Thirteen years ago, Satoshi Nakamoto sent their final message to the Bitcointalk forum members, informing them that “there’s work to be done on DoS.” A few years later, it became more evident to the Bitcoin community that there is still much work to be done – not just on DoS attacks – to improve the whole Bitcoin network.
The acknowledgement of the need for further development and the desire to build more pragmatic use cases have been instrumental in cultivating the thriving environment of the Bitcoin ecosystem. To date, the network has undergone two significant technical changes – the SegWit and Taproot upgrades. These upgrades have been essential in developing the Bitcoin protocol, particularly enabling the building of its ecosystem applications and decentralized finance.
This article discusses the two major problems facing the current Bitcoin ecosystem projects (decentralization and security) and how Discreet Log Contracts (DLCs) solve them.
What is the Bitcoin Ecosystem?
The Bitcoin ecosystem refers to the solutions, apps, and digital assets designed to improve the use and efficiency of the Bitcoin blockchain. Let’s dive into the historical development of the Bitcoin network before we discuss the current focus of the Bitcoin ecosystem.
The Historical Development of the Bitcoin Network
The wise men of ancient times said that there is history in all men’s lives, and those who do not learn from history are doomed to fail. Indeed, we may not be makers of history, but we are made by history. To understand where we are now, it’s essential to dig into the significant milestones that have shaped Bitcoin’s development.
Since mining the genesis block of the Bitcoin blockchain on January 3, 2009, Bitcoin caught the attention of developers and the business community alike. For many years, the primary Bitcoin activities centered around BTC mining and trading, consisting of exchanges, wallets, chips, integrated circuits, and application software.
As digital assets gained more traction, people started to explore more practical use cases on the Bitcoin blockchain. However, they faced technical bottlenecks, often associated with the blockchain trilemma. The trilemma is a challenge in creating a blockchain network that simultaneously satisfies decentralization, security, and scalability needs.
Among the three, decentralization and security are generally regarded as more essential characteristics. As such, how to improve scalability without sacrificing the decentralization and security aspects of the Bitcoin blockchain has emerged as a central concern in Bitcoin’s technological advancements.
Let’s look at the technical upgrades that Bitcoin has undergone so far:
Segregated Witness (SegWit) Upgrade
SegWit was the first major technical Bitcoin Core upgrade implemented in 2017. In the simplest words, SegWit is an updated way of storing data on the Bitcoin blockchain that helps it to operate faster. It separated Bitcoin transactions into transaction data and witness data:
Transaction data consists of information on the transaction itself, like the sender and receiver’s wallet addresses.
Witness data consists of the network signatures that act as a certificate of authenticity.
Before the implementation of SegWit, both data sets were stored together on new blocks. Separating the witness data from the transaction data allowed more transactions to be included in each block and enhanced the speed and capacity of the Bitcoin blockchain.
The Taproot upgrade was implemented in 2021 to enable the Bitcoin blockchain to batch multiple signatures and transactions. This made the verification exercise faster, more private, and more secure in the long run. Previously, Bitcoin transactions were verified individually. Depending on the number of users, this could slow down and congest the network – leading to slow verification times and higher fees.
Taproot consisted of three primary Bitcoin Improvement Proposals (BIPs):
BIP 340 (Schnorr Signatures) – It introduced Schnorr signature algorithm specifications used to sign Bitcoin transactions. Schnorr signatures provide high efficiency, smaller signature sizes, improved security, and signature aggregation compared to their predecessors.
BIP 341 (Segregated Witness v1 and Taproot) – The proposal makes intelligent contracts appear externally indistinguishable from regular transactions, improving privacy. Besides, it minimizes transaction sizes, thereby reducing transaction fees.
BIP 342 (Tapscript) – It updated the Bitcoin network’s script language, making it easily compatible with Schnorr signatures and Taproot.
Current Focus of the Bitcoin Ecosystem
Following the two Bitcoin technical upgrades, the development direction of the Bitcoin ecosystem has focused on developing scaling solutions and asset issuance protocols.
Asset Issuance Protocols
Since the beginning of 2023, the asset issuance protocols on the Bitcoin network have seen substantial growth. After the significant wealth effect caused by various BRC-20 standard tokens under the Ordinal protocol, more protocols have been introduced into the market, such as:
The Ordinals protocol was introduced in 2023 and includes the numbering theory and Inscription. The numbering theory allocates unique identifiers to Satoshis (the smallest Bitcoin units), while Inscription attaches content with an Unspent Transaction Output (UTXO). There are two primary Ordinal protocol asset types – BRC-20 tokens and ordinal NFTs.
The Atomicals protocol is an asset issuance protocol on UTXO-based networks. It supports various assets, like fungible token ARC-20 standard, NFTs, Realms, and Collection Containers. This protocol was innovated to develop a more comprehensive asset issuance protocol than the Ordinals protocol. Contrary to Ordinals, which use third-party sorters to order asset transactions, the Atomicals protocol’s ARC-20 standard leverages Satoshi to issue assets.
The Runes protocol is a Bitcoin UTXO-based fungible token protocol that ensures management and transfers through a simple tuple (ID, OUTPUT, AMOUNT) and the OP_RETURN operation. It was developed to solve BRC-20’s use of the Ordinals protocol to issue many “junk” UTXOs.
Taproot Assets Protocol
The Taproot Assets protocol focuses on asset issuance and transfer. It solves the challenge of efficiently and effectively issuing and transferring assets on the Bitcoin network by keeping operations off-chain to avoid wasting block space.
Bitcoin scaling solutions can be classified into two: on-chain and off-chain expansion. On-chain expansion strives to improve transaction processing capacity by modifying block size, as illustrated in projects like BCH. On the other hand, off-chain development entails creating a Layer 2 transaction network outside the Bitcoin mainnet, as demonstrated in projects like the Lightning Network.
Challenges with the Current Bitcoin Ecosystem Projects
Despite the above Bitcoin ecosystem solutions bringing unique advantages to the space, they do so at the expense of decentralization and security – the two most important characteristics of a blockchain. Let’s consider Rootstock and Taproot assets to understand this point better.
In Rootstock, safeguarding locked funds involves entrusting notaries, who are integral members of the PowPeg Federation. This federation comprises leading blockchain companies known for their stringent security standards. However, the reliance on this third-party organization for managing BTC funds introduces a notable concern related to centralization.
The external handling of locking and unlocking funds raises questions about decentralized principles within the Rootstock ecosystem. It prompts a critical examination of the potential impact on the network’s overall resilience, transparency, and independence, calling for a balance between security measures and maintaining the decentralized ethos of blockchain technology. This intersection between security and decentralization is a pivotal aspect that demands careful consideration and ongoing evaluation for the sustainable development of the Rootstock platform.
In another instance, Taproot assets depend on third-party storage indexers to manage assets. Without them, funds can be lost forever. As such, Taproot users must operate their own BTC full nodes or rely on a centralized server to trade. This makes Taproot one of the most centralized solutions in the Bitcoin ecosystem.
DLCs as the Ideal Solution
DLCs are cryptographic structures invented at MIT by Tadge Dryja, co-inventor of the Lighting Network, to facilitate conditional payments between two parties. The parties here refer to entities with Bitcoin addresses – users, institutions, smart contracts, etc. DLCs enable “Bitcoin escrow contracts” to be held directly in the participants’ wallets for use in other chains.
Basically, DLCs operate like a 2-to-2 multi-sig wallet – two signatures are needed to authenticate a transaction. But contrary to a wallet, the DLC itself doesn’t monitor user balances. Instead, it leverages an attestation layer to observe activities and referee transactions.
Use Case: dlcBTC
dlcBTC is a groundbreaking financial instrument of DLC.Link set to launch in March. It will be a non-custodial representation of Bitcoin within the Ethereum blockchain ecosystem. This innovative approach addresses the inherent risks associated with third-party custodianship, providing a decentralized alternative that enhances security and trust in crypto transactions.
Through the use of DLCs, dlcBTC securely locks Bitcoin on its native chain, ensuring only depositors can access the locked funds. By eliminating the involvement of third-party custodians, dlcBTC mitigates the associated risks, such as the potential for mismanagement and malicious activities. This decentralized approach empowers users with greater control over their assets, aligning with the core principles of blockchain technology.
One key feature of dlcBTC is its unique payout structure through the DLC lockbox. In the case of a security breach or hacking attempt, only the depositor can receive the BTC deposit. This design significantly reduces the impact of potential security threats, safeguarding individual depositors’ assets and reinforcing the DeFi ecosystem’s robustness.
In summary, dlcBTC represents a paradigm shift in transacting Bitcoin on the Ethereum blockchain. Integrating non-custodial principles and leveraging smart contract technology enhances the security of Bitcoin holdings and fosters a more trustless and resilient financial infrastructure, setting new standards for decentralized financial instruments in the evolving Bitcoin ecosystem.
In conclusion, the evolution of the Bitcoin ecosystem, marked by major milestones like the SegWit and Taproot upgrades, reflects the ongoing efforts to make Bitcoin mainstream. Despite notable advancements in asset issuance protocols and scaling solutions, concerns about centralization persist in most projects. DLCs have emerged as an ideal solution, exemplified by innovative products like dlcBTC. By securely locking Bitcoin on its native chain and eliminating third-party custodians, dlcBTC pioneers a decentralized approach with a unique payout structure, enhancing security and trust in DeFi. As the landscape evolves, DLCs signal a pivotal advancement toward a more resilient and trustless financial infrastructure.