1. Preamble

Recently, the BTC ecosystem is booming, with various protocols in their early stages and infrastructure still imperfect. However, this doesn’t diminish the enthusiasm for these innovations. Long-term, most projects, tokens, or NFTs may eventually fade away, but this doesn’t negate their initial wealth effects. My focus on the BTC ecosystem stems from two beliefs:

First, BTC prices can’t rise forever. As halving occurs, miners’ earnings need sufficient assurance, necessitating a new narrative given that “computational power is fundamental to security.”

Second, one solution is to build the BTC ecosystem, creating more transactions and thus ensuring miners’ income. Alternatively, increasing the token supply is possible, though many deem it unlikely. The former, less likely to disrupt BTC consensus, is the preferred solution and brings a new narrative. However, BTC’s base architecture poses development challenges, risking missed opportunities in rapidly evolving, complex crypto spaces. BTC’s on-chain NFTs, limited by block space, seem more ornamental (‘inscriptions’) to me, though I could be wrong. While they’re crucial for the ecosystem’s explosion (being understandable and FOMO-friendly), they’re not the foundation of a complex ecosystem. My interest lies more in innovations that could transform the entire BTC ecosystem, leading me to a promising protocol: RGB.

2. Discussing the RGB Protocol

2.1 What is the RGB Protocol?

Simply put, RGB is a protocol for creating smart contracts on the Bitcoin network. Ethereum’s rise was significantly due to smart contracts, subsequently establishing a vast, diverse ecosystem encompassing various assets and financial models, even linking to the real world (current Real-World Assets or RWAs).

What if smart contracts were integrated into the BTC system? Of course, this is possible, and I disagree with the view that BTC is only a store of value. However, given BTC’s different code architecture from Ethereum, building contracts on it is challenging, necessitating crypto-native innovation.

2.2 UTXO Model

Before delving into this, let’s understand the Bitcoin account model (crucial for following discussions).

The familiar traditional model involves accounts and balances, with transactions moving tokens from A to B. However, the UTXO model is different: it has no accounts or balances, only transaction information.

In transactions, there are inputs and outputs. But these transactions differ from traditional ones. See the illustration:

Imagine you’re Bob with 1 BTC in a UTXO. You transfer 0.5 BTC to Alice (ignoring gas fees), resulting in two UTXOs: a new 0.5 BTC UTXO under your control (bottom right) and a new UTXO for Alice (top right), with the original UTXO becoming unusable. If your input (left side) combines several UTXOs (e.g., 1 BTC = 0.8 BTC + 0.2 BTC UTXOs), it gets more complex.

You see, it’s about creating new UTXOs from old ones to convey transaction information. This is entirely different from Ethereum’s account system (more like a traditional database with names, balances, and dynamic balance updates).

2.3 RGB Protocol Principle

The working principle of the RGB protocol, as explained by its official sources, is as follows:

1. Asset issuers create new assets on the client-side, generating a one-time seal and a transaction commitment. At this point, the asset is linked to a Bitcoin UTXO (Unspent Transaction Output), whether pre-existing or newly created.

2. The issuer anchors the new asset to the Bitcoin network by embedding the commitment into a Bitcoin transaction output (UTXO).

3. The asset recipient validates the asset’s authenticity by verifying the commitment and the one-time seal.

4. During asset transfer, the old one-time seal is destroyed, and a new one-time seal, commitment, and transaction data are anchored to the Bitcoin network.

Twitter user @trustmachinesco explained this process in a more intuitive way:

1. Matt issues 100 $MATT tokens for himself on the RGB network.

2. On the Bitcoin network, Matt’s token issuance corresponds to his current Bitcoin UTXO A.

3. Matt transfers 50 $MATT tokens to Pam.

4. On the Bitcoin network, Matt’s token transfer is represented by a new UTXO B, and the UTXO A from step 2 is destroyed.

5. On the Bitcoin network, Pam’s receipt of the tokens corresponds to a new UTXO C, indicating Pam’s current Bitcoin UTXO.

6. Similarly, when Pam transfers tokens, her original UTXO C is destroyed, generating a new UTXO D.

As $MATT tokens continue to change hands, each transfer is represented by corresponding UTXOs on the Bitcoin mainnet.

However, since contracts cannot be directly created on the chain, how do off-chain contracts correspond with UTXOs? This involves another innovation of RGB: client-side verification.

In the RGB protocol, transaction verification and data storage are completed on the client-side (such as wallet software), not on the blockchain. This approach ensures that transaction data is not publicly available on the chain, enhancing privacy. Client-side verification also reduces the need for data storage on the chain, increasing the network’s scalability. This is a significant difference between RGB and BRC20; since transaction data is stored on the client-side rather than the chain, it theoretically reduces the current network congestion and high transaction fees.

In summary:

The RGB protocol leverages the security of the Bitcoin mainnet’s UTXOs, endorsing the security of its off-chain asset issuance or contract logic.

2.4 Advantages of RGB

1. Security: Relies on the high security of the BTC network.

2. Confidentiality: Transaction information is not publicly disclosed on the blockchain, ensuring privacy. However, this privacy is relative; when one possesses the corresponding UTXO, it is possible to trace back previous data.

3. Scalability: It can be seamlessly integrated with networks like the Lightning Network, which I highly value. The Lightning Network enables the Bitcoin network to surpass its current rate limitations. With RGB introducing smart contracts, isn’t this essentially replicating ETH’s high-speed smart contract system? This replication is meaningful because:

1) BTC can offer higher security, thus smart contracts and similar technologies will also be relatively more secure.

2) It can activate the funds currently settled in BTC or attract funds that trust only the Bitcoin network, providing these funds with more usage scenarios.

3) It makes DEFI a possibility, significantly addressing the issue of miner earnings mentioned at the beginning.

1. No Congestion: Transactions only retain additional storage for homomorphic commitments.

2. Future Upgradability without Hard Forks: Operates off-chain, not affecting the blockchain.

3. Higher Censorship Resistance than Bitcoin: Since transaction information is not disclosed, miners cannot see the flow of assets in transactions.

3. The RGB Ecosystem

Although the RGB protocol has been around for a while and holds strong legitimacy, it has always remained somewhat under the radar (though I believe more people will start talking about it). The current ecosystem includes several notable entities:

3.1 Infinitas

Website: https://www.iftas.tech/

Infinitas integrates the RGB protocol with the Bitcoin Lightning Network to create an ecosystem aimed at providing enhanced privacy, exceptional throughput, and superior low-latency transaction processing. It’s reported that Infinitas will introduce a native economic incentive scheme, initially adopting a mining approach to foster long-term ecological development.

3.2 COSMINMART

COSMINMART, based on the Lightning Network and compatible with protocols like RGB, supports smart contracts in its new Bitcoin application ecosystem. Its products include:

1. • COSM Wallet
2. • COSM Market
3. • COSM Launchpad

3.3 Pandora Prime Inc

Pandora Prime

Pioneering Bitcoin Finance #BiFi

pandoraprime.ch

Pandora Prime is dedicated to pioneering Bitcoin Finance (BiFi) through the combination of RGB smart contracts and the Lightning Network. Starting with programmable Bitcoin assets (RGBTC and CHFN), they aim to scale transaction throughput via the Lightning Network to VISA/MasterCard levels. Additionally, they provide convenient facilities for exchanging these assets without cumbersome KYC procedures for transactions below 1,000 Swiss Francs, in compliance with Swiss laws. Their products include MyCitadel (wallet), RGB Explorer (browser), and the Pandora Network.

3.4 DIBA (Digital Bitcoin Art)

Website: https://diba.io/

Products: DIBA and Bitmask

DIBA is the first marketplace to trade Bitcoin NFTs (as termed by DIBA) using the RGB smart contract protocol and the Lightning Network.

Bitmask, created by DIBA, is the first NFT wallet in the RGB ecosystem. It operates in web browsers and interacts with RGB contracts, similar to MetaMask on Ethereum.

3.4 Bitswap-BiFi

GitHub: https://github.com/BitSwap-BiFi/Bitswap-core

The RGB ecosystem is actively exploring DEX solutions to address liquidity issues with RGB assets. Bitswap’s demos and proof-of-concept showcase the introduction of ‘SWAPS’ into DEX, though currently without AMM or LP. It’s still in the validation phase and very early, but it’s also worth watching.

4. Opportunities for Participation

I’ve looked at these projects and found that the infrastructure is still quite rudimentary, and the wallet experience isn’t great. However, it’s exactly in this early stage that we have more opportunities to get involved at a very early stage.

Personal Suggestion 1: When using wallets, definitely try out the testnet to understand the process and provide feedback to the project team.

Personal Suggestion 2: Keep an eye on similar projects. I’m also watching “Taproot (Taro)”, which is very similar in design to RGB but backed by the “Lightning Labs team” with $70 million in funding, indicating a resource-rich status, while the RGB team is relatively more modest. However, its open-source code and technical head start in the tech circle are noteworthy.

Personal Suggestion 3: Projects within the RGB ecosystem, like meme or NFT projects, are also worth special attention, as they might bring surprises.

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