In the second half of 2023, various BTC derivative protocols have rapidly developed in the ecosystem. In addition to the resurgence of the Ordinals protocol and BRC20, protocols such as Atomicals and Taproot Assets have also received widespread attention in the market. In this article, Beosin will provide a detailed explanation of the RGB protocol, which is a very important asset issuance protocol in the BTC ecosystem.
I. Development of the RGB Protocol
The role of the RGB protocol is to add smart contract functionality to Bitcoin on the Lightning Network, based on a state channel protocol using zero-knowledge proofs, allowing users to conduct privacy-protected transactions off-chain.
RGB is not a token protocol, but it has the capability to issue and manage a variety of highly scalable, programmable, and confidential assets, which can play an important role in many industries beyond finance. The development of the protocol has gone through several important stages, from the initial concept to the current RGB v0.10 version, which brings smart contract functionality to Bitcoin and the Lightning Network.
In 2016, Giacomo Zucco proposed the initial concept of the RGB protocol based on Peter Todd's ideas.
In 2017, BHB Network launched the original version of the RGB protocol with the support of the Poseidon Group.
In 2019, Maxim Orlovsky and Giacomo Zucco founded the LNP/BP Standards Association to promote the practical application of RGB, and Dr. Maxim Orlovsky began to redesign the RGB protocol.
In 2021, the association demonstrated the Turing-complete virtual machine (AluVM) of the RGB protocol, and RGB began to operate on the Lightning Network.
In 2022, a new language called Contractum for writing RGB smart contracts for Bitcoin and the Lightning Network was introduced, along with its new website.
In April 2023, the RGB v0.10 version was released, bringing full support for smart contracts to Bitcoin and the Lightning Network, marking a crucial stage in the development of the RGB protocol.
II. Design Logic of the RGB Protocol
The core idea of the RGB protocol revolves around consensus and off-chain data storage.
First, the most important value of a distributed system is the maintenance of consensus. By using the Bitcoin consensus layer, it only needs to retain brief encrypted commitments to ledger events, which prove the existence of specific data without revealing the actual data content. This is usually achieved through hash functions, and only these commitments are stored on the chain to ensure the authenticity and integrity of the data, thereby reducing the burden of on-chain data.
The ledger data designed by RGB is stored off-chain, meaning all contract data and state transitions are kept off the blockchain, rather than on the blockchain. It uses single-use seals and state transitions to track and verify the state of smart contracts, effectively handling and verifying the state and transactions of smart contracts without storing all the data on the chain.
The foundational layer of RGB is the Bitcoin blockchain, including Nakamoto PoW consensus and transaction ledger. Although no data needs to be stored on the chain, it still needs to adhere to existing infrastructure and utilize Bitcoin transactions as the storage for these commitments.
2.1 Client Verification
In the client verification mode of RGB smart contracts, all data is kept outside of Bitcoin transactions, such as the Bitcoin blockchain or Lightning Network channel states, enabling the system to operate on the Lightning Network and providing a foundation for high-level protocol scalability and privacy.
2.2 RGB Smart Contracts
The basic components of RGB smart contracts include Genesis, State, and Transitions, each of which serves different functions and roles:
Genesis
Genesis is the initialization declaration of the smart contract, defining the basic properties and rules of the contract. This includes the type, purpose, and any initial settings of the contract. In the code, the genesis section defines the starting point of the contract, such as specifying initial identity information in an identity verification contract.
State
State represents the current state of the contract at any given moment, providing a real-time snapshot of the contract data, including all variable values and asset information.
Transitions
Transitions are the rules that define the transition from one state to another. These rules determine how the state changes according to the contract logic. Examples of transitions are op Revocation and op Transfer, which define how to transition from one Identity state to another, or how to transfer tokens between them.
Through these three components, a way is provided to define and execute various operations and protocols. Genesis sets the basic rules and parameters, State maintains the current information of the contract, and Transitions specify the logic of state changes, collectively forming the core architecture of RGB smart contracts.
2.3 Single-Use Seals
To ensure the secure and efficient management of asset transfers while protecting user privacy, the RGB protocol uses the method of "single-use seals," which allows assets (such as tokens) to be bound to a specific Bitcoin transaction output, requiring each asset transfer to "open" an old seal and "create" a new one. Single-use seals are used to represent ownership of assets or contract states. Each time a state transition or transaction occurs, the relevant seal is closed and a new seal is created. The benefit of this approach is that each seal can only be used once, preventing duplicate use or double spending of assets, ensuring the security of transactions, and thereby ensuring the immutability of asset transfers.
Additionally, since these operations are performed on the client side rather than being entirely stored on the blockchain, it greatly enhances user privacy protection, reduces the occupation of blockchain space, and improves the overall efficiency and scalability of the network.
The logical steps of single-use seals are as follows:
The beginning of each RGB contract is a genesis operation, where the initial state and related single-use seals are defined, representing the initial allocation of assets or permissions defined in the contract.
In the contract, the state is used to represent the current configuration of assets or permissions. Each state is associated with a single-use seal, representing the current ownership or permission.
When a transfer or change of assets or permissions is needed, it involves state transitions. This process includes closing the current single-use seal (representing the old state) and creating a new seal (representing the new state).
Closing a seal involves verifying its integrity and marking it as used to prevent reuse. Then, a new seal is created based on the contract rules to represent the new state.
During a transaction, contract participants need to verify the validity of the relevant single-use seal to ensure the legitimacy of the transaction. This verification process is automatic and is completed through collaboration between RGB nodes and participating wallets.
III. Features of the RGB Protocol
The features of RGB are reflected in the innovation of RGB smart contracts. Here are some key points to introduce to everyone:
1. Concept of Schema
The RGB protocol adopts the concept of Schema, similar to classes in object-oriented programming. Schemas are used to define the standard for RGB assets, making it easier for wallets, exchanges, browsers, and BTC nodes to support RGB assets. In this framework, a specific RGB contract is an instance of a certain schema, created by the constructor of that schema (the "genesis operation"). This approach separates the roles of contract developers (schema developers) and contract issuers, allowing the latter to operate without requiring programming or security knowledge.
2. AluVM Virtual Machine
The RGB protocol also introduces the AluVM virtual machine, which is a Turing-complete virtual machine similar to Ethereum's EVM. It can execute almost all types of computations but is limited by the number of operation steps. AluVM limits computations based on accumulated computational complexity, similar to Ethereum's gas consumption mechanism.
3. Contract Definition Examples
In contract definitions, the RGB protocol uses specific data types, such as PgpKey, which are not direct components of the contract but can be shared by multiple contracts. Contract states and operations, such as Identity and Revocation, are defined as components of the contract state and possible state transitions.
4. Contract Instances and State Transitions
Contract instantiation is achieved by applying a schema to a specific situation. For example, meSatoshiNakamoto implements the DecentralizedIdentity schema, defining the initial state and assigning it to a single-use seal. State transitions, such as through the Revocation operation, involve updating the identity and assigning it to a new single-use seal.
5. Extending Contract Functionality
The RGB protocol allows for extending contract functionality, such as adding IOU (I OWE YOU) tokens, represented in the contract as ownable states IOYTokens. Additionally, there are global states, such as IOYTicker and IOYName, which are global properties of the contract not directly owned by any party.
6. Concept of State Extensions
The concept of state extensions allows the public to participate in specific logical parts of the contract, such as through the declaration of Burn. State extension operations allow anyone to create state extensions without on-chain commitments, similar to unmined Bitcoin transactions.
7. Contract Interface
Standardized communication: The contract interface provides a standardized way to communicate with RGB nodes, requiring them to return semantically meaningful states and create operations.
Similar to Ethereum's ERC standards: These interfaces are similar to Ethereum's ERC standards, with general interfaces referred to as "RGBxx," defined as independent LNP/BP standards.
8. Creating a Generic Token Interface Example
Interface definition: Defines global states (such as Ticker and Name) and ownable states (such as Inflation and Asset), as well as operations (such as Issue and Transfer).
Interface implementation: When implementing the interface, specific schema states and operations are bound to the interface. For example, the FungibleToken interface binds global and ownable states to the DecentralizedIdentity schema.
IV. Applications of the RGB Protocol
Financial Applications:
Used to create tokens representing company or project shares, issued centrally but traded in a decentralized manner, increasing market liquidity and transparency.
Managing loans and bonds, implementing automated loan and bond issuance and repayment through smart contracts.
Creating stablecoins running on the Lightning Network, which can be used as a means of payment.
Establishing decentralized exchanges (DEX).
Implementing solutions such as algorithmic over-collateralized stablecoins, providing liquidity and stability to the market.
Non-Financial Applications:
Managing self-sovereign identity solutions, allowing individuals to control and manage their digital identity information.
Creating a decentralized global name registration system, enabling people to register and manage domain names and other network identifiers.
Managing ownership and licensing of digital content, including copyrights and licenses.
Tokenizing artwork, providing a new digital ownership and trading platform for artists and collectors.
Managing DAOs to achieve decentralized decision-making and governance.
Creating a provable and verifiable audit log system to increase transparency and credibility for enterprises and projects.
V. Current Risks of the RGB Protocol
1. Instability
The current version of the RGB protocol is the first to fully support smart contracts. Subsequent versions of the RGB protocol may undergo significant updates or modifications, which could render existing contracts unable to run securely and stably in future versions. RGB's client verification nodes are still undergoing updates and do not yet have a stable version.
2. Complexity
The design and implementation of the RGB protocol are quite complex. Smart contracts developed based on the RGB protocol need to consider many features of the RGB protocol. For example, tokens issued based on the RGB protocol, if a transaction fails or does not receive confirmation from RGB nodes, will not belong to any UTXO, effectively being destroyed. Developers and project parties need to carefully consider the impact of such situations on the project's token economy.
Conclusion
The RGB protocol is still in a very early stage. Through its unique schema definition, AluVM virtual machine, flexible contract state management, and extension mechanism, the RGB protocol demonstrates its innovation in the field of BTC smart contracts, supporting the issuance and transfer of multiple assets on the Bitcoin network and Lightning Network. However, the current RGB protocol is not fully compatible with the Lightning Network, and there is no security guarantee for smart contract development and operation. Users should be aware of the risks when using the RGB protocol.
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