Technical Developments in Bitcoin - Q4 2023
Executive Summary
This note highlights important technical developments that happened in the Bitcoin ecosystem in October and November 2023. We cover the following seven topics:
Unveiling of the BitVM whitepaper
Taproot assets going live on mainnet
OP_CAT proposal
OP_TXHASH proposal
Lightning Timeout Trees proposal
MuSig2-PSBT proposals
BIP-324 proposal
Introduction
In November 2023, Bitcoin on-chain transaction count increased 62% month-over-month (MoM) largely due to a resurgence in Ordinals and BRC-20s. The total USD value of Bitcoin transferred surpassed $147bn in November, reflecting a substantial 21% increase compared to the previous month. This increase is mostly attributable to the price appreciation of BTC in dollar terms, but BTC trading volume in spot markets also increased 18% while futures trading volume decreased by 1% MoM respectively.
Since the rise of Ordinals in January 2023, there has been a notable resurgence among the Bitcoin development community in exploring new fungible token protocols, scaling solutions, and smart contract implementations. Overall, the post-Ordinals Bitcoin development landscape has expanded and includes more effort to enhance both onchain and offchain application use cases than any time in years. This note will highlight seven major Bitcoin developments and proposals in Q4 2023. These developments highlight a renewed commitment among Bitcoin ecosystem developers to expand the range of applications and supported use cases on Bitcoin.
Technical Developments
BitVM
What is it: BitVM enables expressive smart-contracts on Bitcoin. Given the nature of Bitcoin’s design, executing smart contracts directly on Bitcoin is slow and expensive. With BitVM, smart contracts are executed off-chain and participants only engage with the code on Bitcoin directly in the event of a dispute by utilizing Bitcoin's native script to enforce the contract rules. BitVM operates in a manner similar to the optimistic rollups used in the Ethereum ecosystem, incorporating elements such as fraud proofs and a challenge-response protocol.
The structure of BitVM contracts works by having two parties agree on a pre-signed sequence of transactions that lead to an event. Similar to optimistic rollups, these types of contracts assume that you do not cheat, but if you do, the honest party has the chance to challenge the cheater. Crucially, BitVM requires no upgrade to Bitcoin’s Layer 1 blockchain. BitVM only uses primitives that are already understood within Bitcoin like hashlocks, timelocks and tapscript.
Why it matters: Bitcoin has often faced criticism for its lack of innovation and capacity to directly compete with other more general-purpose Layer 1s such as Ethereum and Solana. Instead of trying to expand functionality on the base layer, Bitcoin has always prioritized scaling in layers. The Lightning Network is an example of a more performative payments-focused network built on top of Bitcoin. With BitVM, there is the possibility to execute more complex computation on layers built on top of Bitcoin and thereby continue to scale Bitcoin through layers, instead of upgrading the core protocol.
Taproot Assets Live on Mainnet
What is it: Lightning Labs, a blockchain development company building software for Bitcoin’s Lightning Network, released a new protocol to issue stablecoins and other assets on the Lightning Network. The Taproot Asset Protocol (formally TARO) enables developers to issue, send, and receive assets built on Bitcoin. For several years, Lightning Labs has proposed and worked on a way to issue assets on the Lightning Network, and this mainnet release is a major milestone.
Taproot Assets are created through inputting arbitrary data into a taproot script (Tapscript). Tapscript is the scripting language used to enable a variety of new transaction types as part of the Taproot upgrade. Taproot Assets store token data within a Taproot output using a taptree, which is a merkle tree data structure. All Taproot assets are issued on-chain through a standard taproot transaction at the base layer. Although Taproot Assets are issued and settled on Bitcoin's base layer, Lightning Labs is specifically designing Taproot Assets to be compatible with the Lightning Network. The Taproot asset’s functionality is enabled through a refined version of partially signed bitcoin transactions (PSBTs), which are also used to trade Ordinals and BRC-20s called virtual partially signed bitcoin transactions (vPSBTs). This mechanism is a way to trade Taproot Assets on Lightning in a trustless peer-to-peer way.
Why it matters: Taproot Assets will enable an efficient way to create fungible tokens on Bitcoin. In April 2023, Ordinals developers created a new fungible token standard called BRC-20s. This token standard uses inscription technology, which allows users to attach arbitrary data to individual sats (smallest unit of a bitcoin). The emergence of BRC-20s proves that there is a demand for fungible tokens on Bitcoin, although the BRC-20 standard is notoriously inefficient. With the official release of Taproot Assets on October 18, 2023, fungible tokens on Bitcoin have a chance to blossom on the Lightning Network. The benefit of having fungible tokens on the Lightning Network includes reducing network congestion on Bitcoin’s native chain. Overall, Taproot Assets is a promising solution to introduce fungible tokens on Bitcoin and onboard more users to the Lightning Network.
OP_CAT Proposal
What is it: Ethan Heilman, a Bitcoin researcher, submitted a Bitcoin Improvement Proposal (BIP) to the Bitcoin-Dev mailing list, suggesting the addition of the OP_CAT opcode to Bitcoin’s scripting language. This opcode would give developers the ability to construct and evaluate merkle trees and other hashed data structures in tapscript, the native scripting language used to enable new transaction types as part of the Taproot upgrade.
OP_CAT is not a new idea. Bitcoin developers previously removed the opcode from Bitcoin’s script because it enabled the construction of data intensive scripts that could burden the computational resources of Bitcoin nodes. However, because the Taproot upgrade introduced a size limit on Taproot scripts (520 bytes), OP_CAT will serve as a useful tool for developers and will not introduce excessive computational overhead for node operators.
Why it matters: Prior to the Taproot upgrade in November 2021, Bitcoin exclusively relied on Bitcoin Script for enabling programmability. However, the Taproot upgrade significantly expanded Bitcoin's capabilities for transaction programmability. Enabling OP_CAT will further enhance Bitcoin’s programmability by eliminating previously imposed restrictions and thereby creating new opportunities for diverse use cases.
OP_TXHASH Draft Proposal
What is it: Bitcoin core developer Steven Roose proposed a BIP focusing on the benefits of implementing two new opcodes to Bitcoin’s scripting language, OP_TXHASH and OP_CHECKTXHASHVERIFY. The OP_TXHASH opcode would directly compete with two major covenant proposals for Bitcoin today, BIP-118 and BIP-119. Covenants are pre-determined spending conditions imposed on bitcoin transactions. For example, a user can create a covenant to ensure that the transaction recipient can only spend BTC sent to their address after 200 blocks.
Why it matters: Enabling covenants will likely be the motivation for the next major upgrade on Bitcoin. TXHASH is one of the leading BIPs that developers hope to activate potentially within 1-2 years. TXHASH offers a more adaptable means of expressing covenants by permitting customization of transaction fields within a Bitcoin transaction. This flexibility enables users to adjust transaction fees, a crucial feature when dealing with uncertain and volatile fee rates that other covenant proposals like BIP-119 do not support. Additionally, when combined with other BIPs such as OP_CAT, OP_TXHASH has the potential to replicate the functions of BIP-118, which is another leading covenant proposal currently under evaluation by the Bitcoin community.
Lightning Timeout Trees
What is it: The Lightning Network, Bitcoin's primary Layer 2, has achieved significant adoption over the past few years. A key hurdle to further adoption lies in the requirement for users to initiate at least one on-chain bitcoin transaction to move their funds off-chain when using the Lightning Network. This restriction constrains the number of users who can migrate their assets off-chain, particularly during instances where onchain transaction fees are high.
A longstanding solution under exploration is a concept called "Channel Factories," which enables multiple users to join the Lightning Network within a single bitcoin transaction. The implementation of channel factories has the potential to dramatically lower the entry barrier to the Lightning Network by reducing costs to open a Lightning channel between several users.
Why it matters: Despite being theorized for many years, Bitcoin’s scripting limitations have made it difficult for anyone to come up with a compelling and secure solution to enable channel factories. However, John Law’s “Timeout Trees” proposal may have found a solution using covenants (i.e. spending conditions on the output of BTC transactions). This proposal introduces the concept of a coordinator (or Lightning Service Provider – LSP) that would oversee opening and closing channels for users. With the use of covenants, coordinators would be restricted from spending users’ BTC without proper authorization. While the proposal is not without its limitations, it is the first channel factory architecture that utilizes covenants, a powerful mechanism for adding spending conditions on BTC that is growing in popularity among Bitcoin developers for a variety of use cases including BTC custody (see BIP 345).
Updated Musig2 Proposals
What is it: MuSig2 is an upgraded version of MuSig1, a multi-signature scheme on Bitcoin that enables privacy and scalability. MuSig allows multiple parties to control one private key with their respective keys. The shared private key does not look like a multi signature transaction onchain and, therefore, leaves a minimal onchain footprint. MuSig1, an advancement built upon Schnorr signatures, represents a notable enhancement compared to the conventional multi-signature schemes in Bitcoin reliant on ECDSA.
MuSig2 (BIP-327), an improved iteration of MuSig1, provides superior security, efficiency, and privacy features by operating as a two-round multi-signature scheme, requiring only two communication rounds between signers to generate a valid signature instead of three rounds. In October, Bitcoin Core developer Andrew Chow proposed two new BIPs focusing on MuSig2 development. The proposed BIPs are MuSig2-PSBT and MuSig2-descriptors.
Why it matters: MuSig2-PSBT, a standard track BIP, will enable private multi-signature schemes for partially signed Bitcoin transactions (PSBTs). In addition to other users, this advancement will benefit Ordinals and BRC-20 users and marketplaces, which use PSBTs to facilitate the sale of an asset. Integrating MuSig2 to PSBTs will overall help conceal these types of transactions onchain by making the multi-signature transaction look like a single signature transaction. The second BIP, MuSig2-descriptiors, is an informational BIP that will help wallet providers implement MuSig2-PSBT by providing a method for describing transaction outputs that are controlled by a MuSig2 wallet. Notably, the BIP for MuSig2-PSBT is still under preliminary review and needs to be assigned a BIP number, therefore, this BIP will not be ready to ship in the near term (6-12 months).
BIP-324 – V2Transport
What is it: BIP-324 is a privacy-oriented improvement to Bitcoin’s P2P layer. This layer on Bitcoin facilitates the transmission of data between Bitcoin nodes. The Bitcoin P2P layer acts as a highway for data, though most of this data is cleartext information that is vulnerable to many types of attacks. Potential attackers may employ passive methods, such as monitoring node activity to gather information on IP addresses and transaction origins, as well as active techniques, including intercepting data transmitted by your node and engaging in tampering activities like censorship. These attacks are referred to as MITM (Man in the Middle) attacks. BIP-324, formerly recognized as BIP-151, advocates for encrypting data on Bitcoin’s P2P layer to enhance resistance against passive and active attacks against Bitcoin.
Why it matters: The latest version of Bitcoin core (v0.26) added support for Version 2 encrypted P2P transport as specified in BIP-324. The feature will be disabled by default but will allow anyone to turn it on and benefit from the added protection. This is an important step towards privacy at the P2P level of Bitcoin and marks the first time a BIP is activated on Bitcoin since 2021 (although BIP-324 does not require a soft-fork).
Key Headlines and Notable News Stories
(12/6) Sotheby’s announces its first Bitcoin Ordinals sale
(12/5) ORDI is the first BRC-20 token to top $1bn market Cap
(12/4) El Salvador’s bitcoin bet is in the green: Bukele
(11/30) MicroStrategy buys $593.3 million in bitcoin, plans to raise up to $750 million in new stock sale
(11/29) Jack Dorsey leads $6.2 million seed round for decentralized Bitcoin mining pool OCEAN
(11/27) Demand launches Stratum V2 Bitcoin mining pool
(11/27) Bitcoin halving Is 5 months away and hash rate Just hit an all-time high
(11/19) Ordinals project “Bitcoin Rocks” sells Bitcoin Rock #62 for 3.45 BTC ($128k)
(11/16) Bitcoin Ordinals startup Taproot Wizards raises $7.5 million in seed round
(11/7) Bitcoin Ordinals trading hits 6-month peak as ORDI token surges on Binance listing
(10/27) 1 person is responsible for the collapse in inscription volume during the month of October
(10/26) Bitcoin’s dominance increased to 51.5%
(10/23) US Court confirms Grayscale ruling, says SEC must re-review bid for spot bitcoin ETF
(10/20) Lightning Network developer steps down after discovering apparent security backdoor, this bug was later viewed as over blown and not a major threat to the Lightning Network.
(10/19) Lightning Network sees record adoption amidst new applications.
(10/19) Strike enables Bitcoin spending on everyday Items
(10/19) Paolo Ardoino sees RGB as 'best opportunity' to issue stablecoins on Bitcoin
(10/16) BlackRock's Larry Fink says bitcoin rumor rally shows 'pent up interest in crypto'
(10/10) Paul Tudor Jones backs Bitcoin and Gold as geopolitical risks rise
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