The Future Development of the Bitcoin Ecosystem

As the newly established laboratory in Hong Kong focuses on research in the Bitcoin ecosystem, discussions in the crypto market regarding this field are heating up. Building smart contracts on Bitcoin scripts, while combining transactions with the infinitely scalable Lightning Network, may become a large-scale blockchain application solution that meets the standards of security, decentralization, and scalability.

This article will introduce some basic concepts of the Bitcoin ecosystem, including the "Blockchain Trilemma" that hinders large-scale application, the Lightning Network that overcomes this challenge, and the current solutions for Bitcoin scripts and the principles of the UTXO model.

Barriers to Large-Scale Adoption of Blockchain

For a long time, the "impossible triangle" problem of the "blockchain network being unable to achieve security, decentralization, and scalability simultaneously" has hindered the large-scale application of blockchain. Over the past decade, Ethereum has focused on developing decentralization while ensuring security, continuously innovating the underlying public chain infrastructure to enhance scalability.

However, based on the attempts of Ethereum and its Layer 2, as long as the solutions are limited to the blockchain, there will be a performance ceiling. Even the currently most performant blockchain struggles to break through the TPS( limit of transactions per second ), leaving a huge gap from the requirements of large-scale commercial applications at the million-level TPS and the target of hundreds of millions of TPS for global industrial applications. For mainstream public chains, whether it is Ethereum or Bitcoin, they all face the bottleneck of how to solve scalability.

The Operation Mechanism of the Lightning Network

The Lightning Network fundamentally solves the scalability problem in the "impossible triangle" through off-chain computation with "payment channels" - as long as enough channels are established, it can handle an arbitrary number of concurrent transactions.

The Lightning Network mimics the way banks settle: User A and User B open a Lightning channel through the Lightning Network. Once the channel is opened, A and B can settle directly on the Lightning Network without needing to settle on the Bitcoin blockchain. Only when the channel is closed is final settlement required on the Bitcoin blockchain.

The operation process of the Lightning Channel includes:

1. Pay the reserve
2. Off-chain transaction bookkeeping
3. On-chain settlement records

To prevent on-chain fraud, if one party attempts to close the channel early for fraudulent settlement, the other party can observe this fraudulent transaction and impose a penalty using the pre-signed penalty agreement, confiscating all the counterpart's collateral.

Although the Lightning Network theoretically achieves unlimited scalability, the key issue hindering its large-scale application is: the Lightning Network uses the same scripts as Bitcoin, and there are no smart contracts on the Bitcoin chain, only simple scripts that cannot support complex applications. Therefore, the biggest challenge facing the Lightning Network is "how to implement smart contracts on Bitcoin".

Existing Solutions to Enhance Bitcoin Blockchain Functionality

1. Sidechain: By creating a chain with smart contract functionality that is bi-directionally linked to the Bitcoin main chain, but currently lacks sufficient decentralized bi-directional linking technology.

2. Colored Coins: Using the OP_RETURN instruction of Bitcoin scripts to add arbitrary characters of limited bytes, but the space is limited, making it difficult to achieve complex functions. The subsequent "Ordinals" engraving technology and BRC-20, although offering richer functionalities, will occupy "Segregated Witness" space, affecting Bitcoin performance.

3. Client Verification: By simulating the traditional contract signing method, ensure the privacy of the contract content without the need for third-party involvement, achieving complete decentralization. Fraud prevention is implemented by having the transaction initiator provide complete transaction history data, which the other party can verify independently.

To solve the double-spending problem in client validation, a "one-time seal" mechanism has been introduced, binding each state of every contract to a specific Bitcoin unspent transaction output (UTXO).

Introduction to UTXO Model

Unspent Transaction Output ( UTXO ) is the total amount of cryptocurrency sent from one address to another but not yet redeemed by the recipient. The UTXO model effectively prevents double spending because validators can confirm the validity of a transaction by checking the UTXO balance.

Future Outlook of the Bitcoin Ecosystem

The Bitcoin ecosystem is迎来 a series of new protocols. Among them, the RGB protocol not only adopts the concept of client-side validation but also proposes compatibility with the Lightning Network, laying the foundation for infinite scalability. Although the compatibility of the RGB protocol with the Lightning Network is not yet perfect, it is expected to break the long-standing "blockchain trilemma" limitations in the future.

We anticipate that the next cycle of exponential growth in blockchain will stem from the mass adoption of blockchain driven by the explosion of the Bitcoin ecosystem. We believe that Bitcoin will break through its original single value storage function, while showcasing its monetary attributes, it will bring more applications to the ecosystem through diversified solutions, promoting the scalability and sustainability of the ecosystem, and bringing infinite possibilities to the blockchain world.