The Bitcoin ecosystem saw significant technological developments in October and November 2023, including the release of the BitVM whitepaper, the launch of Taproot Assets, proposals for OP_CAT and OP_TXHASH, the Lightning Timeout Trees proposal, the MuSig2-PSBT proposal, and the BIP-324 proposal.

Source: Galaxy

Translation: Lynn, Mars Finance

This report focuses on the important technological developments in the Bitcoin ecosystem in October and November 2023. We cover the following seven topics:

• BitVM whitepaper release
• Taproot Assets mainnet launch
• OP_CAT proposal
• OP_TXHASH proposal
• Lightning Timeout Trees proposal
• MuSig2-PSBT proposal
• BIP-324 proposal

Introduction

In November 2023, the number of on-chain Bitcoin transactions increased by 62% month-over-month (MoM), primarily driven by Ordinals and BRC-20. The total value of Bitcoin transferred in November exceeded $147 billion, a significant 21% increase from the previous month. This growth is mainly attributed to the appreciation of BTC price in USD, but the spot market BTC trading volume also increased by 18% month-over-month, while the futures trading volume decreased by 1% respectively.

Since the rise of Ordinals in January 2023, the Bitcoin development community has shown significant resurgence in exploring new token protocols, scaling solutions, and smart contract implementations. Overall, the post-Ordinal Bitcoin development landscape has expanded and is working harder than ever to enhance on-chain and off-chain application use cases. This report will focus on the seven major developments and proposals for Bitcoin in the fourth quarter of 2023, highlighting the new commitment of Bitcoin ecosystem developers to expand the range of Bitcoin applications and support use cases.

BitVM

What is it: BitVM supports executing smart contracts on Bitcoin. Given the nature of Bitcoin's design, executing smart contracts directly on Bitcoin is both slow and expensive. With BitVM, smart contracts are executed off-chain, and participants can only use Bitcoin's native scripts directly in the event of a dispute, leveraging Bitcoin's native script to enforce contract rules. The operation of BitVM is similar to optimistic rollups used in the Ethereum ecosystem, including elements such as fraud proofs and challenge-response protocols.

The structure of BitVM contracts works by reaching consensus on pre-signed transaction sequences that lead to events. Similar to optimistic rollups, these types of contracts assume you are not cheating, but if you do cheat, the honest party has the opportunity to challenge the cheater. Importantly, BitVM does not require upgrading Bitcoin's layer 1 blockchain. BitVM only uses primitives already understood in Bitcoin, such as hash locks, time locks, and tapscript.

Why it's important: Bitcoin has often been criticized for its lack of innovation and its ability to directly compete with more general Layer 1 solutions like Ethereum and Solana. Bitcoin has always prioritized layered scaling rather than attempting to expand the functionality of the base layer. The Lightning Network is an example of a high-performance network built on top of Bitcoin, centered around payments. With BitVM, more complex computations can be executed on layers built on top of Bitcoin, continuing to scale Bitcoin through layering rather than upgrading the core protocol.

Taproot Assets Mainnet Launch

What is it: Lightning Labs, a blockchain development company building software for the Bitcoin Lightning Network, has released a new protocol for issuing stablecoins and other assets on the Lightning Network. Taproot Assets (officially known as TARO) enables developers to issue, send, and receive Bitcoin-based assets. For years, Lightning Labs has been proposing and working on ways to issue assets on the Lightning Network, and the mainnet release is a significant milestone.

Taproot Assets are created by inputting arbitrary data into Taproot scripts (Tapscript). Tapscript is a scripting language used to enable various new transaction types in the Taproot upgrade. Taproot Assets store token data in Taproot outputs using Taptree, a Merkle tree data structure. All Taproot Assets are issued and settled on-chain through standard Taproot transactions at the base layer. While Taproot Assets are issued and settled on the Bitcoin base layer, Lightning Labs has specifically designed Taproot Assets to be compatible with the Lightning Network. The functionality of Taproot Assets is achieved through an improved version of partially signed Bitcoin transactions (PSBT), also used for Ordinals and BRC-20 transactions, called virtual partially signed Bitcoin transactions (vPSBT). This mechanism provides a way to trade Taproot Assets on the Lightning Network in a trustless peer-to-peer manner.

Why it's important: Taproot Assets will provide an effective method for creating alternative tokens on Bitcoin. In April 2023, Ordinals developers created a new token standard called BRC-20. This token standard uses covenants, allowing users to attach arbitrary data to individual satoshis (the smallest unit of Bitcoin). The emergence of BRC-20 demonstrates the demand for alternative tokens on Bitcoin, despite the inefficiency of the BRC-20 standard. With the official release of Taproot Assets on October 18, 2023, there is an opportunity for alternative tokens on Bitcoin to thrive on the Lightning Network. The benefits of having alternative tokens on the Lightning Network include reducing network congestion on the Bitcoin native chain. Overall, Taproot Assets is a promising solution that can introduce alternative tokens on Bitcoin and attract more users to the Lightning Network.

OP_CAT Proposal

What is it: Bitcoin researcher Ethan Heilman submitted a Bitcoin Improvement Proposal (BIP) to the Bitcoin-Dev mailing list, proposing to add the OP_CAT opcode to Bitcoin's script language. This opcode will enable developers to construct and evaluate Merkle trees and other hash data structures in Tapscript, the native scripting language used to enable new transaction types in the Taproot upgrade.

OP_CAT is not a new idea. Bitcoin developers had previously removed the opcode from Bitcoin scripts because it allowed the construction of data-intensive scripts, potentially adding to the computational burden of Bitcoin nodes. However, with the introduction of Taproot upgrade's size limit for Taproot scripts (520 bytes), OP_CAT will become a useful tool for developers without imposing excessive computational overhead on node operators.

Importance: Before the Taproot upgrade in November 2021, Bitcoin relied entirely on Bitcoin scripts for programmability. However, the Taproot upgrade significantly expanded Bitcoin's transaction programmability capabilities. Enabling OP_CAT will eliminate previous constraints, further enhancing Bitcoin's programmability and creating new opportunities for different use cases.

Draft Proposal for OP_TXHASH

What is it: Bitcoin Core developer Steven Roose proposed a BIP focusing on the benefits of implementing two new opcodes, OP_TXHASH and OP_CHECKTXHASHVERIFY, for the Bitcoin script language. The OP_TXHASH opcode will directly compete with two major contract proposals for Bitcoin, BIP-118 and BIP-119. Contracts are predetermined spending conditions imposed on Bitcoin transactions. For example, a user can create a contract to ensure that the recipient of a transaction can only spend the BTC sent to their address after 200 blocks.

Why it's important: Enabling contracts could be a driving force for the next major upgrade of Bitcoin. TXHASH is one of the leading BIPs, with developers hoping to activate it within 1-2 years. TXHASH allows for custom transaction fields in Bitcoin transactions, providing a more adaptable way to express contracts. This flexibility allows users to adjust transaction fees, a key feature when dealing with uncertain and fluctuating fees, which is not supported by other contract proposals like BIP-119. Additionally, when used in conjunction with other BIPs such as OP_CAT, OP_TXHASH has the potential to replicate the functionality of BIP-118, another leading contract proposal currently being evaluated by the Bitcoin community.

Lightning Timeout Trees

What is it: The Lightning Network is the primary Layer 2 solution for Bitcoin, widely adopted in recent years. A key barrier to further adoption is that users need to initiate at least one on-chain Bitcoin transaction to move funds off-chain when using the Lightning Network. This limitation restricts the number of users who can migrate assets off-chain, especially when on-chain transaction fees are high.

A long-explored solution is a concept called "channel factories," which allows multiple users to join the Lightning Network in a single Bitcoin transaction. The implementation of channel factories has the potential to significantly lower the barrier to entry for the Lightning Network by reducing the cost of opening Lightning channels between multiple users.

Why it's important: While the theory of Bitcoin has existed for years, the script limitations of Bitcoin make it difficult for anyone to come up with a convincing and secure solution to enable channel factories. However, John Law's "Timeout Trees" proposal may have found a solution using contracts (i.e., spending conditions of BTC transaction outputs). The proposal introduces the concept of a coordinator (or Lightning Service Provider - LSP), who will oversee the opening and closing of user channels. By using contracts, the coordinator will be restricted from spending users' BTC without proper authorization. While the proposal is not without limitations, it is the first channel factory architecture that utilizes contracts, a powerful mechanism for adding spending conditions on BTC, increasingly popular among Bitcoin developers for various use cases, including BTC custody (see BIP 345).

Updated MuSig2 Proposal

What is it: MuSig2 is an upgrade to MuSig1, a Bitcoin multi-signature scheme that achieves privacy and scalability. MuSig allows multiple parties to control a single private key with their respective keys. The shared private key does not look like a multi-signature transaction on-chain, leaving minimal on-chain footprint. MuSig1 is a significant improvement based on Schnorr signatures, compared to the traditional Bitcoin multi-signature schemes relying on ECDSA.

MuSig2 (BIP-327) is an improved iteration of MuSig1, providing superior security, efficiency, and privacy features by running as a two-round multi-signature scheme, requiring only two rounds of communication between signers to generate a valid signature, instead of three. In October, Bitcoin Core developer Andrew Chow proposed two new BIPs focused on MuSig2 development. The proposed BIPs are MuSig2-PSBT and MuSig2-descriptors.

Importance: MuSig2-PSBT, a standard track BIP, will enable private multi-signature schemes for partially signed Bitcoin transactions (PSBT). This advancement will benefit Ordinals and BRC-20 users and markets, who use PSBT to facilitate asset sales, among other users. Integrating MuSig2 into PSBT overall will help hide these types of on-chain transactions by making multi-signature transactions look like single-signature transactions. The second BIP, MuSig2-descriptors, is an informational BIP that will assist wallet providers in implementing MuSig2-PSBT by providing a method to describe controlled transaction outputs using MuSig2 wallets. It is worth noting that the BIP for MuSig2-PSBT is still in preliminary review and needs to be assigned a BIP number, so the BIP will not be ready for deployment in the short term (6-12 months).

BIP-324 – V2 Transport

What is it: BIP-324 is a privacy-focused improvement for the Bitcoin P2P layer. This layer on Bitcoin facilitates data transmission between Bitcoin nodes. The Bitcoin P2P layer acts as a high-speed highway for data, although most of the data is plaintext information, susceptible to various types of attacks. Potential attackers may employ passive methods, such as monitoring node activity to gather information about IP addresses and transaction sources, as well as active techniques, including intercepting and tampering with data transmitted by nodes. These attacks are known as MITM (man-in-the-middle) attacks. BIP-324, previously known as BIP-151, advocates for encrypting data on the Bitcoin P2P layer to enhance resistance to passive and active attacks on Bitcoin.

Importance: The latest version of Bitcoin Core (v0.26) added support for the specified version 2 encrypted P2P transport in BIP-324. The feature is disabled by default but allows anyone to enable it and benefit from additional protection. This is an important step for privacy at the Bitcoin P2P level, marking the first time a BIP has been activated on Bitcoin since 2021 (although BIP-324 does not require a soft fork).

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