UTXO ushers in spring as the new model of Bitcoin Layer 2 ecosystem leads market expectations.

The Spring of UTXO: New Model of Bitcoin Layer 2 Ecosystem

As we all know, Bitcoin does not have the smart contract capabilities like Ethereum. Unlike Ethereum's ERC20 contracts, interfacing with Bitcoin's UTXO is a key aspect that cannot be bypassed. Building applications based on UTXO means that its security naturally shares with the main chain, and this model brings a lot of expectations to the market, potentially creating an ecological model different from Ethereum's L2.

Compared to Ethereum, UTXO is the most distinctive data model of Bitcoin, so the Bitcoin Layer 2 ecosystem is expected to present a pattern different from that of Ethereum. In recent years, Ethereum L2 has developed rapidly, and the on-chain fees of the Ethereum chain have been overall controlled under a prosperous ecosystem, while the development of the Bitcoin network ecosystem is still quite primitive. The on-chain trading activity brought by activities such as inscriptions in 2023 and runes this year has laid the foundation for exploring the potential of UTXO.

The Taproot upgrade further enhances the development potential of the Bitcoin ecosystem. The Bitcoin Taproot upgrade is the most important upgrade since the activation of Segregated Witness, aimed at further improving the network's privacy and efficiency. The Taproot upgrade allows for the aggregation and verification of multiple complex signatures together, rather than verifying them individually. By aggregating signatures, the network performs faster, incurs lower fees, and saves block space. Taproot provides a new way to execute Bitcoin transactions by enhancing user privacy and flexibility, which will greatly improve Bitcoin's scalability.

The Cell of Nervos CKB is similar to a more intelligent UTXO. A Bitcoin UTXO is a box containing a paper ledger, while a Cell replaces the ledger in the box with an Excel document. Nervos CKB inherits the architecture of Bitcoin UTXO and creates the Cell Model ( cell model ), which is a universal UTXO model used for state storage, maintaining the simplicity and consistency of UTXOs. In CKB, all states are stored in Cells, computation is done off-chain, and transactions are verified and recorded on-chain by nodes. Cells can contain various data types, such as CKByte, Token, JavaScript code, or serialized data like JSON strings. This richer data type expands the capabilities of Cells, allowing UTXO to be extended - for example, to implement smart contracts.

Can the unique characteristics of UTXO give rise to a different ecological world? The deep exploration of inscriptions and runes on Bitcoin UTXO makes it possible to deploy assets based on UTXO, while the upgrade of UTXO by Nervos CKB further liberates computational power. These indicate the unique application potential of UTXO, which seems more interesting and has become a new expectation in the industry. Looking at the development of Ethereum, the ERC20 standard gave rise to ICOs, and the development of AMM provided the driving force for DeFi, leading to the emergence of NFTs and the metaverse, gradually enriching its ecological paradigm. However, this process is not without its challenges; there have been many setbacks along the way. Recent innovations in Bitcoin have initially gained some market heat, which is a positive sign, indicating that the market holds great expectations and confidence in the potential of UTXO. But the heat comes quickly and cools just as fast; after the emergence of runes, the popularity of inscriptions naturally declined. Currently, both inscriptions and runes are still at the stage of competing for "minting." Minting is just the beginning; how to develop applications and enrich the ecosystem afterward is what truly matters. The situation with Nervos CKB is similar; the current ecological applications can be said to be a simple "copy" of the Ethereum ecosystem.

Risk Warning: The research and development of blockchain technology falls short of expectations; uncertainty in regulatory policies; the implementation of Web3.0 business models is not as expected.

1. Core Viewpoint

Bitcoin UTXO itself does not have smart contract capabilities, and currently Bitcoin has not produced a rich ecosystem similar to Ethereum. With the exploration of UTXO potential through the Ordinals protocol, Nervos CKB, and other projects, new application models such as inscriptions and runes have emerged, gradually becoming the focus of industry attention. Applications based on UTXO architecture naturally share security with the main chain, and this model brings many expectations to the market, potentially constructing an ecosystem different from that of Ethereum L2, which is also the market's expectation.

This article analyzes several typical UTXO application patterns and provides an outlook on the Bitcoin ecosystem.

2. The Spring of UTXO, BTC Layer 2 Ecosystem is Expected to Further Develop

2.1 UTXO-based BTC Layer 2 is expected to foster new ecological models

The working principle of blockchain requires decentralized nodes to reach consensus and confirmation, which inevitably leads to a decrease in efficiency. Therefore, when processing tasks such as the transfer of ( or executing contract program ), it is naturally not as fast as centralized nodes. This is a typical impossible triangle problem where security, scalability, and decentralization cannot be simultaneously optimal. From the perspective of enhancing scalability, Layer 2 (L2() is a widely adopted solution. In recent years, with the rapid development of Ethereum L2, the on-chain fees of Ethereum under a prosperous ecosystem have been overall controlled, while the ecological development of the Bitcoin network is still quite primitive. The activities in 2023, such as inscriptions and this year's runes, have led to active on-chain transactions, which can be seen in the rapid increase in fees on the Bitcoin network.

The UTXO mechanism makes every satoshi of Bitcoin "non-fungible", promising to foster an ecosystem different from Ethereum. Since Bitcoin does not have accounts, the outputs created by Bitcoin transactions are not simply public key addresses, but scripts. We can understand that in the transaction where Bob pays Alice 1.5 BTC, the output script created by Bob will include Alice's public key hash. The entire script means that whoever can provide a signature that allows this script containing Alice's public key to execute can spend this transaction's 1.5 BTC. Obviously, the signature can only be created using Alice's private key; signatures created with other private keys will fail to validate against this script, thus ensuring that no one else can impersonate Alice to spend this output. In other words, the BTC in UTXO is not recorded as a balance in someone's account—each transaction initiator creates a lock for this BTC through the script, and only the owner has the key. Of course, the input ) of a certain transfer's Bitcoin, the initiator (, and the output ) recipient of the transfer may be composed of multiple historical UTXOs, similar to the assembly of different denominations of paper money. One of the benefits of this approach is that all transfer transactions are viewed from the perspective of BTC circulation, and different UTXOs can conduct parallel transactions because UTXOs are strictly distinguished. It can also be understood that the UTXO mechanism records the complete circulation history of every part of BTC (, with the smallest unit being "satoshi", sats ), and one can imagine each satoshi as a coin that receives a stamp at each circulation to record the history of its turn. Compared to Ethereum, UTXO is the most distinctive data model of Bitcoin, therefore Bitcoin L2 is expected to present an ecosystem different from that of Ethereum.

The upgrade further enhances the development potential of the Bitcoin ecosystem. We all know that the Bitcoin Taproot upgrade is the most significant upgrade since the activation of SegWit(. Taproot aims to further improve the privacy and efficiency of the network. The most notable change in the Taproot upgrade is the ability to aggregate and verify multiple complex signatures), such as those used in multi-signature wallets(, instead of verifying them individually. By aggregating signatures, the network performs faster, incurs lower fees, and saves block space. Taproot provides a new way to execute Bitcoin transactions by enhancing user privacy and flexibility, which will greatly improve Bitcoin's scalability.

With the Ordinals protocol giving rise to applications such as inscriptions and runes, the development of the Bitcoin ecosystem has been further promoted. As of May 6, the TVL of the Ethereum ecosystem has exceeded $96 billion, while the Bitcoin ecosystem has experienced rapid development over the past year, with a TVL reaching $1.2 billion. There is no doubt that, compared to Ethereum, the development of the Bitcoin ecosystem is still in its early stages.

2.2 Ordinals Protocol Further Explores New Possibilities of UTXO

Referring to the development of Ethereum Layer 2, Bitcoin L2 also has different technical routes. As is well known, Bitcoin does not possess the smart contract capabilities like Ethereum; therefore, some technical routes of the Bitcoin second layer network include state channels like the Lightning Network, sidechains, Rollups, etc. Most of these routes rely on L2 to achieve the expansion capabilities of smart contracts and utilize cross-chain bridges to connect assets between the Bitcoin main chain and L2, which can be considered a type of sidechain. A core issue with sidechains is achieving consensus and shared security with the main chain, and how to interface with the Bitcoin main chain's UTXO is an unavoidable aspect. The recent rise of applications like Ordinals, such as inscriptions and runes, provides a possibility for building applications based on UTXO. Applications built on a UTXO architecture naturally share security with the main chain, and this model brings a lot of expectations to the market, potentially constructing an ecosystem different from that of Ethereum L2, which is also the market's expectation.

Under the UTXO model, every sat )sats, the smallest unit of Bitcoin (BTC, is traceable and non-fungible ); perhaps this is the earliest NFT (, which provides a foundation for the development of the Ordinals protocol and the BRC-20 ecosystem. In December 2022, Bitcoin developer Casey Rodarmor released an open-source software called ORD that runs on top of Bitcoin Core ). In simple terms, this software allows users to input any information on the Bitcoin blockchain, such as a string of text or an image, and then bind this uploaded information to a specific sat, ultimately resulting in a sat with certain information, known as a Bitcoin NFT. More clearly, the Ordinals protocol is divided into two parts: Ordinals ( and Inscription ). Ordinals ( are essentially a scheme for numbering the smallest unit of Bitcoin, sat, where 1 BTC = 100000000 sats ), and allows tracking and transferring individual sats. Here, sats are numbered in the order they are mined and transferred from transaction inputs to transaction outputs in a first-in, first-out manner. Once each sat is numbered, a piece of content can be written into the transaction's "witness isolation area", which will also be ascribed to the first sat of this transaction output. This writing process is called inscribe (, and the written content is called Inscription ). The inscriptions can be images, text, audio and video, or even code; theoretically, as long as the size does not exceed the Bitcoin block limit of 4MB, the inscription can be completed. Therefore, the Inscription is similar in form to NFTs, and Ordinals is a protocol that allows people to mint similar NFTs on the Bitcoin network as those on Ethereum.

The Ordinals protocol can not only be used to issue NFTs, but also to issue tokens when inscriptions are attached in JSON data format. This has led to the emergence of new asset protocols like BRC-20 after further exploring the potential of UTXO, promoting the development of applications like inscriptions and runes. Since the advent of BRC-20, transactions on the Bitcoin chain have accounted for a certain proportion, indicating the development potential of a unique Bitcoin Layer2 ecosystem.

3. What kind of ecological applications should UTXO generate

3.1. The Ordinals Protocol Gives Rise to the Ecosystem of Inscriptions and Runes

BRC-20 originated from a community experiment and is an attempt within the Bitcoin ecosystem. On March 9, 2023, Twitter user domodata published what he called a "fun and experimental standard" known as the BRC-20 standard on GitBook. This standard is created based on the Ordinals protocol and allows inscriptions to be set in JSON data format for deploying tokens, minting, and transferring tokens. In simple terms, damodata believes that the Ordinals protocol can be used not only for issuing NFTs; when inscriptions are attached in JSON data format, they can also be used to issue tokens. Therefore, BRC-20 tokens can be understood as a mutated version of Ordinals NFTs, where the inscriptions on NFTs are images, but the inscriptions on BRC-20 are uniform JSON formatted text data. BRC-20 mainly provides three standards for issuing fungible tokens on the Bitcoin network, including the deployment of BRC-20 tokens (deploy), minting (Mint), and transferring (Transfer). Developers can complete the creation and issuance of BRC-20 tokens by executing according to this standard. On the GitBook homepage, domodata also provided examples of deployment, minting, and transferring.

The BRC-20 standard has accelerated the rapid development of inscriptions, after all, Bitcoin blocks and UTXOs.