The evolution of the Bitcoin technology stack: overcoming obstacles and embracing innovation

For more than a decade since the birth of Bitcoin, the Bitcoin ecosystem has attracted developers to invest a lot of effort to improve and update its underlying code base. From an outsider's perspective, bitcoin has hardly changed, mainly due to the core consensus mechanisms that define the properties of bitcoin, such as the inflation algorithm and the fixed supply total.

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Different "splits" have repeatedly tried to change the core characteristics of Bitcoin, but so far, all their plans have ended in failure. The above-mentioned "struggle process" highlights and consolidates two major advantages of Bitcoin: 1. No one can determine the development of Bitcoin; 2. Decentralized control protects Bitcoin's monetary attributes.

Overcoming obstacles to development

Since Bitcoin has become a popular value storage method, compared to other digital assets, developers developing software on Bitcoin is more challenging. In order not to destroy the core value of Bitcoin as a value storage method, developers are restricted to "change" Bitcoin in a certain range.

Nonetheless, the Bitcoin network has the potential to continue to innovate. But this process requires the creativity and patience of developers.

Because changing the core layer of bitcoin requires a quasi-political process, and this process may damage the currency properties of bitcoin, innovations on the bitcoin network are usually implemented in the form of modules. This development is similar to the Internet's protocol suite, with different protocol layers dedicated to specific functions. For example, the SMTP protocol handles email, the FTP protocol handles files, the HTTP protocol handles web pages, the IP protocol handles user addresses, and TCP handles routing. Over time, these sub-protocols have evolved to create the great experience that the Internet has today.

Blockchain Capital's Spencer Bogart succinctly expresses this trend in Bitcoin: we are now witnessing the development of Bitcoin's own protocol suite. The inflexibility of the Bitcoin core layer has spawned several additional protocols specifically for various applications, such as Lightning Network's payment channel standard BOLT. Innovation on Bitcoin is dynamic and relatively secure, as this approach minimizes the potential risks of innovation as much as possible.

The following figure reflects all the relatively new initiatives on Bitcoin, showing a more complete Bitcoin technology stack. Of course, the following figure does not cover all the innovative technologies, and we are neutral on the technologies in the figure. From the second-tier technology to the emerging smart contract solutions, Bitcoin's innovation is being fully promoted, which is impressive.

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Layer 2 network

There have been many discussions recently about the use of the Lightning Network, which is the second-most layer of Bitcoin's network technology. Critics often point out that after evaluating the use of Lightning Network's users, it has been found that the number of Lightning Network channels and the total number of locked Bitcoins have dropped significantly. However, these metrics do not reflect the true adoption of the Lightning Network.

One of the most underrated advantages of Lightning Network is its privacy properties. Because lightning network transactions do not depend on all nodes in the world. Users can conduct private transactions by using additional technologies and overlay networks such as Tor. Trading activity that occurs within the private channel will not be displayed in the Lightning Network browser. Similarly, Lightning Network has more and more private transactions, so its publicly available data decreases, which has led some observers to incorrectly conclude that Lightning Network adoption has decreased. Although Lightning Networks must overcome a number of usability obstacles before they are widely adopted, it is not advisable to use misleading indicators to assert the state of the Lightning Network.

Another recent advancement in privacy of the second layer network is the creation of WhatSat, a privacy messaging system based on Lightning Network. This project is a modified version of the Lightning Network Daemon (LND), which can use the micro-payment of the Lightning Network to make the related services of the private message repeater get paid. LND innovations, such as developers' recent improvements to Lightning-Onion (Lightning Network's Onion Routing Protocol), make this decentralized, censorship-proof, and spam-proof chat possible.

There are several other projects that leverage Lightning Network ’s privacy-enabled micropayment capabilities, from cloud-powered VPS that supports Lightning Network to image hosting services that generate advertising revenue through microtransactions. In simple terms, we define Bitcoin's second-tier network as a set of applications that can treat the underlying layer of Bitcoin as a court and let it mediate external events and resolve disputes. In addition to the Lightning Network, the data of some projects are also anchored on the Bitcoin blockchain.For example, companies such as Microsoft pioneered a decentralized identity recognition system based on Bitcoin.

Smart contract

Some projects attempt to embed the functionality of smart contracts into the Bitcoin network in a secure and responsible manner. This is a major advance, because in 2010, after a series of vulnerabilities were exposed, several initial bitcoin opcodes were removed from the protocol by Satoshi Nakamoto (Nakamoto disabled part of the Bitcoin programming language Script Features).

Years of experience show that there are significant security risks in using smart contracts. For example, the more functions a virtual machine (collective verification mechanism that handles opcodes) has, the more unpredictable its program becomes. However, some new smart contract architectures are addressing the above issues, and they can reduce the unpredictability of contracts while providing powerful features.

A new method for Bitcoin smart contracts called "Merklized Abstract Syntax Trees (MAST)" has enabled more and more people to start supporting the deployment of smart contracts on the Bitcoin network. The implementation of MAST includes Taproot, which supports representing the entire application as a Merkle tree, where each branch of the tree represents a different execution result.

Another innovation is the implementation architecture of a new type of Bitcoin transaction contract (output conditions). The framework was originally derived from a thought experiment proposed by Greg Maxwell in 2013, which can limit the use of Bitcoin balances. Although this idea has been around for almost 6 years, it was impractical to implement this contract before Taproot appeared. Currently, a new opcode called OP_CHECKTEMPLATEVERIFY (formerly OP_SECURETHEBAG) is using this new technology to facilitate the secure implementation of contracts in the Bitcoin network.

In addition, the above contracts are very useful in lending (and perhaps bitcoin-based derivatives), as they enable policies such as call backs on specific bitcoin transaction balances. The potential impact of this technology on Bitcoin availability extends far beyond loans. The contract allows the implementation of functions such as the Bitcoin Vault, which is equivalent to providing a second private key when users host Bitcoin. If a hacker attacks the hosted funds, the hosted user can "freeze" the stolen funds.

The technical basis that makes these new smart contract methods possible is Schnorr signatures. There are also some more cutting-edge technologies that are forming theories, such as Scriptless Scripts, which can make fully private, scalable Bitcoin smart contracts represented as digital signatures rather than opcodes. These new methods may allow multiple smart contract applications to be built on the Bitcoin network.

Mining

Bitcoin also has some interesting developments in mining protocols. Although the problem of Bitcoin mining centralization is often seriously exaggerated, the computing power structure retained by the mining pool operators can indeed make the Bitcoin network further decentralized.

The mining pool operator can choose which transactions are mined by all mining pool members, which gives them considerable power. Over time, some operators have abused this power by reviewing transactions, digging out empty blocks, and reallocating hashing power.

In order to subvert the control of the mining pool operator during the mining process, the developer changed the mining agreement. One of the most significant changes to the Bitcoin mining protocol is the second version of Stratum, the most commonly used protocol in mining pools. Stratum implements a comprehensive improvement of BetterHash, a second-level protocol that allows miners to determine the composition of the blocks they mine.

Another development that has helped improve Bitcoin's stability is reigniting miners' interest in hash rate and difficulty. This can be particularly useful for miners who want to hedge against fluctuations in hash rate and difficulty.

privacy

Contrary to some outside opinions, there are a large number of protocols that can bring alternative privacy attributes to the Bitcoin network. However, in the next few years, Bitcoin's privacy technology may still be difficult to land.

The immaturity of big solutions has become the biggest obstacle to digital asset privacy transactions. And those privacy assets that focus on transaction privacy often overlook network-level privacy and vice versa.

Thankfully, several projects have made breakthroughs in both areas.

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Solutions such as P2EP and CheckTemplateVerify work well for private exchanges. As a novel CoinJoin method, these solutions can promote users to adopt private transactions. Of course, users' motivation is only that transaction fees are less. For those technologies similar to Coinjoin, their privacy guarantees are still not optimal because they do not block the number of transactions sent, but these technologies maintain the auditability of the Bitcoin supply.

Bitcoin has also made considerable progress in the privacy protection of P2P communications, and protocols like Dandelion are being tested on encrypted networks. Another notable development is Erlay, which is an alternative transaction relay protocol that can improve the efficiency of private communications and reduce the overhead of running nodes. Erlay is an important improvement because it improves efficiency, enabling more users to easily complete tasks and continuously verify the blockchain network, especially in countries where ISP bandwidth is capped.

Bitcoin's road to technological innovation has just begun

These examples are just a few of the changes that have changed the Bitcoin framework. Overall, Bitcoin is an evolving set of protocols.

Although it is challenging for developers to innovate in a relatively strict set of rules, the layered approach we have seen makes progressive, effective changes possible. Reducing the "political activity" within Bitcoin and protecting its basic monetary attributes are a necessary part of this development process. Developers are learning how to work within a defined framework in a more meaningful way.

The views, ideas, and opinions expressed above are solely those of the author.

Lucas Nuzzi is the technical director of Digital Asset Research (DAR). He leads the research department of DAR, developing original reports and insights on all areas of the cryptocurrency ecosystem. As an expert in blockchain and distributed systems, Lucas is widely recognized in the digital asset community. Prior to co-founding DAR in 2017, he was a blockchain researcher and consultant for several years.