Inventory of BTC derivative contracts Who is the most promising alpha?

Exploring the Most Promising Alpha An Inventory of BTC Derivative Contracts

Author: blockpunk, Anmicapital Source: X (original Twitter) @blockpunk2077

Why was the BTC ecosystem suddenly discovered for its value?

While the BTC ETF speculation skyrocketed, the ecosystem of BTC derivative protocols is also rapidly developing.

A protocol can only become truly potentially alpha if it has both the enthusiasm for speculation and the legitimacy in the community.

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In the crypto world, funds are not scarce, and the real competition is in legitimacy. This is crucial for finding alpha.

And the BTC community is an extremely conservative community that believes in decentralization. In the eyes of btc wizards, the protocol that is more authentic and aligns with the community culture is more likely to succeed, after all, the buying power and influence of BTC OGs are astonishing.

Therefore, we start with the above-mentioned protocol to understand the legitimacy and advantages of different protocols.

First, remember the doctrine of BTC wizards:

Cannot modify and upgrade the BTC network itself, as it would make the system more complex and affect the security of all BTC.

Cannot increase the BTC block size, as it would centralize BTC.

Not your keys, not your coins. You should hold your own BTC and not trust third-party institutions.

Before understanding these protocols, let’s first answer a question: Why was the value of the BTC ecosystem suddenly discovered?

This brings us to two important technical updates:

First is the segregated witness upgrade in 2017, which extended BTC’s block data from 1 MB to 4 MB, but the extended portion can only be used for storing signatures.

Until the Taproot upgrade at the end of 2021, where advanced scripts could be written in segregated witness, allowing complex data to be written on BTC.

BTC has made significant progress in programmability and scalability, and protocols with complex logic have started to emerge. The BTC ecosystem has finally entered the next stage of its milestone, which is the main opportunity for the ecological explosion in 2023.

Ordinals & BRC20

The ordinals protocol has completely ignited the BTC ecosystem, and its rapid development is also mutually reinforcing with Taproot’s adoption. People can encode NFT data and write it into the space of segregated witness extension (4 MB per block).

The image of the NFT itself is also permanently engraved in the BTC block, making it more decentralized than ETH NFTs. It can be viewed and transferred (essentially UTXO) without relying on any third party.

The implementation of Ordinals uses the most basic functionalities of BTC, and the transfer of NFTs is completely handled by the BTC network, which aligns with the concept of the BTC original community. This quickly ignited the community’s enthusiasm and was adopted rapidly. However, due to the limitations of its artwork, its development potential is also greatly limited.

Soon, new developers improved Ordinals by mimicking ERC20 and wrote the full functionality of tokens into BTC output scripts, and thus BRC20 was born.

But the output script of BRC20 only stores data and cannot actually execute the functions of the token, such as transfer and minting. Therefore, we must rely on a third-party sorter to record the ledger on the BTC chain and engrave new state data into the script.

As a result, the third-party sorter becomes the weak point of the system. BRC20 transfers do not occur on the BTC main chain and must be split into two steps: BTC transaction execution (i.e., first pool the funds in the sorter and then transfer them). The additional complexity results in a large number of junk transactions.

Therefore, it is not widely accepted by the BTC community, and it has been controversial since its inception. However, due to the wide applicability and better liquidity of tokens, it is favored by speculative authors.

Due to its lack of orthodoxy and lack of support from the BTC core community, there have been no major innovations or gameplay with BRC20 and its improved protocols.

To continue to gain orthodoxy, some developers have started developing decentralized sorters such as #Trac. This seems to be a good direction, but I believe it is still limited by the overall framework and difficult to break through.

Atomical & ARC20

The Atomicals Protocol is another derived protocol that embeds token data on UTXO to implement tokens.

Unlike Ordinals, which was initially designed for NFTs, it rethinks how to issue tokens on BTC in a centralized, tamper-proof, and fair manner.

Atomicals uses the smallest unit of Bitcoin, sat, as the basic “atom,” and each sat’s UTXO represents the token itself, where 1 token = 1 sat.

When validating an Atomicals transaction, it only needs to query the corresponding sat’s UTXO on the BTC chain. The atomicity of ARC20 tokens is consistent with the atomicity of BTC itself, and the transfer of ARC20 tokens is completely processed by the BTC underlying network.

Therefore, compared to BRC20, ARC20 greatly reduces the need for a third-party sorter in transactions, which greatly improves the decentralization of the entire system. This is closer to the culture of the BTC community.

UTXOs can be combined in BTC transactions, which improves the programmability of ARC20 tokens. For example, since BTC is also composed of UTXOs, theoretically, swapping BTC and ARC20 only requires swapping the inputs and outputs of UTXOs.

Another key improvement of Atomicals is that it introduced Proof of Work (POW) in the minting process of ARC20. Minters must use CPU enumeration to calculate a hash value that matches a specific prefix character before they can “mint” new tokens. This is a more decentralized and fair distribution method.

The design of Atomicals binding UTXOs cleverly avoids the complexity faced by BRC20. It is more decentralized, more native to BTC, and most importantly, more in line with the culture of the BTC community.

ARC20 and $ATOM are still in the early stages and need further improvements in wallets and markets, but they already occupy a high position in terms of orthodoxy.

On a potential level, there is also an opportunity to achieve true BTC-native DeFi.

They have not yet experienced large-scale hype but still have great potential.

Rune & Pipe

Interestingly, although BRC20 originated from Ordinals, as a “heresy,” it has always been criticized by founder Casey.

However, under the trend of hype, Casey also proposed a way to issue FT specifically, called Rune.

In fact, the design of Rune may also be influenced by ARC20, choosing to directly write Token data in the script of UTXO, which includes the ID, output, and quantity of the Token.

Obviously, Rune’s implementation is very similar to ARC20, directly handing token transfers to the BTC mainnet for processing. The difference is that Rune writes the Token quantity in the script data, which allows it to have higher precision than ARC20.

But at the same time, the complexity also increases, making it difficult to use the combinatorics of BTC UTXOs directly like ARC20.

The idea of Rune is only a concept, and the founder of #Trac wrote the first usable protocol based on this and issued $pipe. Due to Casey’s high visibility, $pipe continued the hype of BRC20 and quickly completed the first wave of speculation.

Rune’s orthodoxy is stronger than BRC20, but it is still difficult to be accepted by the BTC community.

Lightning Network

The Lightning Network is the king of orthodoxy in the BTC community. Since 2016, for a long period of time, over half of the developers in the BTC ecosystem have been working on Lightning Network development.

The foundation of the Lightning Network is “payment channels,” a concept originally proposed by Satoshi Nakamoto (the paragon of orthodoxy). The trading parties lock BTC through multisignature, and maintain an off-chain ledger to record transactions.

The connected payment channels form a network, and even parties not directly connected can route transactions through other channels. The Lightning Network indeed expands the performance of BTC transfers, providing users with a better experience.

The final settlement of BTC can only be done on the BTC mainnet, and all coins are still stored using the public-private key system.

The Lightning Network is designed at the cryptographic level, requiring no upgrades to the BTC network or block size increases, adding no redundancy to the network, and strictly adhering to the core principle of “your keys, your coins.” The network itself has nearly 15,000 nodes.

Therefore, although it relies on a large number of third-party nodes for off-chain calculations such as routing and balancing channel states, the orthodoxy of the Lightning Network remains very high.

However, the use cases of the Lightning Network are limited. It can only be used for BTC payments, cannot issue tokens, and lacks smart contract functionality, making it almost insulated from speculation.

Although around 2020, the Lightning Network experienced a wave of growth and became well-known throughout the crypto community through Nostr, it is still not accepted by the general public outside the BTC community. Its usage also decreased significantly after the popularity of Ordinals.

It is pure, but its use cases are too few to support BTC funds and make it difficult to be used for speculation.

Taproot Assets (Taro)

In fact, the Lightning Network has been trying to expand its use cases. The popularity of BRC20 prompted Lightning Labs to release Taproot Assets, which is also a protocol for issuing tokens on BTC.

Unlike Brc20 and others, Taproot Assets only write the Token information in the UTXO output script of the BTC mainnet, without storing the transfer, minting, and other functional codes of this Token.

Taproot Assets only consider the BTC mainnet as a registry for Tokens, and does not rely entirely on the BTC mainnet to operate, so these assets must be stored in the Lightning Network in order to be traded.

Therefore, Taproot Assets Tokens must rely on third-party storage indexers, and without these storage indexers, these Tokens may be permanently lost.

Therefore, users either have to run a BTC full node and Taproot Assets client themselves, or completely rely on a centralized server to trade Taproot Assets Tokens, making it possibly the most centralized solution in the current BTC Token protocol.

As a result, the fundraising method for Taproot Assets has also changed.

Users cannot directly send transactions to mint Tokens on the BTC mainnet, instead, there is a project address that issues (or registers) all Tokens at once, which are then transferred to the Lightning Network for distribution.

Therefore, Taproot Assets Tokens are not fairly distributed through free minting, and often require a centralized project to airdrop them. The project itself can also reserve tokens, just like the recently issued $trick $treat.

From a decentralization perspective, Taproot Assets are not as decentralized as Rune, ARC20, or even BRC20, but because it is released by the “Pope” of orthodoxy, Lightning Labs, and does not burden the BTC network, the community does not oppose it, at least.

Yes, orthodoxy is such a vague concept, where the “Pope” who holds the power of speech declares whether or not you’re kosher.

But it should be noted that the change in the distribution method and the emergence of project parties have led to a significant shift in the speculative logic, with a greater emphasis on the project party’s structure, inadvertently increasing the cost of speculation.

RGB

RGB is a smart contract system based on BTC and the Lightning Network, and it is considered a more ultimate scalability solution, but progress has been slow due to its complexity.

RGB converts the state of a smart contract into a short proof and engraves the proof into the output script of a BTC UTXO.

Users can verify this UTXO to check the state of the smart contract. When the smart contract state is updated, a new UTXO is created to store the proof of state change.

All smart contract data is completely off the BTC blockchain and is managed by dedicated RGB nodes. The RGB nodes themselves store the complete data of the smart contract and process the computational load of the transactions. Users verify the determinism of the contract state changes by scanning the UTXOs of the entire BTC blockchain.

Each smart contract in RGB has a separate state history and data, meaning that RGB itself does not have a concept of a chain, and different smart contract states do not intersect, unlike the shared state of ETH smart contracts.

In order to facilitate the interaction between multiple RGB contracts, it is necessary to utilize the Lightning Network, such as the swapping function of multiple RGB tokens.

RGB can be seen as the L2 of BTC. The advantage of this design is to leverage the security of BTC to guarantee smart contracts. However, as the number of smart contracts increases, the demand for wrapping data in UTXOs will also increase, ultimately inevitably causing a significant amount of redundancy in the BTC blockchain.

Since 2018, RGB is still in the development stage and there is no content to speculate on. The issuer of USDT, Tether, is an important promoter of RGB and they have always said that they will issue a large amount of USDT on the BTC RGB.

Although RGB must rely on third-party nodes to run smart contracts, the UTXO records for each state update make it the most secure and BTC-native smart contract implementation method currently available, maintaining a strong sense of legitimacy.

RSK & RIF

RSK can be seen as the Layer 2 solution for BTC and is essentially a smart contract chain based on the EVM structure.

RSK does not write anything into the BTC network, so its operation and security are not dependent on the BTC network.

RSK simply uses hash locks to cross-chain BTC from the main network to its own chain for network gas.

Furthermore, RSK adopts the same POW consensus algorithm as BTC, so BTC miners can also mine on RSK and earn transaction fees in $RBTC.

It can be seen that the relationship between RSK and BTC is almost negligible, with minimal ecological connections. The rise of $RIF fully demonstrates the speculative enthusiasm within the BTC ecosystem and scarcity of tradable assets.

Stacks & SBTC & STX

Stacks can be seen as the smart contract sidechain for BTC.

Unlike RSK, Stacks has its own block reward system, with gas and block rewards in $STX.

Stacks produces multiple “micro blocks” during the 10-minute interval between BTC blocks, and when a BTC block is mined, the hashes of these blocks are written into the script of the BTC transaction.

At the same time, to become a Stacks node, miners need to stake BTC on the main network to qualify. Rewards are sent to miners in $STX, while the staked BTC is distributed to $STX stakers. This effectively burns BTC in exchange for $STX tokens, which is not something BTC maximalists readily accept, to say the least.

Although there are doubts about its legitimacy, it has to be said that $STX has done a very good job in terms of storytelling and has the best liquidity, which is evident in its impressive rise.

Recently, Stacks also launched the SBTC network, which allows for the creation of 1:1 SBTC assets on the Stacks chain through threshold signatures from $STX stakers, locking BTC on the main network for use in DeFi.

This method of introducing BTC assets through threshold signatures eliminates the need for a third-party bridge. It is more decentralized and authentic compared to the previous method of using hash locks with the mantra “not your keys, not your coins.”

With the launch of SBTC and the upgrade of the Stacks chain, although its legitimacy is not high, these plans seem to be guiding $STX towards a healthy speculation.

Rollkit by Celestia

$TIA will soon be launched, and @CelestiaOrg, as a proponent of modular blockchains, has also issued a Rollup called Rollkit based on the BTC network, which also writes L2 data into the Taproot data.

Of course, this looks more like a possibility showcase, and it should currently not be actually usable.

BitVM

BitVM is currently the most Bitcoin-native, most potential, and technically hardcore smart contract extension solution.

Without modifying the Bitcoin network, it runs a VM virtual machine that supports general computation through optimistic rollups, to achieve smart contracts on Bitcoin.

The Bitcoin network is used to run optimistic rollups’ fraud proofs, using the most basic hash lock and Bitcoin script opcodes OP_BOOLAND and OP_NOT, to implement a simple logic gate.

By combining Bitcoin’s logic gates, a calculable circuit is formed, and this circuit handles fraud proofs on the Bitcoin chain.

The execution of smart contracts is done off-chain, while on Bitcoin, only fraud proofs from the optimistic rollups are running.

If there are issues with optimistic rollups, validators can initiate fraud challenges on the Bitcoin network, with penalties directly implemented through Bitcoin transfers. This ensures the overall security of the rollup and is “verifiable” on the BTC mainnet.

Starting with logic gates to create a circuit, it’s evident that this implementation is truly hardcore. It’s like the beauty of manually creating a computer using redstone circuits in the game “Minecraft”.

It perfectly taps into the psyche of Bitcoin’s hardcore developers and community. It can be said to be the king of legitimacy at the smart contract level in Bitcoin.

Although BitVM is still in the theoretical stage, it has attracted the attention of BRC20 and Ordinals speculators, as well as Bitcoin community developers. Many people have already joined its development. It is estimated that the first version could be released within a year. It can be anticipated that speculation will also occur simultaneously. BitVM is currently my most significant focal point.

Conclusion

To summarize the above Bitcoin derivative protocols, BRC20, ARC20, Rune, and Taproot Assets as token issuance protocols:

ARC20 implementation is the most decentralized, closest to native BTC DeFi, and has great potential. However, it is currently less of a speculative focal point compared to others.

Taproot Assets has the backing of Lightning Labs, making it strong. However, due to changes in distribution methods, there will be a change in speculative thinking, with more emphasis on the project’s scope.

BRC20 and Rune were proposed by the same person and currently rely more on Trac team’s development to achieve decentralization and ecosystem growth.

For the BTC extension protocols RGB, Lightning, Stacks, BitVM, and RSK:

Lightning is undoubtedly the king of legitimacy, but speculation can only be based on the aforementioned Taproot Assets.

RGB, although appearing to be “halal” to a high degree, has not been released for a long time, making it difficult to speculate, and no one cares.

RSK and Stacks, strictly speaking, are not Bitcoin-native protocols. However, due to their narrative and good liquidity, they have become attractive targets for BTC leveraging. The launch of SBTC will not really bring any ecosystem.

BitVM has attracted a lot of attention from speculators and the BTC community, making it the most potential protocol to realize the Bitcoin ecosystem. However, it requires patience, and there are also speculative opportunities in it, making it perhaps the most significant alpha.

According to the previous protocols, the order is:

Lightning > RGB > BitVM > Atomicals > TaprootAssets > BRC20 > RSK > Stacks

Lastly

During the interest rate hike period with government bonds reaching as high as 5%, the days of using ETH, which has transitioned to POS, as an interest-bearing asset are not so good. BTC, which is supported by the original value of pow, is clearly more desirable, and the ETH/BTC exchange rate continues to decline.

However, the position of ETH as a smart contract platform has not been shaken. We are still primarily using ETH smart contracts to implement complex applications such as DeFi and Gamefi.

But at the same time, BTC’s derivative protocols (and even smart contract protocols) are catching up.

Although these protocols may seem primitive, old, cumbersome, and difficult to use, this is still a historic development opportunity. BTC’s technology has accumulated enough to move forward, and the community is gradually opening up and accepting derivative innovations.

Backed by a huge developer base, funds, and attention, the potential may be much higher than any other field.

In some future scenario, could the use of BTC smart contracts surpass ETH’s smart contracts?

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