Authors: LD Capital, duoduo, Alfred
I. Brief Classification of BTC L2
The rise of BTC L2 is an undeniable narrative in this round of the market. BTC L2 includes at least two aspects: offchain, not on the BTC chain, but has some kind of connection with the BTC chain, such as joint mining related to consensus algorithms, or asset bridging, etc. The second aspect is the ability to provide some capabilities stronger than the BTC chain itself, mainly including three aspects - performance optimization, programming, and privacy. The capabilities of these three aspects may not necessarily be fully realized, and the focus of different projects at different stages may also vary. At the current stage, most BTC L2 hopes to achieve performance optimization and programming capabilities, providing faster application products and enriching the BTC ecosystem.
Currently, the categories of Bitcoin L2 solutions roughly include state channels (such as Lightning Network), sidechains (such as Liquid, Merlin), Rollup (such as Rollkit), client verification (such as RGB, RGB++, Taro), etc.
According to whether the underlying architecture is isomorphic to BTC, it can also be divided into two major camps:
● UTXO Camp: Derived from the UTXO model, such as Nervos Network;
● EVM Camp: Such as the hot staking airdrop Merlin and B².
This article mainly introduces the product features, ecological development, and token economic model of UTXO isomorphic BTC L2 Nervos Network.
II. Team and Financing
The Nervos Network team founders have been deeply involved in the industry for many years.
Chief Architect Jan Xie: He has long contributed to the development of Ethereum clients Ruby-ethereum and pyethereum, and has also collaborated with Ethereum founder Vitalik Buterin to develop Casper consensus and sharding technology. In addition, he also founded Cryptape, a company engaged in the development of underlying blockchain platforms and consensus algorithm research.
Co-founder Kevin Wang: He previously worked on enterprise data solutions at IBM Silicon Valley Laboratory and co-founded Launch School, an online school for software engineers. In addition, Kevin Wang is also a co-founder of Khalani, an intent-driven centralized solver infrastructure.
Co-founder and COO Daniel Lv: Co-founder of the Ethereum wallet imToken, and former Chief Technology Officer of the cryptocurrency exchange Yunbi. In addition, Daniel Lv organized the Ruby China community for 10 years and co-founded ruby-china.org.
In August 2018, Nervos Network completed a $28 million financing round, with participation from Polychain Capital, Sequoia China, Wanxiang Blockchain, Blockchain Capital, and others. On October 16, 2019, Nervos Network completed an ICO on Coinlist, raising $72 million.
III. Core Product
Nervos Network was launched in November 2019, using the PoW consensus mechanism and UTXO model, isomorphic to Bitcoin. CKB has had a long time of development and accumulation in security, extending Bitcoin's programming capabilities, technical accumulation, and ecology in many aspects. Since its establishment, the main development direction of the project has been a high-performance public chain based on POW+UTXO, which coincides with the current BTC L2 trend.
2.1 PoW: Hashrate Doubled Since the End of 2023
The Nervos Network team believes that in terms of decentralization and security, PoW is superior to PoS. It is extremely difficult to forge or reconstruct a PoW chain because it requires recalculating the hash power of each block. Therefore, its underlying mechanism adopts the POW mechanism, which is completely permissionless, and users only need to purchase mining machines and electricity to participate in block generation.
Nervos Network's mining algorithm is Eaglesong, common ASIC mining machines include Antminer K7, Goldshell CK6, Toddminer Como, etc. The chart below shows the growth of Nervos Network's hashrate. The project's hashrate experienced a retreat in 2022, but has been growing since the end of 2022, doubling from the end of 2023 to the present, indicating an influx of funds into mining.
Currently, CKB token mining returns are also good, ranking eighth in mining returns on f2pool.
2.2 Cell Model: Security and Scalability
Cell is the most basic structure in Nervos that represents a single piece of data. The data contained in Cell can take various forms, including CKByte, tokens, JavaScript code, and even JSON strings and other serialized data. Since the types of data contained are not limited, developers can choose flexibly.
The Cell model treats all digital assets (such as CKB, tokens, and digital collectibles) as the proprietary property and responsibility of their owners. Assets must comply with smart contract rules when participating in transactions, but the assets essentially belong to the users rather than the smart contracts. Even smart contracts defining tokens do not have authority over the assets. This means that even if attackers find vulnerabilities in the contract code, they still cannot access the assets because the assets are under the control of the users, increasing the security of the assets.
Based on this, the Cell model adds programmability, supporting smart contracts. Specifically, Cell abstracts the nValue field representing the value of tokens in UTXO, dividing it into capacity and data fields, with data storing state and capable of holding arbitrary data. Additionally, the Cell data structure also includes two fields, LockScript and TypeScript, the former mainly reflecting ownership, while the latter can customize many rich functions.
2.3 RGB++ Protocol: Contract Extension and Performance Enhancement
RGB++ is an extension protocol based on RGB, using one-time seals and client verification technology to manage state changes and transaction verification. It maps Bitcoin UTXO to Nervos CKB Cell through isomorphic binding and uses CKB and Bitcoin chain script constraints to verify the correctness of state calculation and the validity of ownership changes.
RGB++ addresses the technical challenges faced by the original RGB protocol in practical implementation and provides more possibilities, such as blockchain-enhanced client verification, transaction folding, shared state of ownerless contracts, and non-interactive transfers.
RGB++ inherits the core ideas of the RGB protocol, using different virtual machines and verification schemes. Users do not need an independent RGB++ client, only need to access Bitcoin and CKB light nodes to independently complete all verifications. RGB++ brings Turing-complete contract extensions and performance improvements to Bitcoin. It does not use any cross-chain bridges, but uses native client verification solutions to ensure security and censorship resistance.
2.4 Spore Protocol: Upgraded Ordinals
In mid-March 2024, the Nervos Network ecological project JoyID Wallet officially launched the first Spore DOB Marketplace based on the UTXO order book trading model, and has opened the first DOB asset - Unicorn Box for trading. Unicorn Box was an airdrop to the community, and the current application has ended, occupying 340CKB during minting, and the current floor price in the market is 71800CKB, a 200-fold increase.
DOB (Digital Object) is an encrypted asset issued through the Spore protocol on the CKB blockchain. DOBs generated by the Spore protocol are immutable, completely stored on the chain, and establish intrinsic connections between content and value.
If CKB is considered an upgraded version of Bitcoin, then Spore is an upgraded version of Ordinals. Its main features are as follows:
- It supports various content types such as video, audio, and text, giving creators more space.
- The content is fully stored on the chain, making it a complete digital asset. Previous NFTs actually only stored the link address on the chain, with most of the specific content stored off-chain.
- Generating DOB requires obtaining CKB tokens as "raw materials," and the amount of CKB used for minting determines the storage space of the DOB on the chain. Destroying DOB allows the retrieval of the occupied CKB. This mechanism ensures that holding Spore DOB is equivalent to holding CKB, thereby reducing the circulation of CKB within the ecosystem.
- It is fee-free. When minting DOB through the Spore protocol, an additional 1 CKB is automatically deposited. In non-congested network conditions, 1 CKB is sufficient to cover the miner's fee for over 7000 on-chain transfers, effectively achieving fee-free transactions. This can improve user experience and attract new users.
- It can freely flow between different UTXO chains. According to current plans, the Bitcoin layer 1 asset issuance protocol RGB++ will be launched at the end of March, allowing DOBs issued on the CKB blockchain to be transferred to the Bitcoin mainnet via RGB++, becoming digital objects on the Bitcoin chain.
IV. Ecological Development
The Nervos Network ecosystem is in its early stages, including projects such as wallets, cross-chain bridges, DID, and DEFI. However, there are not many well-known projects, and there has been no phenomenon-level product yet.
As a BTC L2, the main challenge is to improve the application level of BTC as a stable asset and activate its liquidity. In this regard, Nervos Network is still in its early stages.
According to community information, the RGB++ protocol is planned to be launched at the end of March or early April, which will bring more possibilities and enrich the ecosystem.
The ecological project Nervape has just released the whitelist for its DOBs, which will be directly released on the BTC chain in early April.
From on-chain data, the protocol's transaction volume has increased, with a peak in early 2024. The number of unique addresses and Cells has been continuously increasing, and on-chain transaction fee income has grown since the end of 2023. Overall, there is a noticeable increase in on-chain data and activity.
V. Token Economic Model
5.1 Token Distribution and Release
Currently, the total supply of CKB tokens is 44.5 billion, with a circulation of 43.8 billion, and 9.4 billion locked in the NervosDAO.
The initial supply of CKB tokens was 33.6 billion, of which 8.4 billion have been burned, resulting in an actual supply of 25.2 billion. These were allocated to investors, the team, and the ecosystem fund, and have all been unlocked.
CKB is an inflationary token, with inflation coming from two parts:
1. Mining inflation, all used to reward miners. The inflation rate follows that of BTC, halving every four years until it reaches zero. In the first 4 years, there was an annual addition of 4.2 billion, which was halved for the first time in November 2023, reducing the annual issuance to 2.1 billion CKB. The second halving is expected to take place in November 2027, reducing the annual issuance to 1.05 billion CKB.
2. There is also a fixed annual issuance of 1.344 billion tokens, known as "secondary issuance." These tokens will be used for: incentives for miners (state rent from users storing data on the chain); incentives for Nervos DAO depositors (users locking CKB in the DAO); and treasury funds (based on liquidity CKB not used for storing data), with the portion deposited in the treasury being burned.
The specific allocation is shown in the figure, indicating that there are approximately 5.77 billion CKB tokens from the secondary issuance, with 69.5% of the tokens being burned, resulting in a circulation of approximately 1.77 billion.
Based on this calculation, in the coming year, CKB will add approximately 2.5 billion tokens, with an annual inflation rate of approximately 5.7%, placing it in the category of moderate inflation.
5.2 NervosDAO Staking
NervosDAO has locked approximately 9.4 billion tokens, accounting for approximately 21% of the total circulation, with an average deposit period of approximately 800 days, indicating long-term holding. The current staking yield is low, at only 2.29%, with limited staking attractiveness.
Looking at historical data, during the bull market in 2021, the highest lockup reached approximately 12 billion, followed by a decline to around 8 billion. Therefore, overall, this part of the holdings is relatively stable. Since the end of 2023, there has been an increase in new staking. However, the overall staking/circulation ratio is declining, with new users and new tokens not entering staking.
5.3 Holdings Distribution
The distribution of CKB token holdings is relatively concentrated, with a total of 270,000 addresses holding CKB. The top 100 holding addresses collectively hold 76.93% of the tokens, while the top 10 addresses hold 54.28%, with Binance's address holding over 32% of the tokens.
Among the top 10 holding addresses, excluding exchange addresses, there are 4 unmarked addresses. The fourth-largest address began accumulating in May 2023 and has continued to receive transfers, with the latest transfer on March 25, 2024, without participating in staking. The fifth-largest address was established in May 2023, with only one transfer and no participation in staking. The eighth-largest address was established in 2021, with only one transfer, all of which are participating in staking. The ninth-largest address was established on March 22, 2024, without participating in staking.
VI. Conclusion
Nervos Network is a POW+UTXO isomorphic public chain launched in 2019, now positioned as a BTC L2. The team has rich development experience, and the product has innovated in programmability and scalability. Since 2024, it has introduced concepts such as RGB++ and DOB, aligning with the current narrative of BTC L2 development.
The ecosystem is in its early stages, with reasonable community activity. As a BTC L2, the ecosystem's focus should be on bringing more convenient BTC applications and activating BTC asset liquidity. The RGB++ protocol is planned to be launched at the end of March 2024, and the Nervape project plans to issue DOBs on the BTC chain, hoping to drive the development of assets on the BTC chain.
CKB tokens are inflationary. The initial issuance has entered full circulation, and there is now annual inflation. Inflation comes from two sources: mining rewards and secondary issuance. Overall, Nervos Network has a solid foundation, and key observations include changes in token staking, ecosystem development progress, scale, and market activity.
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