Author: Jennifer Obem

Abstract

• Expanded on the core technology of Bitcoin, providing support for Bitcoin Layer 2 (L2) through a scalable underlying blockchain.
• To improve the programming limitations of Bitcoin, Nervos Network adopts a customized model (Cell model) for state storage and a customized virtual machine (CKB-VM) for transaction execution.
• Nervos extends the usability of Bitcoin through RGB++, which is an asset issuance protocol based on the original RGB protocol, aiming to position CKB as the execution layer and data availability layer for Bitcoin.
• Since the launch of the RGB++ protocol on the CKB mainnet, transaction activity on the CKB network has become active again, with nearly 400,000 new addresses added in April, representing a 181% increase compared to March.
• The integration of payment channel networks into the Lightning Network is underway, which will make CKB more scalable and suitable for various blockchain applications.

Background

As the largest cryptocurrency, Bitcoin continues to gain adoption and recognition. However, its success has also exposed some limitations and challenges, particularly in terms of scalability. For example, after the Segwit upgrade, the Bitcoin blockchain limited block size to within 4 MB, restricting the number of transactions that can be processed within a given time. As the network grows, this limitation has led to longer confirmation times and higher transaction fees, reducing the efficiency of Bitcoin in handling large transaction volumes. In addition to value transfer, Bitcoin's scripting language currently lacks the flexibility and expressiveness required to develop complex smart contracts compared to other blockchains.

To address these limitations, various Layer 2 (L2) solutions have been proposed, such as payment channels, sidechains, and Rollup. Most of them aim to scale Bitcoin by processing transactions off-chain, attempting to increase transaction throughput without compromising the security of the base layer. For example, the Lightning Network has created a second-layer payment channel network, allowing nearly instant micropayments. Another approach is sidechains — independent blockchains connected to the Bitcoin main chain, with greater scripting capabilities and faster transactions. However, these solutions often involve trade-offs, such as increased complexity, trust assumptions, and potential security vulnerabilities.

Nervos Network is one of the scalability solutions for Bitcoin, adopting a more native approach by modifying the underlying UTXO model that supports Bitcoin. It improves the RGB protocol to provide Bitcoin with Turing-complete contract capabilities without the need for cross-chain bridges. Nervos Network, founded in the first quarter of 2018 by Terry Tai, Kevin Wang, Cipher Wang, and Daniel Lv, is a Layer 1 blockchain aimed at improving scalability. To drive the development of the network, the project team raised over $100 million from seed rounds, private rounds, and public offerings. In November 2019, Nervos Network's Layer 1 blockchain — Common Knowledge Base (CKB) went live. In February 2024, CELL Studio led by Cipher Wang, co-founder of Nervos, launched the Bitcoin Layer 1 asset issuance protocol RGB++. Inspired by the RGB protocol, the RGB++ protocol uses CKB as the data availability and execution layer, enabling smart contract capabilities and asset issuance for Bitcoin. Since the launch of RGB++ on the mainnet in April 2024, the number of projects issuing assets on Bitcoin using RGB++ has continued to increase. As of June 2024, over 15 existing ecosystem projects have reactivated on-chain activities for CKB, as detailed here.

Technology

Source: Nervos Network

Nervos Network adopts a layered architecture, including an L1 blockchain (Common Knowledge Base, CKB) that can be extended through payment channels and RGB++. The Cell model is an improved version of the Bitcoin UTXO accounting model, and CKB-VM is a customized virtual machine that supports the network's layered design. CKB-VM provides a flexible execution environment for initiating transactions or building applications on the network. This design allows the network to vertically scale by running dedicated components at each layer, similar to a modular blockchain.

Common Knowledge Base

CKB is the underlying L1 blockchain of Nervos Network, operating similarly to Bitcoin with a proof-of-work (PoW) consensus mechanism. It uses an upgraded version of the Bitcoin algorithm called NC-MAX to improve network efficiency and responsiveness by speeding up transaction confirmations and reducing orphan rates. While Bitcoin targets a 10-minute block interval with mining difficulty adjustments approximately every two weeks, CKB dynamically adjusts block intervals (approximately every four hours) based on network activity to optimize performance.

CKB utilizes the Eaglesong function to ensure network security, which is an ASIC-resistant custom hash function that replaces the widely used SHA256 hash function. Eaglesong is a sponge function optimized for multiple cryptographic elements, providing security equivalent to other proof-of-work (PoW) hash functions while specifically tailored for Nervos Network.

Cell Model

Source: Nervos Network

The Cell model is the core data structure of CKB, capable of storing and validating any data on-chain. The original Bitcoin scripting language and UTXO model limit its ability to execute complex computations required for smart contracts. In contrast, CKB generalizes the UTXO model, allowing more flexible data storage and validation. Unlike Bitcoin, which uses a single script to validate transactions, CKB introduces dual scripts in its Cell model:

• The Lock Script ensures that only authorized users can access and use the contents of the Cell, similar to Bitcoin.

• The Type Script is an optional script used to define how the Cell's rules can be used or modified in future transactions.

This system enables CKB to support more functionalities compared to the limited options in Bitcoin, making it suitable for various applications. Each Cell in CKB is a programmable Cell, capable of storing different data types such as tokens, smart contracts, and specific application states. It can also run complex scripts similar to Turing-complete languages. Cells operate independently, allowing them to be updated or referenced in a parallel manner without affecting other parts of the blockchain, thereby enhancing scalability.

CKB-VM

CKB-VM is the execution engine of CKB used for running smart contracts and decentralized applications. The virtual machine uses the RISC-V instruction set, a flexible, open-source hardware architecture that supports multiple programming languages, including popular languages like C and Rust. This broad compatibility sets CKB-VM apart from other blockchain virtual machines that are typically limited to specific languages, opening it up to a wider developer community. The CKB network also supports SDKs for mainstream languages such as JavaScript, Rust, Go, and Java, making it convenient for developers to use familiar tools for development. This makes it easier for developers to create complex decentralized applications using familiar programming languages.

Furthermore, the architecture of CKB-VM provides predictable gas fees, secure execution, and efficient integration with the Cell model, aiding in effective state management and transaction validation. The predictable gas fee model avoids unexpected costs, improves user experience, and simplifies contract development.

RGB++ Protocol

Source: Nervos Network

CKB utilizes the RGB++ protocol to extend Bitcoin. This protocol is an asset issuance standard that can expand the functionality of Bitcoin on CKB. The RGB++ protocol enables complex smart contracts and asset management operations, which are typically not achievable on the Bitcoin network. The original RGB protocol was an L2 solution designed to enable smart contracts and asset issuance on Bitcoin without altering the Bitcoin mainnet. It achieved this by binding assets to specific Bitcoin UTXOs, allowing these assets to move along with the UTXOs themselves. The RGB protocol heavily relied on client-side validation, processing and validating transactions off-chain, thereby reducing the load on the Bitcoin network. However, this approach also had limitations, such as potential issues with data availability—since the data was not stored on-chain, it might not be accessible at all times when needed. Additionally, the reliance on client-side validation added complexity and could impact user experience.

Nervos Network addresses these limitations through the RGB++ protocol, which resolves these limitations by using CKB as the data availability and execution layer for Bitcoin, expanding and enhancing the principles behind the original RGB protocol. RGB++ seamlessly integrates Bitcoin UTXOs with CKB's Turing-complete smart contracts through homogeneous binding technology. This is achieved by leveraging CKB's layered architecture and Cell model, allowing Bitcoin assets to interact with dApps on CKB. With RGB++, CKB can execute more complex smart contracts for Bitcoin, which was not possible with the original RGB protocol. RGB++ also introduces on-chain validation of critical transaction elements, enhancing security and data availability. Furthermore, the RGB++ protocol can implement transaction folding, non-custodial contracts for shared states, and non-interactive transfers, enabling cross-chain transfers of Bitcoin without the need for cross-chain bridges.

Payment Channels

As the underlying public chain, CKB can be extended through payment channels, such as the payment channel framework developed by Polycrypt called Perun. These payment channels can support various applications, from micropayments to payment gateways, by processing transactions off-chain and settling on-chain, thereby improving CKB's performance. Perun utilizes CKB's Cell model, where Cells carry capacity, Lock Script, Type Script, and data to manage the channel's state. One implementation of the channel (PerunLockScript) can manage access to real-time Cells in the channel, while another implementation (PerunTypeScript) can handle the validation logic for state transitions. These transitions, from funding the channel to closure, are automatically managed. As of the time of writing, Perun is still in testing and has not been deployed on the CKB mainnet. Core developers of Nervos are also working to connect CKB to the Bitcoin Lightning Network, enabling users to exchange BTC and CKB without relying on third parties.

Token Economics

Nervos Network's native token, CKByte (CKB), plays a crucial role in maintaining network security and incentivizing effective storage. The primary roles of CKB in the network include:

• Granting token holders the right to store data.
• Serving as transaction fees on-chain.
• Being distributed as block rewards to miners to ensure network security.

Additionally, CKB tokens have three sources: (1) Genesis block; (2) base issuance; (3) secondary issuance.

Genesis Block

At the launch of the mainnet in November 2019, the Genesis block minted 33.6 billion CKB tokens, of which 8.4 billion CKB tokens (25% of the initial issuance) were immediately burned. Among the burned 8.4 billion CKB tokens, 5.04 billion tokens were allocated for on-chain storage ("locked up on-chain"), and the remaining 3.36 billion tokens were in circulation ("liquidity"). The corresponding allocation of these burned tokens was intended to ensure that miners would receive at least 15% of the secondary issuance initially, and the treasury fund would receive at least 10%. It is worth noting that all CKB tokens allocated to the treasury fund have been burned, and this setting can only be changed through a network hard fork according to the current setup.

The distribution of CKB in the Genesis block is as follows:

• Public Sale (~21.50%): The majority of the Genesis block was provided to public sale investors in 2018 and was fully released at the launch of the mainnet in November 2019.

• Ecosystem Fund (17.00%): The ecosystem fund will support third-party developers within the Nervos ecosystem. As of the Genesis block plan, 3% of this allocation has been disbursed, and the remaining portion will be distributed over two years, ending in December 2022.

• Team (15%): Reserved for the project team, with a lock-up period ending in May 2022 after four years.

• Private Sale (14%): Provided to private sale investors in July 2018. 66.60% of this allocation was released at the launch of the mainnet, and the remaining portion will be released after the end of a two-year lock-up period in 2020.

• Partners (5%): This allocation is reserved to help establish strategic partners of Nervos Network, with a lock-up period of four years.

• Testnet Rewards (0.5%): These rewards were fully allocated to participants in the testnet and bug bounty programs at the launch of the mainnet.

• Burn (25%): This portion was directly burned in the Genesis block to ensure continuous secondary issuance for miners and the treasury fund.

Base Issuance

The goal of CKB's base issuance (primary issuance) is to enhance network security in the early stages of development. The fixed base issuance of CKB for each Epoch is entirely rewarded to miners for processing transactions on the network. The upper limit for base issuance is 33.6 billion CKB tokens, following a similar inflation schedule to Bitcoin, halving every four years until the supply limit is reached. In November 2023, CKB experienced its first halving event, reducing the annual base issuance from 4.2 billion CKB to 2.1 billion CKB.

Secondary Issuance

CKB manages state bloat through two methods. Firstly, to store data on-chain, users must lock CKB tokens. CKB does not directly charge users locking CKB tokens for state rent, but indirectly collects fees through an inflation mechanism called secondary issuance. Each year, 1.344 billion CKB tokens are minted through secondary issuance and distributed to miners, Nervos DAO depositors, and the treasury fund. Therefore, secondary issuance introduces inflation for users storing data, as locked CKB tokens automatically face value dilution, serving as an indirect way to pay state rent. As of the time of writing, over 600 million CKB tokens have been allocated as state rent rewards to miners, approximately 1.15 billion CKB tokens have been rewarded to Nervos DAO depositors, and over 4.27 billion CKB tokens allocated to the treasury fund have been directly burned.

Through Nervos DAO, CKB token holders can natively avoid dilution from secondary issuance. By locking their CKB tokens in the Nervos DAO smart contract, users can earn token rewards from secondary issuance, ensuring their holdings are not affected by inflation. The yield for Nervos DAO depositors is the same as the inflation rate of secondary issuance, and as the total supply increases, the APR will continue to decrease. Users can deposit into Nervos DAO at any time, with a minimum amount of 102 CKB, but withdrawals can only be made after a 30-day deposit period.

As of now, 9.2 billion CKB tokens have been deposited into Nervos DAO. The circulation ratio of CKB is 20.84%, and it has been decreasing over the past two years. This decreasing trend may be due to the increasing number of unspent Cells on CKB.

Network Activity

Over the past year, the CKB network has remained active. As of now, the daily average transaction volume of CKB is 43,600 transactions. This represents a 110% increase compared to the daily average of 20,800 transactions in the fourth quarter of 2023. There was a significant increase in on-chain activity in April, with 387,600 new addresses created, representing a 181% increase compared to March.

Since April, Cell activity on CKB has been steadily increasing, partly due to the launch of the RGB++ protocol. Cell activity is divided into unspent Cells and spent Cells. Unspent Cells can be used for future transactions, smart contract execution, and data storage, reflecting increased network activity and adoption. While spent Cells are no longer used as transaction inputs, they still contain valuable data that can be accessed and referenced, contributing to the historical record and data traceability of the blockchain. As of May 15, 2024, there are a total of 1.7 million unspent Cells, representing a 13% increase from the end of the first quarter. As for spent Cells, there are a total of 57.6 million spent Cells on CKB as of the time of writing.

Since the launch of the RGB++ protocol on April 3, 2024, there have been over 13,200 transactions and 4,400 unique addresses using the protocol. Network activity in May and June has been declining, but more ecosystem projects utilizing RGB++ are expected to help reverse this trend.

Security and Decentralization

As a PoW network, miners verify transactions and add new blocks to the blockchain by solving cryptographic puzzles, ensuring the security of CKB. With each mined block, miners receive the full "base issuance" reward for that block and a portion of the "secondary issuance" reward. Miners can also earn proposal rewards or submission rewards from processing network transactions. To manage changes in network activity without compromising performance, CKB's customized NC-MAX consensus protocol adjusts mining difficulty approximately every four hours based on the network's orphan rate. This optimization allows the network to maintain block production time while reducing the likelihood of block reorganization, which could disrupt network stability.

Hashrate is a measure of the basic computational power of miners on a PoW blockchain. Therefore, hashrate represents the security of the CKB network. In 2024, the overall hashrate of CKB has continuously reached new highs. On April 27, the network hashrate of CKB reached 397.5 PH/s, the highest hashrate value in the history of the CKB network. The increase in hashrate is partly due to Binance launching a CKB mining pool on April 18, 2024. Similar to hashrate, the average mining difficulty in 2024 has also reached a historical high (3.96E on April 21).

Ecosystem

Nervos Network continues to promote ecosystem development through funding, infrastructure, and tools support. At the launch of the mainnet in November 2019, approximately 5.7 billion CKB (17% of the CKB allocation in the Genesis block - valued at $62.4 million at the time of writing) was reserved for the Ecosystem Fund. Over the years, the Ecosystem Fund has provided seed funding for various ecosystem development initiatives to drive the network's growth plans. One of these initiatives is the CKB Eco Fund (formerly known as InNervation), which focuses on incubating and investing in early and seed-stage projects that connect CKB and Bitcoin using RGB++. The CKB Eco Fund supports critical infrastructure and cross-domain decentralized applications in the ecosystem, including DeFi, gaming, tools, and NFT markets. In January 2024, the CKB Eco Fund launched the BTCKB initiative, aiming to strengthen the integration between the Bitcoin and CKB blockchains through the PoW consensus mechanism and UTXO model. The BTCKB initiative introduces new smart contract capabilities, bringing BTC, Taproot Assets, and RGB++ assets to the CKB blockchain, enhancing the functionality of the Bitcoin blockchain. As part of this initiative, the CKB Eco Fund also incubated CELL Studio, a blockchain software company led by Nervos co-founder Cipher Wang and the lead advocate for the BTCKB initiative. CELL Studio develops infrastructure and applications to enhance and expand the Nervos ecosystem, similar to how ConsenSys develops foundational tools for Ethereum such as Infura and MetaMask. Notable ecosystem tools developed by CELL Studio include:

• CoTA: An aggregation protocol for fungible and non-fungible tokens on CKB.
• ForceBridge: A cross-chain interoperability protocol connecting CKB with other blockchain networks, currently supporting Ethereum and BNB Smart Chain.
• Spore: A protocol for on-chain Digital Objects (DOBs) supported by CKB.

Since the launch of the RGB++ mainnet in April 2024, over 15 existing ecosystem projects have utilized the protocol for asset issuance. Notable ecosystem projects include:

• UTXO Stack: A Bitcoin L2 "OP Stack" based on the RGB++ protocol.
• JoyID: A non-custodial wallet utilizing biometric technology for user authentication, supporting multiple networks including Ethereum, Bitcoin, and RGB++ assets.
• HueHub: A decentralized exchange platform and launchpad supporting RGB++ assets on Bitcoin.
• Stable++: A decentralized stablecoin protocol supporting CKB and BTC.
• World3: An autonomous world game based on the RGB++ protocol and DOBs.
• Nervape: A multi-chain composable digital object based on Bitcoin, with "base assets" issued on Bitcoin and "sub-assets" issued on CKB.
• Haste: An RGB++ asset management solution.
• d.id: A decentralized identity protocol for Bitcoin.

The RGB++ development roadmap released by CELL Studio emphasizes important plans to be completed in 2024, including:

• Releasing a cross-UTXO chain issuance protocol for RGB++ assets.
• Cross-chain bridging of Atomicals, Orderals, and other UTXO-based assets to CKB through the RGB++ protocol.
• Proposing and implementing a multi-network extension solution for RGB++.
• Connecting RGB++ with the CKB Lightning Network.

As part of the BTCKB initiative, the CKB Eco Fund also plans to launch a cross-chain bridge and UTXO-based DEX connecting BTC and CKB. Additionally, a payment channel network for CKB has been developed using the RGB++ protocol, and the related concept validation has been completed. This payment channel network will connect to the Lightning Network, making CKB more scalable for various blockchain applications.

Competitive Analysis

As a Bitcoin L2 solution, Nervos Network's approach to extending Bitcoin's capabilities primarily revolves around enhancing Bitcoin's functionality through the RGB++ protocol. Competitors like Stacks offer a customized execution environment and programming language, while Rootstock pegs transactions between the two chains. In contrast, Nervos aims to enhance the native Bitcoin experience without adding complexity or compromising decentralization. With the RGB++ protocol, CKB can provide an intelligent contract execution environment closely integrated with Bitcoin's original UTXO model. This design may give Nervos Network an advantage, attracting users skeptical of solutions that deviate from the core principles of Bitcoin - decentralization and security.

Compared to scaling solutions like the Lightning Network, CKB's smart contracts offer a broader range of functionalities, serving developers in building more complex applications on Bitcoin. While the Lightning Network facilitates fast, low-cost transactions, it does not support complex decentralized applications. Meanwhile, platforms like Liquid Network, Merlin Chain, and Bouncebit require trust in semi-centralized alliances to manage cross-chain bridges between sidechains and the Bitcoin mainnet. CKB's use of off-chain computation and on-chain settlement avoids this level of centralization.

However, Nervos' approach to extending Bitcoin using the RGB++ protocol is not without limitations. The reliance on external networks (especially the CKB blockchain) for data availability and asset issuance adds complexity and potential latency to Bitcoin. Additionally, the lack of comprehensive development tools and multi-party interaction solutions limits the protocol's ability to effectively support decentralized applications. Lastly, the transparency of transactions on the CKB blockchain compromises the privacy advantages initially provided by the RGB protocol.

Conclusion

As the demand for scalability and functionality beyond Bitcoin's original capabilities continues to grow, the Bitcoin L2 market is evolving. Various L2 solutions, such as the Lightning Network, sidechains, and Rollups, aim to increase Bitcoin's throughput without compromising security by moving transactions off the main chain. However, these solutions often introduce new complexities and security challenges. What sets Nervos apart is the extension of the RGB protocol through RGB++. RGB++ provides native extensions for Bitcoin, integrating deeper smart contract functionalities directly related to Bitcoin's UTXO model. These functionalities, in turn, promote a more seamless and secure extension of Bitcoin's utility. Additionally, work is underway to connect the payment channel network to the Lightning Network, making CKB more scalable for many blockchain applications.

Ultimately, Nervos aims to strengthen its position in the Bitcoin L2 space by simplifying user and developer experiences. Furthermore, Nervos can prioritize providing RGB++ support for a wider range of asset types and complex applications, thereby enhancing its practicality within the Bitcoin ecosystem. By doing so, Nervos can play a crucial role in the broader adoption and functionality of Bitcoin as a decentralized application and smart contract platform.

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