Over the past 10 years, the Bitcoin ecosystem has attracted developers to spend thousands of hours improving and renewing most of its underlying codebase. However, Bitcoin ( BTC ) is largely the same. The reason for this is that its main set of consensus rules that define its monetary properties, such as its algorithmic inflation and its hard code offer, remain unchanged.
Again and again, the factions have tried to change these core properties, but all hostile takeovers so far have failed. It is often a painful process but it highlights and solidifies two of Bitcoin’s greatest virtues: nowhere can dictate on its own how Bitcoin evolves; and the absence of centralized control protects the monetary properties of Bitcoin.
Barriers to development – and how to work through them
The values that make Bitcoin a popular phenomenon are also those that make the development of software in Bitcoin more challenging than any other digital asset. The developers are limited to what they are able to transform so as not to undermine their device as a store of value.
However, as we will see in the following examples, innovation in Bitcoin is possible. It requires creativity and patience.
Since changing the core layer of Bitcoin requires a quasi-political process that can infringe its monetary properties, innovation is often implemented as modules. This development is similar to that of the Internet protocol suite, where layers of different protocols specialize in specific functions. Emails were handled by SMTP, files by FTP, web pages by HTTP, user addressing by IP and packet routing by TCP. Each of these protocols has evolved over time to create the experience we have today.
Spencer Bogart of Blockchain Capital has captured this development succinctly: We are now witnessing the start of the Bitcoin protocol suite itself. The inflexibility of the core layer of Bitcoin has resulted in several additional protocols that specialize in various applications, such as the Lightning BOLT standard for paid channels. Innovation is as vibrant as it is relatively safe since this layered approach minimizes potential risks.
The following diagram is an attempt to map all relatively new initiatives and shows a more complete representation of the Bitcoin technology stack. It is not exhaustive and does not indicate any support for specific initiatives. However, it is impressive to see that innovation is being driven on all fronts – from second layer technologies to emerging smart contract solutions.
Lately, there has been a lot of talk about the adoption rate of Lightning Network, Bitcoin’s most prominent second layer technology. Critics often point to an apparent decrease in the number of channels and total Bitcoin blocked when evaluating the adoption of Lightning users. However, these metrics are not the most definitive measure of adoption.
One of the most underrated virtues of the Lightning Network is its direct privacy property. Since Lightning does not depend on the reconciliation of global states – that is, its own Blockchain – users can perform private transactions using additional techniques and network overlays, such as Tor. The activity that occurs within private channels is not captured by popular Lightning browsers. As such, an increase in the private use of Lightning has resulted in a decrease in what can be measured publicly, leading observers to erroneously conclude that adoption has declined. While it is true that Lightning must overcome substantial usability barriers before it can enjoy wide adoption.
● “Bitcoin is already faster and cheaper than Bitcoin Cash,” says Wall Street expert
Another recent development in the field of second layer privacy was the creation of WhatsApp, a private messaging system about Lightning. This project is a modification of the Lightning Network Daemon (LND) that allows private message relays, which connect the communicating entities, to be compensated for their services through micropayments. This decentralized chat, resistant to censorship and spam, has been possible thanks to the innovations of the LND itself, such as the recent improvements in the routing protocol of Lightning onion.
There are other projects that take advantage of Lightning’s private micropayment capabilities for numerous applications, from a cloud computing VPS powered by Lightning to an image hosting service that shares advertising revenue through microtransactions. In more general terms, we define the second layer as a set of applications that can use the base layer of Bitcoin as a court where exogenous events are reconciled and disputes resolved. As such, the issue of data anchoring in the Bitcoin Blockchain goes beyond Lightning, with companies like Microsoft that are pioneers in a decentralized identification system about Bitcoin.
There are projects that try to return the functionality of expressive smart contracts to Bitcoin safely and responsibly. This is a significant development because, as of 2010, several of Bitcoin’s original opcodes – the operations that determine what Bitcoin is capable of computing – were removed from the protocol. This occurred after a series of errors were revealed, which led Satoshi to disable part of the functionality of Script, the Bitcoin programming language.
Over the years, it became clear that there are non-trivial security risks that accompany highly expressive smart contracts. The general rule is that the more functionality you enter into a virtual machine – the collective verification mechanism that processes opcodes – the more unpredictable your programs will be. However, more recently we have seen new approaches to smart contract architecture that can minimize unpredictability and also provide extensive functionality.
The design of a new approach to Bitcoin smart contracts called Merklized Abstract Syntax Trees (MAST) has since triggered a new wave of support technologies for Bitcoin smart contracts. Taproot is one of the most prominent implementations of the MAST structure that allows an entire application to be expressed as a Merkle Tree, in which each branch of the tree represents a different execution result.
Another interesting innovation that has recently resurfaced is a new architecture for the implementation of pacts, or spending conditions, in Bitcoin transactions. Originally proposed as a thought experiment by Greg Maxwell in 2013, covenants are an approach to limit the way balances can be spent, even when your custody changes. Although the idea has existed for almost six years, the pacts were not practical to be implemented before the arrival of Taproot. Currently, a new opcode called OP_CHECKTEMPLATEVERIFY – formerly known as OP_SECURETHEBAG – is taking advantage of this new technology to potentially allow covenants to be safely implemented in Bitcoin.
At first glance, covenants are incredibly useful in the context of loans – and perhaps Bitcoin-based derivatives – since they allow the creation of policies, such as clawbacks, to be implemented in specific Bitcoin balances. But its potential impact on the usability of Bitcoin goes well beyond loans. The agreements can allow the implementation of things like Bitcoin vaults, which, in the context of custody, provide the equivalent of a second private key that allows someone who has been hacked to “freeze” stolen funds.
In essence, Schnorr firms represent the technological base that makes all these new approaches to smart contracts possible. And there are even more advanced techniques that are currently being theorized, such as Scriptless Scripts, that could allow fully private and scalable Bitcoin smart contracts to be represented as digital signatures rather than opcodes. These new approaches may allow new smart contract applications to be built on Bitcoin.
There have also been some interesting developments in mining protocols, especially those used by the components of mining pools. Although the issue of centralization in Bitcoin mining is often very exaggerated, it is true that there are power structures retained by mining pool operators that can be even more decentralized.
Specifically, pool operators can decide which transactions will be mined by all pool components, which gives them considerable power. Over time, some operators have abused this power by censoring transactions, extracting empty blocks and reallocating hashing without the authorization of the members that constitute the pool.
The changes in the mining protocols have been aimed at subverting the control that mining pool operators can have over the decision of what transactions are extracted. One of the most substantial changes that have come to Bitcoin mining is the second version of Stratum, the most popular protocol used in mining pools. Stratum V2 is a complete revision that implements BetterHash, a secondary protocol that allows members of the mining pools to decide the composition of the block they are going to exploit – and not vice versa.
Another development that should contribute to greater stability is the revival of interest in hash rates and difficulty derivatives. These can be particularly useful for mining operations that want to protect themselves against hash rate fluctuations and difficulty readjustments.
- The new Bitcoin Core software update uses Bech32 addresses by default
Contrary to some arguments that exist, there are a number of emerging protocols that can provide optional privacy to Bitcoin. That said, it is likely that privacy in Bitcoin will continue to be more an art than a science in the coming years.
More generally, the biggest impediment to private transactions through digital assets is that most solutions are halfway. Privacy cryptocurrencies that focus on privacy in the transaction chart often neglect privacy at the network level, and vice versa. Both vectors suffer from a lack of maturity and use, which makes transactions easier to unprotect by analyzing statistical tracking in the peer-to-peer (P2P) network layer or in the Blockchain layer.
Fortunately, there are several projects that are expanding the limits on both fronts.
When it comes to the privacy of transaction graphics, solutions such as P2EP and CheckTemplateVerify are interesting because privacy becomes a byproduct of efficiency. As novel approaches to CoinJoin, these solutions can increase the adoption of private transactions by users that are motivated only by lower transaction fees. Like CoinJoins, your privacy guarantees remain suboptimal, but amounts sent without shielding can be beneficial, as they preserve the suitability of the Bitcoin supply.
If lower transaction fees become a motivator and lead to an increase in the set of Bitcoin anonymity (the percentage of UTXO that are CoinJoin products), anonymization through statistical analysis will be even more subjective than It is already.
There has also been considerable progress in the privacy of P2P communications, with protocols such as Dandelion being tested through crypto networks. Another notable development is Erlay, an alternative transaction retransmission protocol that increases the efficiency of private communications and reduces the overhead of running a node. Play is an important improvement since its efficiency gains allow more users to more easily complete the IBD and continuously validate the chain, especially in countries where ISPs impose bandwidth caps.
It’s just the beginning
These examples are just a handful of initiatives at stake to transform the Bitcoin framework. Bitcoin, in its entirety, is a constantly evolving set of protocols. While the evolution within a relatively strict set of rules and values can be a challenge for developers, the layered approach we have seen unfolding is what makes a gradual and effective change possible. Minimizing politicization within Bitcoin and protecting its fundamental monetary properties are necessary parts of the process. The developers are learning to work within these limits in a meaningful way.