Bitcoin Ecosystem Panorama Analysis

I. 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 potential of the Bitcoin ecosystem. As the earliest blockchain, Bitcoin was created in 2008 by the anonymous entity Satoshi Nakamoto, marking the birth of decentralized digital currency and challenging traditional financial systems.

Bitcoin was born as a response to the inherent flaws of centralized financial systems, introducing the concept of a peer-to-peer electronic cash system that does not require intermediaries, achieving trustlessness and disintermediation. The underlying technology of Bitcoin, blockchain, has fundamentally changed 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.

After the birth of Bitcoin, it experienced a period of stable growth. The 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 purchased 2 pizzas for 10,000 Bitcoins in Florida, marking a historical moment in the adoption of cryptocurrency.

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

The market, which has been quiet for a long time in 2023, has been rejuvenated by the Ordinals protocol and the popularity of BRC-20 Tokens, bringing about a summer of inscriptions and refocusing attention on Bitcoin, the oldest public chain. What will the future development of the Bitcoin ecosystem be like? Will the Bitcoin ecosystem become the engine of the next bull market? This article will delve into the historical development of the Bitcoin ecosystem and explore its three core directions: asset issuance protocols, scaling solutions, and infrastructure, analyzing the current status, advantages, and challenges of its development to discuss the future of the Bitcoin ecosystem.

2. Why is the Bitcoin ecosystem needed

1. The characteristics and development history of Bitcoin

Bitcoin has three core characteristics:

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 is composed of blocks, each containing the hash 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 keep accounts. This mechanism requires network nodes to solve mathematical problems to verify transactions and record them in the blockchain. This ensures the security and decentralization of the network.

3. Mining and Bitcoin Issuance: The issuance of Bitcoin is completed through mining. Miners solve mathematical problems to verify 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. These unspent outputs have not been used by previous transactions, and they can be used to construct new transactions. Its features 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 used 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, possibly to be used in the next transaction.

The UTXO model can provide higher security and privacy because each UTXO has its own owner and value, allowing transactions to be tracked more precisely. Additionally, the design of the UTXO model allows for parallel processing of transactions, as each UTXO can be used independently without resource contention.

However, due to the limitations of block size and the non-Turing complete programming language, Bitcoin largely serves as "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, resulting in BCH, BSV, and others; after the fork, BTC began to explore scalability enhancement solutions, launching the SegWit upgrade in 2017, which introduced extended blocks and block weight, expanding block capacity; the Taproot upgrade, which started in 2021, improved the privacy and efficiency of transactions. These key upgrades also laid the foundation for the development of various subsequent scaling protocols and asset issuance protocols, leading to the popularity of the Ordinals protocol and BRC-20 Token that we are familiar with today.

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

2. Comparison of Bitcoin ecosystem and Ethereum smart contracts

In the process of Bitcoin's development, in 2013, Vitalik Buterin proposed another blockchain - 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 currency transactions. This programmability feature has made Ethereum a smart contract platform, enabling people to create and run blockchain-based applications that can execute automated contracts without the need to trust third parties.

It can be seen that one of the most significant features of Ethereum is smart contracts, where developers can create various applications on Ethereum. With this characteristic, Ethereum has gradually become the leader in the entire cryptocurrency field, leading to the emergence of various Layer2 solutions, applications, and diverse asset types such as ERC20 and ERC721, gathering many developers to build and enrich this city-state called Ethereum.

Since Ethereum can already implement smart contracts and develop various decentralized applications, 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, possessing the highest recognition and trust among the public and investors. Therefore, it has a unique advantage in terms of acceptance and recognition, currently with a market value of 800 billion, accounting for about half of the total market value of the cryptocurrency market.

2. Bitcoin is highly decentralized: Among mainstream blockchains, Bitcoin has the highest level of decentralization, as its founder Satoshi Nakamoto has gone into hiding, and the entire chain is driven by the community; whereas Ethereum still has Vitalik and the Ethereum Foundation maintaining control over its development.

3. Demand for Fair Launch from Retail Investors: The demand for Web3 cannot be separated from the way new assets are issued. In traditional token issuance, whether it be FT or NFT, the project team acts as the issuer, and the returns for retail investors heavily rely on the project team and the backing VCs for market making; however, in the Bitcoin ecosystem, innovative Fair Launch venues like inscriptions have emerged, giving retail investors more voice and thereby 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, there are still a large number of developers who hope to introduce smart contracts on it for application development, even though its original purpose was to serve as a background for cryptocurrency transactions.

In summary, just as the rise of BTC stems from a consensus on value—people generally recognize Bitcoin as a valuable digital asset and medium of exchange—the innovation in the cryptocurrency world is largely related to asset attributes. The current heat of the BTC ecosystem is mainly driven by inscribed asset types such as the Ordinals protocol and BRC-20. This enthusiasm also feeds back into the entire Bitcoin ecosystem, prompting more people to turn their attention back to the Bitcoin ecosystem.

Unlike previous bull markets, retail investors have increasingly gained influence in this round of the market. Traditionally, VCs and project teams 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 wish 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 this round of the Bitcoin ecosystem.

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 space. As a result, people continue to focus on 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 seen that there are currently two main dilemmas facing Bitcoin:

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

• The applications in the Bitcoin ecosystem are limited, and the development of the Bitcoin ecosystem requires some blockbuster applications/projects to attract more developers and generate more innovations.

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

1. Relevant agreements around asset issuance

2. Scaling Solutions: On-chain Scaling and Layer 2

3. Wallets, cross-chain bridges and other infrastructure projects

Due to the fact that the development of the entire Bitcoin ecosystem is still in its early stages, applications such as DeFi are still in their infancy. Therefore, this article will mainly analyze 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 starting in 2023 is inseparable from the promotion of the Ordinals protocol and BRC-20, allowing Bitcoin, which was originally only a means of value storage and exchange, to also serve as a venue for asset issuance, greatly expanding the use cases of Bitcoin.

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

1）Ordinals & BRC-20

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, were minted based on this protocol. Later on, the now-popular BRC-20 standard also emerged from the Ordinals protocol, ushering in the summer of inscriptions.

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

Casey became interested in NFTs starting from 2017, inspired to develop Ethereum smart contracts using Solidity, but didn't like building NFTs on Ethereum, considering it a "Gutenberg machine.