is already very delicate and fragile. If most UTXOs become CoinJoin output, then this may break existing clustering methods.

Before that, developers need to do a lot of work on usability so that all Bitcoin users (regardless of technology savvy) can use the privacy mechanism equally. In addition to P2EP and CheckTemplateVerify , the latest development in usability is SNICKER (Simple Non-Interactive CoinJoin with Reusable Encryption Key), a new way to generate CoinJoin with untrusted peer nodes. SNICKER combines multiple technologies, allowing users to access CoinJoin transactions without having to trust or interact with peer nodes.

In terms of improving the confidentiality and efficiency of P2P communication, some protocols have also made significant progress. Over the course of 2019, Dandelion (dandelion), a privacy-protecting network protocol, was successfully tested on multiple cryptocurrency networks. Although privacy in transaction broadcasting is not a silver bullet in the entire P2P communication spectrum, protocols such as Dandelion (dandelion) can still meaningfully increase user privacy by hiding the original IP address of the broadcast transaction node.

The last development worth highlighting in the Bitcoin network stack is a new transaction relay protocol called Erlay . Although Erlay is still in the very early stages of development, it is an important innovation that can greatly reduce the bandwidth requirements for running Bitcoin's full nodes. If Erlay is implemented, the efficiency improvement can make it easier for users to complete the bandwidth-intensive initial block download (IBD) and continue to verify the blockchain (especially for users in countries with limited bandwidth settings).

V. These innovations are just the tip of the iceberg of Bitcoin

Tracking all of Bitcoin's innovations is actually very difficult. This article is just a corner on the surface. This also tells us a truth: Bitcoin is generally a set of evolving protocols. The modular innovation approach described here is important because it plays a key role in minimizing the political nature of Bitcoin's evolution and protecting Bitcoin's basic monetary attributes.

Remember this article the next time someone claims Bitcoin is a static technology.