Building on Bitcoin: How Builders Are Developing New Innovations on the Bitcoin Protocol
September 24, 2023
Building on Bitcoin has arguably never been more exciting than now, where both on-chain and layer-2 protocols provide infrastructures developers can build on. Read on to learn more about what can be and is being built on Bitcoin.
What Does “Building on Bitcoin” Mean?
Building on Bitcoin means developing infrastructure and technologies on top of the Bitcoin network to broaden its use cases.
Although applications can also be built directly on the network, Bitcoin’s simple architecture makes this process somewhat difficult. It supports basic smart contracts with limited programmability, impeding the direct development of decentralized applications (dApps) on the network. Scalability issues like low transaction throughputs and limited block space also hinder applications from successfully running directly on the Bitcoin blockchain.
Bitcoin’s scalability problem stems from Satoshi prioritizing decentralization and security over scalability. Essentially, blockchains cannot possess all three of these attributes at once, leading to what is known as the blockchain trilemma.
To solve scalability issues, Bitcoin core developers can upgrade the protocol, yet only to a certain extent, as tinkering too much with the network would interfere with its integrity. As a result, Bitcoin builders are increasingly choosing to build on Bitcoin layers, protocols built on top of the Bitcoin blockchain.
How to Build on Bitcoin
There are several ways to build on the Bitcoin blockchain. Let’s take a look at how.
Building on Bitcoin On-Chain
While building directly on-chain on the Bitcoin blockchain has its limitations, it hasn’t stopped developers from finding clever ways to expand Bitcoin’s functionalities without making any changes to the protocol.
Ordinals is an excellent example of a project that allows anyone to build directly on Bitcoin without altering the protocol. It manages this by leveraging two Bitcoin upgrades: Taproot and Segregated Witness (SegWit). Subsequently, non-fungible and fungible tokens are now being issued on the base layer, making Bitcoin more than just a store of value and payments blockchain.
Since the Ordinals protocol rose to popularity in early 2023, various developers have used its methodology to create several token standards, such as BRC-20, ORC-20, BRC-721, and BRC-69. Each standard expands Bitcoin's utility in different and innovative ways.
Building on Bitcoin Layers
Building on Bitcoin layers is the most preferred method of developing the Bitcoin network. Bitcoin layers or Layer-2 networks are protocols built on top of the blockchain. They seek to make Bitcoin more effective by scaling it using diverse innovations. This enables developers to build applications without any obstacles.
Examples of Bitcoin Layer-2 networks include the Lightning Network, Ark Protocol, Rootstock, Mintlayer, the Liquid Network, and Stacks.
Let’s take a closer look at four of these Bitcoin layers.
The Lightning Network (LN) is a Bitcoin Layer-2 (L2) scaling protocol that allows users to make near-instant transactions. It performs transactions off-chain, taking the load off of the base layer.
Lightning focuses on micropayments denominated in satoshis (0.00000001), the smallest Bitcoin unit. The network may also sometimes use other Bitcoin units like millibitcoins (0.001) and bits (0.000001). Micropayments on the base layer are confirmed inconsistently, making them impractical. On Lightning, however, these small transactions are conducted easily, efficiently, and quickly without intermediaries.
When two parties transact using Lightning, a payment channel is created between them. The payment channel, represented as an entry on the base layer, is a multisig smart contract that holds funds from each person. Users can make unlimited near-instant payments inside the channel as long as it is open.
Lightning achieves almost “lightning-fast” transactions because block confirmations are not needed. The network only interacts with the main chain again when the payment channel is closed and its final state is broadcast to Bitcoin network participants.
Thaddeus Dryja and Joseph Poon proposed the Lightning Network in 2016.
The Liquid Network is a Bitcoin L2 sidechain that allows users to make fast and private transactions and issue assets. It is governed by a Federation of members consisting of financial institutions, Bitcoin companies, and exchanges.
A sidechain is an independent and separate network that connects to the parent chain through a two-way peg. Liquid’s two-way peg system allows users to move BTC to and from the main chain. A user’s BTC is locked on the base layer when transferring funds from Bitcoin to Liquid. In return, they receive an equal amount of Liquid Bitcoin (L-BTC), redeemable for BTC on a ratio of 1:1. To move funds out of Liquid, the locked BTC is unlocked, and the L-BTC is burned (removed from circulation).
As an independent network, Liquid operates under a separate consensus model from Bitcoin. This allows it to generate blocks faster and confirm transactions expeditiously. Its block confirmation time is 1 minute compared to Bitcoin’s 10 minutes. Liquid transactions are also considered final after two confirmations. This is in contrast to the Bitcoin finality of 6 confirmations.
Blockstream launched the Liquid Network in 2018.
Rootstock (RSK) is a sidechain that runs parallel to the Bitcoin blockchain. It provides Bitcoin-secured smart contracts and fast transactions. Rootstock is EVM-compatible, meaning developers can deploy Rootstock smart contracts on Ethereum.
EVM compatibility is the ability to write and deploy smart contracts suited to the Ethereum Virtual Machine (EVM), a virtual engine that manages the state of the Ethereum network and powers smart contracts.
Since Rootstock’s smart contracts are more programmable than Bitcoin’s, developers can build a wide range of dApps.
RSK uses Bitcoin’s Proof-of-Work (PoW) consensus mechanism through merged mining, a process that permits miners to concurrently mine blocks on Bitcoin and Rootstock with the same resources. Thanks to merged mining, RSK is secured by over 50% of Bitcoin’s hash power.
The RSK two-way peg system is facilitated by its native token, Smart BTC (RBTC), which is redeemable for Bitcoin on a 1:1 ratio. Users receive this token when moving BTC from the main chain to Rootstock. Their BTC then remains locked on the Bitcoin network until they create a peg-out transaction where RBTC is redeemed for Bitcoin.
Rootstock has a block generation time of 30 seconds. It is also fast since blocks are confirmed every 18 to 45 seconds, unlike Bitcoin’s 10-minute confirmation time.
RSK Labs introduced Rootstock in 2016.
Stacks is a smart contract-focused Bitcoin layer that enables developers to write and deploy Bitcoin-secured smart contracts using the Clarity programming language. These smart contracts are programmable, allowing projects to create dApps, mint NFTs, and create Web3 identities on the Stacks network.
The Proof-of-Transfer (PoX) consensus mechanism links Stacks to Bitcoin, permitting Stacks blocks to eventually settle on the main chain. Stacks miners commit BTC to mine STX, the network’s native token, effectively leveraging Bitcoin’s security with the use of BTC.
Users are required to lock BTC on the base layer to interact with smart contracts on Stacks. In return, they acquire sBTC, a two-way peg token backed by BTC on a ratio of 1:1. The Bitcoin layer redeems users’ BTC by burning their sBTC tokens.
Stacks improves transaction speeds through microblocks (blocks of transactions), allowing it to avoid transaction latency. The network’s miners add transactions into microblocks after the preceding Bitcoin block is mined and before the next one is selected. Stacks has the same confirmation time as Bitcoin, its anchor blockchain.
What Can You Build on Bitcoin?
Here’s a breakdown of some of the things developers can build on Bitcoin.
dApps are, in essence, apps for the Web3 ecosystem. They are powered by smart contracts, allowing them to be decentralized. As such, dApps are not controlled by any entity or individual.
A variety of Bitcoin dApps are available today thanks to Layer-2 protocols that make building on Bitcoin easy. These dApps support various functions that enable users to lend and borrow assets, swap tokens, mint stablecoins, store tokens, bridge tokens, and mint NFTs.
Some popular Bitcoin dApps include ALEX, Arkadiko, and Sovryn.
Bitcoin layers like Stacks and Rootstock support programmable Bitcoin-secured smart contracts, allowing developers to create DeFi-focused dApps. As a result, the Bitcoin DeFi ecosystem is steadily growing, giving users a wide range of activities they can undertake.
The Bitcoin DeFi environment encompasses lending and yield farming protocols, decentralized exchanges, and atomic swaps.
Non-fungible tokens are digital representations of art, music, in-game items, real estate, and videos. They are created with unique attributes, making them non-fungible. That means one NFT is not interchangeable with another non-fungible token from the same or different collection since they are unequal.
The Stacks Bitcoin layer, for example, supports the minting of NFTs, allowing creators to generate collections safeguarded by the most secure blockchain today.
Anyone can issue tokens on the Bitcoin blockchain through the Liquid Network and the Ordinals-based BRC-20 and ORC-20 token standards.
A fungible token is a crypto asset that can be exchanged with an identical token. For instance, Bitcoin is fungible because 1 BTC equals 1 BTC and, therefore, is interchangeable.
Stablecoins are price-stable digital currencies that enable users to interact with the Bitcoin DeFi ecosystem without having to worry too much about market volatility. They draw their relative price stability from the fiat currencies whose prices they are tracking.
What Makes Building on Bitcoin Special?
More and more building is occurring on Bitcoin due to the following reasons:
Bitcoin has a large network of over 16,000 nodes distributed across the globe, giving it a security edge over other blockchains. This expansive network is incentivized to produce a lot of computing power through the PoW consensus mechanism, making it economically unviable for anyone to attempt to take over control of the blockchain.
Bitcoin transactions are also highly secure since they are immutable once added to the chain. Every block of transactions is connected to the previous one, forming a long, unbreakable chain. Therefore, the data in one block cannot be manipulated without changing the records of all the other blocks in the chain, a task that’s virtually impossible.
Bitcoin is not controlled by any individual, state, or entity. Instead, it has a vast and distributed network of nodes responsible for validating transactions and maintaining a record of the blockchain. The decentralized nature of Bitcoin enables users to transact peer-to-peer without a middleman. Furthermore, no one can alter the protocol’s rules at will, making Bitcoin censorship-resistant.
A Long History of Stability
Thanks to a robust system of reliable miners, the Bitcoin network hasn’t experienced any downtimes in 10 years. This track record transcends all other blockchains, including Ethereum, which suffered two outages in May 2023.
Investing in Bitcoin Builders
At Samara Asset Group, we believe the future of finance lies in decentralization and democratization, empowered by Bitcoin.
To play our role in realizing this future, we invest in Bitcoin builders who are creating the infrastructure needed to put Bitcoin on the path of mass adoption, empowering our shareholders to participate in the performance of the growth of the Bitcoin ecosystem.