ABCDE Investment Partner Lao Bai's comment: Imagination and flaws in BTC ecosystem expansion, fundamental limitations of NFT and BRC20.

Venture capital firm ABCDE's research partner Lao Bai recently commented on the Bitcoin ecosystem, such as BRC-20, Ordinal analysis and comments. Starting from the code applications of Bitcoin OP_Return, the discussion extends to the current development and limitations of Bitcoin network in applications such as NFT and token issuance. He believes that despite the efforts to expand applications in the Bitcoin ecosystem, there are still fundamental limitations compared to Ethereum from a technical perspective.

Read more trend analysis by Lao Bai

BRC20, Ordinal Emergence: Lao Bai Talks About History

To understand concepts like BRC20 and Ordinal, one needs to have a certain understanding of their technical history. Lao Bai briefly introduces it in the simplest way:

In the early days, Satoshi Nakamoto created Bitcoin with the aim of establishing a peer-to-peer cash system. Later, he mentioned on forums that as Bitcoin grew, it could take on more roles such as hosting transactions, escrow contracts, and third-party arbitration.

However, it was later discovered that Bitcoin's performance was poor and its price fluctuated greatly, making it unable to achieve peer-to-peer cash transactions, leading it to gradually move towards the "digital gold" route it is on today. This also sparked the subsequent scaling debate, resulting in the fork events that created Bitcoin Cash (BCH) and Bitcoin Satoshi Vision (BSV) from Bitcoin, causing controversy over Satoshi Nakamoto's original intentions and vision.

Opening the Technological Imagination: OP_Return

Lao Bai mentioned that Bitcoin has a script operation code called OP_Return, which can accommodate various information up to 80 bytes. Therefore, in 2012, the concept of Colored Coins was proposed, using OP_Return to mark some content, transforming Bitcoin from homogeneity to heterogeneity. However, due to Bitcoin's performance issues, this concept was not achievable.

Subsequently, in 2013, MasterCoin emerged, later evolving into OmniLayer, which issued USDT based on Bitcoin. In 2014, there was also CounterParty, which also utilized OP_Return to implement certain functions.

As expected, these concepts were eventually abandoned, for example: Bitcoin is no longer used as the basis for USDT. In 2014, as one of the co-authors of Colored Coins, Vitalik Buterin created Ethereum (ETH) out of frustration because his Bitcoin upgrade proposal to MasterCoin was ignored.

Subsequently, numerous controversies arose due to scaling issues, with the most famous being Bitcoin Cash (BCH) and Bitcoin Satoshi Vision (BSV), both following the path of large blocks. BCH planned to gradually increase block sizes from 1MB to 8MB, then to 32MB, and so on, while BSV took a more extreme approach by directly increasing block sizes to several hundred MB or even 1GB.

In comparison, Bitcoin (BTC) has been relatively conservative in this regard, adopting the SegWit segregated witness technology to separate signature verification and transactions. The original 1MB data is now divided into 1MB transaction data and 3MB witness data, achieving "minimal scaling."

Lao Bai noted that it is worth mentioning that Segregated Witness played an important role in subsequent concepts like Ordinal and BRC20.

Bitcoin Ecosystem Issues and Current Status

Lao Bai mentioned that besides direct block scaling, BTC's own technology stack has many ways, but it is far less popular than Ethereum. After all, the comparison between supporting smart contracts and not supporting them in terms of technical complexity and feasibility is incomparable.

Lao Bai also raised an issue often discussed regarding Bitcoin, that is, after hundreds of years, there will be no more block rewards, and even after a decade, they will be scarce. Without block rewards providing miners with basic income, what will happen to BTC's security? Will it eventually have to switch to Proof of Stake (POS) and issue tokens? Therefore, the question of how to stimulate enough on-chain transactions to bring transaction fee revenue to miners becomes crucial.

Bitcoin Ecosystem Development: Segwit Inspires Ordinal Development

Lao Bai summarized several current developments related to Bitcoin's network:

1. Sidechains - Liquid Network, a consortium chain created by Bitcoin technology company Blockstream, has around 10 times the performance of BTC, mainly targeting institutions for large Bitcoin transfers and transaction settlements.
2. State channels - Lightning Network, considered one of the most prominent technologies for BTC, designed for fast payments, including micro-payments. It has support from companies like Walmart and McDonald's. Lao Bai mentioned that although it has been in the spotlight for a few years, the data inside shows around 5,000 BTC locked and about 70,000 channels. Note: Lightning Network statistics
3. Indirect sidechains - RSK and Stacks, where RSK is EVM compatible and uses a mechanism for block generation jointly with Bitcoin mining, while Stacks is not EVM compatible, developed its Clarity language, and uses a Proof of Transfer (POX) mechanism for block generation. Both do not inherit BTC's security or hash power, just resembling it superficially, unlike Ethereum L2.
4. Client validation - RGB and Taro, a relatively new paradigm that links off-chain asset issuance with on-chain UTXO but validates transactions and stores data on the client-side. When verifying, one only needs to verify the UTXO related to the off-chain asset, without the need for network-wide consensus checks as in traditional blockchains. It's innovative but slow in development, overshadowed by Ordinal.
5. Ordinal including NFT, BRC20, etc. - Lao Bai mentioned that this involves stuffing things into the 3M witness data space from Segwit. Previously, OP_Return could only handle 80 bytes, but with Segwit, we can now fit 3M. Originally, Segwit imposed restrictions on the amount of data a single transaction could place in the witness data, but the Taproot upgrade at the end of 2021 relaxed these requirements, completely removing the limits. This led to BTC NFTs and BRC20 tokens using the 3M space. Note: Segwit explanation

Ordinal Controversy and Future

Lao Bai mentioned that the Ordinal controversy has sparked significant debates, not only between Ethereum and Bitcoin supporters but also within the Bitcoin community.

On one hand, Ordinal has indeed stimulated on-chain transactions, briefly increasing the proportion of transaction fees from 2% to 74%, making Bitcoin more expensive and congested, which miners are not too happy about. On the other hand, many Bitcoin proponents feel that the Bitcoin network is filled with small images or useless "text garbage," which is not how BTC should be. Additional: Why has BRC-20/Ordinals sparked controversy?

So the crux of the debate is simple - how should this 3M data space be utilized? What is the most meaningful thing to insert into it?

Data Space Utilization and Flaws

Lao Bai mentioned that there are several ways to properly use the data space currently and in the future, but there are also logical flaws in the technology. If the purpose is for speculation, it's a different story.

1. NFT - BTC NFTs emphasize being purely on-chain, while on Ethereum, many NFTs are on-chain but store a link pointing to Arweave or IPFS. But when you think about it, is that small image really so crucial on the ETH or BTC chain? At least in the past two years, during the NFT craze, no one really cared about this. Is it really more valuable to place a small image in the 3M segregated witness space than on AR or IPFS? It's a bit far-fetched. Additional: Where is the essence of NFT?
2. BRC20/ORC20/SRC20/BRCXXX - BRC20 had many limitations and inconveniences, leading to the creation of ORC20, which is more functional and flexible. Later, BRCXXX emerged, but the more feature-rich XRC tokens resemble ERC tokens more, so what's the point of all this fuss? Regardless of how much BTC is tweaked, it will never be more functional than ETH and other smart contract-based public chains. Additional: OKX proposes "BRC-30" proposal
3. DA data availability - Lao Bai mentioned: "Celestia's Rollkit is working on this. DA technology can be placed in the 3M space, but in terms of speed and capacity, DA doesn't have an advantage. ETH is about to upgrade to KanKun, which will have a block every 12 seconds, hanging 1M data. After two years, Danksharding will be fully operational, able to hang 16M, 5M per minute, and 50M every 10 minutes. BTC has a block every 10 minutes with 3M, competing with BRC spaces, making it small and expensive."

In short, no matter what you stuff into it, Ethereum seems to do it better.

Lao Bai stated: "As mentioned earlier, the lack of smart contracts is a latitude difference; no matter how you tweak the 3M space, the ceiling is ETH. If you insist that BTC is more OG or secure than ETH, it's not impossible. The question is, do you really need to elevate security from ETH to BTC? Moreover, there are different opinions on who will be more secure after ETH transitions to POS compared to BTC."

New Applications in the Bitcoin Ecosystem

Lao Bai summarized several new applications in the Bitcoin ecosystem:

1. Timestamp servers - Cosmos ecosystem's Babylon is working on using the Bitcoin network as a timestamp server to help PoS chains prevent long-range attacks, leveraging Bitcoin's security to serve some PoS chains. However, this is just a reinforcement, not a complete replacement for the PoS chains' own verification and consensus mechanisms.

2. DA - As mentioned above

3. EVM compatibility/equivalence - RSK is also EVM compatible, but hasn't made much progress, and its joint mining mechanism doesn't seem "advanced." Some new teams in the primary market are exploring this direction, using methods like ETH to pledge BTC as nodes to create EVM equivalence, forking OP, and implementing a form of BVM Bitcoin virtual machine to realize "BTC-based Optimistic Rollup."

4. Zk+BTC - ZeroSync is working on this, leaning towards public goods style. Using ZK-STARK to generate ZK proofs for the Bitcoin network, it verifies the latest blockchain state in real-time without needing hours or days to sync all BTC transaction histories. Currently, it can prove block headers and transaction data, with signature information proof still in development.

Lao Bai commented: "In summary, the BTC ecosystem is a particularly perplexing one. On one hand, whenever something new comes out, it can indeed be hyped because it's the blockchain pioneer. On the other hand, many things cannot withstand technical scrutiny and the test of time. It's a bit like the earliest Ford cars; others have moved on to turbocharging, hybrid, or pure electric technologies, while you're just expanding cylinders and increasing displacement, unable to catch up."

He further stated that the security and computing power of the Bitcoin network decades later are real concerns and must quickly find a direction, effectively utilize the 3M space from Segwit, and stimulate on-chain transactions. Ideally, some native Bitcoin network applications should be unique and best suited for Bitcoin, but logically, it seems that regardless of the direction, ETH can do it better, leaving people conflicted.

About Venture Capital Institution ABCDE

ABCDE is a VC focusing on leading top Crypto Builders, co-founded by Du Jun, co-founder of Huobi, and BMAN, founder of internet and crypto companies. The team includes entrepreneurs who have been working in the Crypto industry for 10 years, CEOs of listed companies, and top researchers. ABCDE's co-founders have built companies worth billions from scratch in the Crypto industry. They have constructed an end-to-end ecosystem including the licensed Hong Kong listed company New Fire Technology 01611.HK, exchange Huobi, SAAS company ChainUP, media CoinTime.com, developer platform BeWater.xyz, etc., welcoming collaboration to build the next generation of the crypto world together.