3 - 5 minute read
The Bitcoin ecosystem is gearing up for a significant transformation, according to Lisa Neigut, a Lightning Protocol engineer for the Bitcoin infrastructure firm Blockstream. Speaking at CoinDesk’s Consensus 2023 conference, Neigut predicted a layer 2 “Cambrian explosion” that will revolutionize the network’s capabilities. The catalyst for this transformation will be new features including covenants and script updates, which will unlock a plethora of new layer 2 technologies.
Covenants such as bitcoin improvement proposal (BIP) 118 will put constraints on how a bitcoin (BTC) can be spent, creating Bitcoin smart contracts. Script updates include a proposal by Blockstream to introduce Simplicity, a new programming language for Bitcoin smart contracts. The Bitcoin network is already experiencing a technical renaissance thanks to the introduction of Bitcoin non-fungible tokens (NFTs) via the Ordinals protocol. More than 3.3 million NFTs or “inscriptions” have been produced in under five months.
Despite the Bitcoin ecosystem being occasionally criticized in crypto developer circles for its slow pace of technological advancement, Neigut believes the flywheel effect will be triggered once certain functionality is in place on the base layer. Neigut stated, “APO is going to, hopefully, unlock a Cambrian explosion with these script updates and new covenants. So I think a lot of new layer 2 stuff will come in the future.”
The Bitcoin network already boasts six major layer 2 protocols, including the Lightning payment network, the Liquid sidechain, the Fedimint and Cashu protocols, wrapped bitcoin (wBTC), and Bitcoin statechains. Lightning’s network capacity is currently just over 5,425 BTC, and it is scaling well. Meanwhile, the Liquid sidechain allows users to issue security tokens and other digital assets.
Cashu and Fedimint are Bitcoin custody protocols that borrow from the concept of Chaumian mints, which use blind signatures to preserve user privacy. Wrapped tokens are synthetic versions of crypto assets that are not native to the blockchains on which they exist. Wrapped bitcoin (wBTC) is an ERC-20 token backed by 1 BTC and typically used in the Ethereum decentralized finance (DeFi) ecosystem. Bitcoin statechains are conducted off-chain and offer a scaling benefit similar to Lightning.
Neigut asserts that new developments like Bitcoin’s “Inquisition Signet” testnet will not only help fast-track experimental projects but also test the robustness of new proposals. Potential proposals include things like validity rollups, which would combine large numbers of transactions off-chain, validate those transactions, and submit the validated batch as a single “rolled-up” transaction to the Bitcoin blockchain.
The Bottom Line
The advent of new features such as covenants and script updates on the Bitcoin network will unlock new layer 2 technologies. The Bitcoin ecosystem is already experiencing a technical renaissance, and new functionality may trigger a flywheel effect. The Bitcoin network already boasts six major layer 2 protocols, including the Lightning payment network, the Liquid sidechain, the Fedimint and Cashu protocols, wrapped bitcoin (wBTC), and Bitcoin statechains. The Inquisition Signet testnet will help fast-track experimental projects and test the robustness of new proposals. Potential proposals include things like validity rollups, which would combine large numbers of transactions off-chain, validate those transactions, and submit the validated batch as a single “rolled-up” transaction to the Bitcoin blockchain.
