Bitcoin Ecosystem Comprehensive Depth Research

Introduction: The Historical Development of the BTC Ecosystem

The popularity of Bitcoin inscriptions has sparked a frenzy among cryptocurrency users, bringing renewed attention to the development and possibilities of the Bitcoin ecosystem. As the earliest blockchain, Bitcoin was created in 2008 by Satoshi Nakamoto, marking the birth of decentralized digital currency and challenging the traditional financial system.

Bitcoin was born as a response to the shortcomings of centralized financial systems, introducing the concept of a peer-to-peer electronic cash system that eliminates the need for intermediaries and achieves trustlessness and disintermediation. The underlying technology of Bitcoin, blockchain, has transformed the way transaction records, verification, and security are handled. The Bitcoin white paper released in 2008 laid the foundation for emphasizing a decentralized, transparent, and tamper-proof financial system.

Bitcoin experienced gradual and stable growth after its inception. Early adopters were mainly technology enthusiasts and cryptography supporters who began mining and trading Bitcoin. The first recorded real transaction occurred in 2010 when programmer Laszlo bought 2 pizzas in Florida for 10,000 Bitcoins, marking a historic moment in the adoption of cryptocurrency.

As Bitcoin gains attention, related ecological infrastructure begins to take shape. Exchanges, wallets, and mining pools are emerging in large numbers to meet the demands of this new digital asset. With the development of blockchain technology and the market, the ecosystem expands to more stakeholders, including developers, startup teams, as well as financial institutions and regulatory bodies, promoting the diversification of the Bitcoin ecosystem.

The market, which had been silent for a long time in 2023, has experienced a summer of inscriptions due to the popularity of the Ordinals protocol and BRC-20 Tokens, bringing renewed attention to Bitcoin, the oldest public chain. What will the future development of the Bitcoin ecosystem look like? Will the Bitcoin ecosystem become the engine for the next bull market? This research report will delve into the historical development of the Bitcoin ecosystem and explore the three core directions within the ecosystem: asset issuance protocols, scalability solutions, and infrastructure, analyzing the current state, advantages, and challenges of their development to discuss the future of the Bitcoin ecosystem.

2. Why Bitcoin Ecosystem is Needed

1. Characteristics and Development History of Bitcoin

Bitcoin has three core features:

1. Decentralized Distributed Ledger: The core of the Bitcoin network is blockchain technology. This is a decentralized distributed ledger that records all transactions on the Bitcoin network. The blockchain consists of blocks, each of which contains the hash value of the previous block, forming a chain structure that ensures the transparency and immutability of transactions.

2. Accounting through Proof of Work (PoW): The Bitcoin network uses a Proof of Work mechanism to verify transactions and maintain the ledger. This mechanism requires network nodes to validate transactions by solving mathematical problems and recording them on the blockchain. This ensures the security and decentralization of the network.

3. Mining and Bitcoin Issuance: The issuance of Bitcoin is accomplished through mining. Miners solve mathematical problems to validate transactions and create new blocks, and as a reward, miners receive a certain amount of Bitcoin.

Bitcoin uses the UTXO (Unspent Transaction Output) model. UTXO is a way to track Bitcoin ownership and transaction history, where each unspent output (UTXO) represents a transaction output in the Bitcoin network that has not been used by previous transactions. These unspent outputs can be used to create new transactions. Its characteristics can be summarized as:

1. Each transaction generates a new UTXO: When a Bitcoin transaction occurs, it consumes previous UTXOs and generates new UTXOs, which will serve as inputs for future transactions.

2. Transaction validation relies on UTXO: When validating a transaction, the Bitcoin network checks whether the UTXO referenced by the transaction inputs exists and has not been spent, to ensure the validity of the transaction.

3. UTXO as Transaction Inputs and Outputs: Each UTXO has a value and an owner's address. When making a new transaction, some UTXOs will be used as transaction inputs, while others will be created as outputs of the transaction, which may be used by the next transaction.

However, due to the limitations of block size and the non-Turing complete programming language, Bitcoin largely serves the role of "digital gold" and has not been able to support more projects.

After the birth of Bitcoin, colored coins emerged in 2012, allowing certain Bitcoins to represent other assets by adding metadata to the Bitcoin blockchain; in 2017, a hard fork occurred due to the block size debate, including BCH, BSV, and others; after the fork, BTC also began to explore solutions for scalability improvement, launching the SegWit upgrade in 2017, which introduced extended blocks and block weight, expanding block capacity; the Taproot upgrade that began in 2021 enhanced the privacy and efficiency of transactions. These key upgrades also laid the foundation for the development of various scalability protocols and asset issuance protocols that followed, leading to the later popularity of the Ordinals protocol and BRC-20 Token.

It can be seen that although Bitcoin was originally positioned as a peer-to-peer electronic cash system, there have always been many developers who do not want Bitcoin to merely remain as "digital gold" in value. They are committed to enhancing Bitcoin's scalability and doing more based on the Bitcoin blockchain, such as having their own ecological applications.

2. Comparison between Bitcoin ecosystem and Ethereum smart contracts

During the development of Bitcoin, in 2013, Vitalik Buterin proposed another blockchain called Ethereum, which was subsequently co-founded by Vitalik Buterin, Gavin Wood, and Joseph Lubin. The core concept of Ethereum is to provide a programmable blockchain that allows developers to build various applications on it, not just limited to monetary transactions. This feature of programmability makes Ethereum a smart contract platform, allowing people to create and run blockchain-based applications that can execute automated contracts without the need to trust a third party.

One of the most significant features of Ethereum is its smart contracts, which allow developers to create various applications on the platform. With this characteristic, Ethereum has gradually become the leader in the entire Crypto space, leading to the emergence of various Layer 2 solutions, applications, and diverse asset types such as ERC20 and ERC721, attracting many developers to build and enrich this city-state of Ethereum.

Since Ethereum can already implement smart contracts and develop various Dapps, why do people still need to return to BTC to expand and develop applications? The core reasons can be summarized in the following three aspects:

1. Market Consensus: Bitcoin is the earliest blockchain and cryptocurrency, holding the highest recognition and trust among the public and investors. Therefore, it has a unique advantage in acceptance and recognition, with a current market value of 800 billion, accounting for about half of the total market value of the cryptocurrency market.

2. The decentralization level of Bitcoin is high: among mainstream blockchains, Bitcoin has the highest level of decentralization, with its founder Satoshi Nakamoto having disappeared, and the entire chain is driven by the community; while Ethereum still has Vitalik and the Ethereum Foundation controlling its development.

3. The Demand for Fair Launch from Retail Investors: The demand for Web3 is inseparable from the way new assets are issued. In traditional project Token issuance, whether it is FT or NFT, the issuing party is basically the project party, and the returns for retail investors heavily depend on the market-making by the project party and the underlying VCs; whereas in the Bitcoin ecosystem, innovative Fair Launch venues like inscriptions have emerged, giving retail investors more voice and thus attracting more money and wealth into the BTC ecosystem. The renewed attention on the Bitcoin ecosystem this time largely owes to the characteristics of the inscription Fair Launch.

This is also why, although BTC is weaker than Ethereum in terms of TPS and block time, and was initially intended for use as a background for cryptocurrency transactions, there are still a large number of developers who hope to introduce smart contracts on it for application development.

In summary, just as the rise of BTC stems from a consensus on value where people generally recognize Bitcoin as a valuable digital asset and medium of exchange, the innovation in the Crypto world is largely related to asset attributes. The current popularity of the BTC ecosystem is mainly driven by inscription asset types such as the Ordinals protocol and BRC-20. This popularity also feeds back into the entire Bitcoin ecosystem, causing more people to shift their focus back to the Bitcoin ecosystem.

Unlike previous bull markets, retail investors are having an increasing influence in this round of the market. Traditionally, VCs and project parties have dominated the crypto market, investing in and driving the development of many blockchain projects. However, as retail investors' interest in crypto assets continues to grow, they seek to play a larger role in the market and participate in the development and decision-making of projects. To some extent, retail investors have also driven the development and renewed prosperity of the Bitcoin ecosystem in this round.

Therefore, although the Ethereum ecosystem is more flexible in terms of smart contracts and decentralized applications, the Bitcoin ecosystem, as digital gold and a stable store of value, along with its leading position and market consensus, still holds an unparalleled important status in the entire cryptocurrency field. As a result, people continue to pay attention to and strive to develop the Bitcoin ecosystem to further explore its potential and possibilities.

3. Analysis of the Current Development Status of Bitcoin Ecological Projects

In the process of developing the Bitcoin ecosystem, it can be observed that there are currently two main dilemmas regarding Bitcoin:

• The scalability of the Bitcoin network is relatively low, and better expansion solutions are needed to build applications on it;

• The applications of the Bitcoin ecosystem are relatively few, and the development of the Bitcoin ecosystem requires some blockbuster applications/projects to attract more developers and foster more innovation.

To address these two dilemmas, the Bitcoin ecosystem is primarily built around three aspects:

1. Related agreements around asset issuance

2. Scaling solutions: on-chain scaling and Layer 2

3. Infrastructure projects such as wallets, cross-chain bridges, etc.

As the development of the entire Bitcoin ecosystem is still in the early stages, applications such as DeFi are still in their infancy. Therefore, this article will mainly focus on analyzing the development of the Bitcoin ecosystem from four aspects: asset issuance, on-chain expansion, Layer 2, and infrastructure.

1. Asset Issuance Agreement

The Bitcoin ecosystem's boom that started in 2023 is inseparable from the promotion of the Ordinals protocol and BRC-20, allowing Bitcoin, which was originally only able to serve as a store of value and medium of exchange, to also become a venue for asset issuance, greatly expanding the use cases of Bitcoin.

In terms of asset issuance protocols, various different types of protocols such as Atomicals, Runes, PIPE, etc. have emerged after Ordinals to assist users and projects in issuing assets on BTC.

1. Ordinals & BRC-20

First, let's take a look at the Ordinals protocol. Simply put, Ordinals is a protocol that allows people to mint NFTs similar to those on Ethereum on Bitcoin. The Bitcoin Punks and Ordinal punks, which initially drew attention, are both minted based on this protocol; subsequently, the now-popular BRC-20 standard also emerged from the Ordinals protocol, marking the beginning of the later inscriptions summer.

The birth of the Ordinals protocol can be traced back to early 2023, introduced by Casey Rodarmor. He has been working in technology since 2010 and has worked at Google, Chaincode Labs, and Bitcoin Core, and is currently a co-host of the SF Bitcoin BitDevs community.

Casey became interested in NFTs in 2017, inspired to develop Ethereum smart contracts using Solidity, but he abandoned building NFTs on Ethereum because he didn't like it, considering it a "Gutenberg machine" (achieving simple things in an overly complicated way). In early 2022, he rekindled the idea of implementing NFTs on Bitcoin. During his research on Ordinals, he mentioned that his inspiration came from the founder of Bitcoin.