According to ChatGPT, Bitcoin only accommodates a limited number of use cases, and this fact will consequently limit its adoption and growth. This is, by far, the silliest piece of criticism one can write about Bitcoin. There are two approaches to debunk it: one appeals to Bitcoin conservatism and the meaning of sound money in order to discredit the different use cases, while the other leverages the various technological breakthroughs that Bitcoin maximalists have made over the years with protocols, sidechains and second layers. Ultimately, both sides of the debate will explain why putting large amounts of data and running complex applications on the main chain is a bad idea which leads to inefficiencies that can be mitigated with more elegant designs.
In its current state, Bitcoin can already accommodate most of the altcoin use cases: it can do on-chain tokens and host decentralized exchanges with Counterparty and Omni, it can store files within the limit of 4 megabytes per block, and it can do some basic smart contracts (multisig setups, conditional coin locks, dispensers). But there’s still a lot that Bitcoin cannot do on its base layer, ranging from recurring payments to confidential transactions. These features exist on plenty of altcoins which experiment with them in different shapes and forms. However, just because Bitcoin currently doesn’t enable them on the base layer doesn’t mean that the world’s dominant cryptocurrency is bound to remain stagnant and won’t catch up by integrating the best-performing of implementations.
There’s a conservative school of thought, mostly dominated by Austrian economists, who argue that Bitcoin doesn’t need any of these use cases because sound money should be basic by design. They tend to believe that the imminent collapse of fiat money will make every person on planet Earth buy bitcoin and denominate all goods and services in the verifiably-scarce BTC. And while the likeliness of this outcome is low (fiat money and central banking will exist and get perpetuated under different shapes and forms for as long as people have faith in their governments and provide demand for whatever currency is being supplied), the idea is still worth considering.
Conservatives tend to label non-BTC tokens as scams, refer to non-monetary uses of Bitcoin as fiat degeneracy, and slam other chains for being inefficient and poorly-optimized Rube-Goldberg machines. Some of this criticism is valid, but in many instances the free market disagrees with their ideology – there are people who don’t care about sound money and simply want to fundraise with tokens, trade between assets without having a centralized exchange in the middle, create and sell tokenized art, and save their video game items on a neutral global network which can’t get shut down by the developers. On the other side of the spectrum, there are freedom fighters and investigative journalists whose main concern is transaction privacy – they don’t care about digital gold which serves the store of value function, they only want to send and receive money without leaving any kind of evidence regarding who they might be, with whom they are transacting, and which amounts are being moved.
Yes, many of these use cases don’t require a blockchain. And no, it’s not a wise approach to direct these people to other chains which offer scalability and extra features at the expense of blatant centralization – not only because the underlying networks are fragile and deal with bad money that’s most likely going to 0, but also because people should be using the hardest form of money on one of Bitcoin’s layers.
Bitcoin maximalists provide a much more nuanced approach to this situation: instead of discouraging use cases not natively enabled by the Bitcoin network (or not scalable when deployed on it), they build layers on top of Bitcoin to accommodate the needs of different types of users and attract new market segments. Though in some cases conservative bitcoiners refer to themselves as maximalists, the distinction is in the maximization itself: someone who is against certain types of projects being built on a Bitcoin layer and believes that the 21 million BTC should only be used to make monetary payments doesn’t really maximize anything – these people use ideology to justify remaining convservative.
My issue with Bitcoin conservatives is that they willingly and knowingly reduce the scale of adoption through purity tests. Their belief is that the collapse of central banking and the hyperinflation of fiat currencies will make every person on planet Earth start using bitcoin as money. This scenario requires a universal acceptance of free markets and a new paradigm for distrust in governments. Everyone would want to conduct peaceful, voluntary transactions instead of becoming violent for the purpose of seizing property and wealth. At least in our lifetime, this is an utopia… especially in a world where governments get bigger and more people rely on Big Brother to provide everything from education and healthcare to subsidies, financial aid, and employment.
Given these considerations, the thesis that I defend (not just for the sake of beating ChatGPT’s FUD, but also because I happen to ideologically position myself on this side) is the maximalist one. In order to get mass adoption, Bitcoin shouldn’t rest on its laurels and flaunt its qualities as sound money. Integrating more use cases to get everyone from business owners to artists interested in the project is a far better approach.
Some of the best Bitcoin maximalist projects include Colored Coins, Counterparty, Omni, Blockstream’s Liquid sidechain, Rootstock (RSK), the Lightning Network, Paul Sztorc’s Drivechains, Ruben Somsen’s Statechains, John Carvalho’s Synonym, Portal, Eric Martindale’s Fabric, Maxim Orlovsky’s RGB, Lightning Labs’ Taro, Eric Sirion’s Fedi, Calle’s Cashu, and Casey Rodarmor’s Ordinals. This list is somewhat chronological and covers protocols and layers deployed on Bitcoin since 2012. However, the enumeration isn’t necessarily exhaustive – there’s always something new that comes out and extends the ways in which you can use your coins… there’s an even longer list of proposals that never came to fruition.
For the sake of destroying ChatGPT’s argument about “limited use cases”, I’ll present the projects that have been delivered, are still available to get used, and successfully extend the ways in which you can transact your BTC.
Colored Coins, Counterparty and Omni enable token issuance on the Bitcoin blockchain. From a technical standpoint, they are OP_RETURN transactions which leave permanent and recognizable marks in the public ledger. Their goal is to mark real-world assets (commodities like gold, real estate, equities, fiat currencies) on the Bitcoin blockchain either by arbitrarily assigning a certain meaning and value to a handful of BTC units (as in the case of Colored Coins), or by issuing a token which represents the ownership of other assets (Rare Pepes and Bitcoin Heads on Counterparty, Tether on Omni). Launched in 2014, Counterparty was even more ambitious – it aimed to enable decentralized companies to issue their own shares, pay dividends, and trade their stock against other assets on an open marketplace. But due to limited scalability and high transaction costs, most of these plans were never fully realized.
Casey Rodarmor’s ordinal inscriptions are another take on Colored Coins. The project aims to associate numbered bitcoin units with a string of data which is stored in the witness side of a Bitcoin block. The design is more elegant and minimalistic than anything NFT-related on chains such as Ethereum, but it can’t scale to accommodate everybody’s arbitrary data and it ultimately competes with the financial transactions of other users. Due to these limits, proponents of Ordinals deem their inscriptions more scarce and assign a relative value to their existence.
Canadian bitcoiner Mike in Space has created something similar with STAMPS – an even more radical way to put files on the Bitcoin blockchain, which encodes data in Base58 format and permanently stores it on the unprunable UTXO set. Bitcoin nodes end up using a lot of their RAM memory to keep the transaction information… so if too many actors deploy such transactions at the same time, these STAMPS can take down lots of validators around the world. So far, due to high transaction costs, STAMPS have only been used to store silly pixel art. But if a series of attackers coordinate to broadcast many of these large data-heavy transactions, Bitcoin nodes will have to upgrade their hardware. The deterring factor for such an undertaking is the high cost of every transaction (about 0.01 BTC per kilobyte).
The projects described are certainly from the Bitcoin maximalist crowd, but they purposely use block space inefficiently to leverage scarcity. They’re the equivalent of turning gold bars into jewellery, their use generates controversy among community members due to concerns of bloating the blockchain for future generations of node operators, but they find themselves in a minority in relation to economic transactions. If there’s a positive to their existence, outside of dunking on ChatGPT, it’s that they absolutely confuse regulators – named Counterparty tokens, ordinal inscriptions and STAMPS are an exercise of free speech on a public immutable ledger. As Bitcoin-friendly attorney Justin Wales wrote in his 2019 University of Miami Law Review research paper “Bitcoin Is Speech”, the US Government has pretty solid reasons to protect Bitcoin transactions under the provisions of the First Amendment to the US Constitution.
On the other side of the spectrum, we have the scalable and economical Bitcoin maximalist projects. They don’t bloat the base layer, as they move the extra transactions to a second layer or pegged parallel chain. Furthermore, their transaction costs are significantly lower.
Blockstream’s Liquid is perhaps the best known Bitcoin sidechain. It functions as a federation of block producers who also act as gatekeepers of the system – it’s through them that you receive your L-BTC when you lock your BTC on the base layer, and it’s also at least a federation member who must process your request to burn the L-BTC and unlock the funds on the main chain. Some argue that the design is a far cry from the October 2014 research paper which first outlined the sidechain concept, mostly due to the permissioned design and the replacement of decentralization with a federation of members.
However, Liquid offers pretty good privacy via Confidential Transactions and can also help Bitcoin scale during times of high demand. It can issue tokens just like Counterparty/Omni and mimic some of the features you find on Ethereum (contracts, royalty systems), but in a more private environment. Nonetheless, the main use case is to help exchanges and traders make settlements faster, at lower costs, and with the option to hide the amounts that they’re moving around – these whale tracker bots on Twitter and Telegram won’t reveal large money transfers anymore.
On top of Liquid, there are also a few interesting applications. One of them is Raretoshi, a tokenized digital art marketplace which emulates the style and functionality of the more popular OpenSea. SideSwap, BitMatrix, and TDEX are some of the decentralized exchanges which allow you to trade L-BTC for L-USDT (Tether on Liquid). Then there’s Fuji money, a platform which enables users to borrow bitcoin-backed stablecoins and synthetic assets without a trusted third party in the middle. The ecosystem built around the Liquid sidechain is certainly interesting, but it didn’t get too much traction. Maybe in the future, when demand for mainchain block space is higher, Liquid will have its moment in the spotlight of mainstream Bitcoin culture.
Rootstock, known today as RSK, is another important sidechain. Its purpose is very simple, yet ambitious: to provide the infrastructure to successfully port all Ethereum smart contracts to a Bitcoin layer. It’s a modified version of Ethereum which gets secured via merge mining by more than 57% of the Bitcoin hashrate – meaning that the same miners provide thermodynamic security to the system and collect transaction fees to increase their revenue. Rootstock architect Sergio Demian Lerner has also added a few extra optimizations that don’t exist in Ethereum.
At the time of this writing, about 3500 bitcoins are locked into RSK – which is nearly as much as Liquid’s 4130. Since Rootstock is designed to be compatible with Ethereum, its applications feature both original works and ports from other chains. Metamask allows an easy transition, assets can be secured with both Trezor and Ledger hardware wallets, and there are ways to borrow stablecoins against your RBTC with Sovryn. For those who are into decentralized finance, the ecosystem also offers RSK Swap – a clone of Uniswap which provides the foundation for a decentralized exchange where no KYC is necessary.
Overall, RSK benefits from features and integrations that you can’t find on Liquid specifically because porting applications and contracts from Ethereum is seamless. The reason why it’s not replacing Ethereum yet is that the original chain still hasn’t had critical security flaws and the preminers still have a lot of money to spend on marketing to attract new users. But RSK is a useful safety net which guarantees that there won’t be any disruptions when Ethereum fails… and in the end, it all comes back home to Bitcoin.
Drivechains, on the other hand, are a reimagining of the 2014 sidechains research paper and proudly represent the purest form of Bitcoin maximalism. Through them, Bitcoin could integrate every altcoin use case in existence and put an end to their blatant scamminess. Brought into existence by Paul Sztorc’s BIP300 and BIP301, Drivechains are best described by the “altchains without altcoins” mantra. The principle is rather simple: if this system of hashrate escrows and blind merged mining gets deployed on the main chain, then it would allow anyone to create their own Bitcoin sidechain which pays fees to the same BTC miners.
The free market approach is what might put an end to all shitcoins. The entire economy would revolve around the 21 million BTC that get moved across various chains in order to gain several advantages. For instance, some coins can be moved to a Monero/Zcash sidechain to get better transaction privacy, while others can get into an Ethereum-like sidechain where anyone can do ICOs and DeFi. What’s radically different about this design is that nobody gets to print money out of thin air anymore – every activity, regardless of how legit or scammy it is, incurs BTC costs and pays fees to the Bitcoin miners. Furthermore, conservatives who only want to use the main chain are not affected and their full nodes don’t store any information generated by the sidechains.
On testnet, Drivechains show promising results: Paul Sztorc posted guides and video tutorials which demonstrate how a Zcash and an Ethereum sidechain work. Most importantly, he showed that Bitcoin Core wasn’t affected and had zero knowledge (pun intended) of the activity taking place on other chains. If merged on the main net, Drivechains could be the Bitcoin soft fork to end all altcoins and minimize the need to further upgrade the Bitcoin base layer in the future.
Statechains also extend the functionality of Bitcoin and provide further scalability options. First presented by Ruben Somsen at Scaling Bitcoin 2018 in Tokyo, Statechains function as a layer two for swapping coin ownership. On the basis of a main chain multisig which locks funds, users can hop onto this protocol to generate transitory keys which enable off-chain transfer of value.
The most popular implementation of Statechains can be found in MercuryWallet: a desktop Bitcoin wallet that performs off-chain CoinSwaps that empower users to trade UTXOs of the same value without leaving on-chain traces. But beyond the transferring feature, Statechains are also interoperable with the Lightning network and allow users to open channels directly from this layer. This has privacy, scalability, and cost benefits.
Of all the layers and protocols presented in this article, Statechains are the most overlooked and they’re extremely underrated for the potential they have. But maybe after you’re reading this, you will be inspired to take a look at Ruben Somsen’s work and build something on top of it.
The Lightning network is by far the most successful Bitcoin layer. If the other protocols and sidechains mostly have a single team of developers which focuses on their improvement and growth, then Lightning has thousands of people working on it from all around the world. At the protocol level, Lightning Labs (lnd), Blockstream (Core Lightning), ACINQ (eclair), Nayuta (Nayuta Core) and Electrum all compete for market share by making various refinements across all platforms. At the operating system and distribution level, we have RaspiBlitz, Umbrel, MyNode, Start9 EmbassyOS, Citadel, and a bunch of other interfaces which allow everyone to easily spin up Bitcoin and Lightning nodes.
Even at the wallet level, Lightning is the most popular and robust – Breez, Blixt, Phoenix, Electrum, and Muun being only a few examples of non-custodial solutions that work without needing a dedicated node that runs 24/7. As of April 2023, the Lightning network also reigns supreme in terms of liquidity (5460+ BTC), independent nodes (15000+) and channels (70000+).
At this point, Lightning is so big and significant that there are layer 3s built on top of it, as well as interoperable layer 2s: RGB, Taro, and Cashu represent the former, while Statechains, Liquid, and Fedi are amongst the latter. This phenomenon happens because Lightning is network-agnostic and can do atomic swaps between different chains.
The value proposition for Lightning network is that, for the price of two on-chain transactions, users can transact hundreds (if not thousands of times) at the speed of their internet connections and at a significantly lower cost. However, the main issue is routing – in order for a payment to get from wallet A to wallet B, the two of them need to either open a channel between each other or have a third party which connects them. As the liquidity increases, big hubs emerge – users naturally gravitate towards the nodes with the most economic activity (shops, dedicated companies which provide infrastructure). And if this influx of liquidity is accompanied by obvious choices for common hubs, then the lonely islands will become fewer and the odds to connect nodes become greater.
What’s great about Lightning is that it can act as the foundation for other layers that can leverage its speed and flexibility in order to do other stuff. For example, RGB aims to make the Ethereum design obsolete with client-side validation, while Taro seeks to bring a USD stablecoin to enable more trading options. There’s also Portal and Fabric, which contribute with atomic swaps, computation and data storage. And if your Lightning transactions aren’t private enough, then Chaumian mints such as Cashu and Fedi will come to the rescue. But before we get to these, let’s talk about John Carvalho’s Synonym.
Synonym describes a whole suite of applications and integrations: from Bitkit (Bitcoin toolkit) to Blocktank (a Lightning service provider), there’s a lot to discover. But the truly unique product is Slashtags – a tool that makes identity across web a lot easier. With only a Bitcoin and Lightning wallet (currently provided by Bitkit), anyone can set up a profile, build their reputation, and make their contributions easily discoverable under a simple mobile-friendly interface.
In a nutshell, Synonym’s Slashtags attempts to fix the censorship problem across the internet in a way which incentivizes good faith. Your profile is platform-independent to the point that any website with a Slashtags integration will enable you to comment and participate in debates, and there’s also a Lightning payments dimension on top of it. Facebook and Google attempted something similar in the mid 2000s, except that they always had control over the profiles to the point that they could shut down, restrict, and censor accounts.
Currently, Metamask attempts to do something similar for assets across the Ethereum ecosystem: a browser integration which makes it easy to log into other applications and protocols. However, the scope of Metamask is limited to financial applications. Slashtags cover a wider spectrum of use cases which include commenting across websites and building a reputation. So once again, the Bitcoin version does more and does it better.
Another interesting project is Portal, a DeFi platform which makes use of atomic swaps on the Lightning network. It’s being built by some of veterans who created the first Bitcoin meet-up in Silicon Valley (most notably, George Burke), it’s backed by capital from a bunch of big centralized exchanges (most notably, Coinbase and OKEX), and it aims to become a scalable replacement for custodial exchanges. So far, Portal has successfully managed to perform a successful cross-chain L2 swap between Bitcoin and Ethereum – without the need for “bridges” or wrapped coins. In time, the project’s scope is expected to grow.
Fabric is a protocol which takes the ambitions of the Lightning network to the next level, as it aims to build a computation layer for data storage and trustless application deployment. The official description is that of an “operating system for the world’s most powerful super computer”, but the data storage plans extend the scope beyond the app store ambitions.Fabric was first announced in February 2016 and chief architect Eric Martindale has reported some breakthroughs with early prototypes. However, the project is yet to get deployed at its full scale.
RGB, Taro, Fedi and Cashu are also third layers built on top of the Lightning network. Though there are some technical similarities between them, their purposes are very different. RGB is a smart-contract system based on Bitcoin and Lightning Network, which benefits from client-side validation and enables instant transfers of asset ownership. So if Bitcoin Heads digital collectible cards get moved to RGB, then collectors can exchange them within seconds and at significantly lower costs than making on-chain transactions.
Conceptually speaking, Taro by Lightning Labs is very similar to RGB – to the point where RGB creator and lead developer Maxim Orlovsky slammed their tactic to copy parts of the code without giving credit and then raise millions of dollars for the final product. However, Taro is more explicitly being built to put “the world’s currencies” (aka stablecoins) on the Lightning network. RGB is universal in design and aims to empower users to build a worldwide economy where they can fundraise via secure tokenised company shares, trade digital collectibles, and more. Basically a more scalable, elegant, and private version of the stuff happening on Ethereum today.
Taro has a narrower and more specialized role, as it’s using the Lightning network as the settlement layer for other types of currencies. It appears to be focused on bringing the dollar to Lightning, but other types of fiat money will definitely follow. If properly funded, RGB can technically replace the need for Taro – but this type of competition, where one side has more ideas while the other has more capital, might turn out to be healthy for innovation.
Fedi and Cashu are the latest additions to Bitcoin’s layer 3 stack. They are very similar in design, as they both create Chaumian mints for anonymity. But it’s the tiny differences that make them unique in their own way. Firstly, Eric Sirion‘s Fedi serves the purpose of creating community banks which make onboarding easy and accessible for people who are generally afraid of self-custody. People in small towns, villages, or members of various clubs and religious groups can pool their bitcoins together and trust a handful of figures who set up a multisignature to give birth to the mint. The advantage is that everybody’s transactions are private and nobody can see how much money everyone else has. The only information that everyone can observe is the total amount of BTC in the mint.
However, Fedi’s disadvantages are social and political. Community banks are easier to censor and shut down than a decentralized global network of computers. Furthermore, the creators of the mint can coordinate to steal the funds – of course, this comes with a reputation cost among the community… but it’s still possible.
On the other hand, Cashu is designed in order to improve on Lightning’s privacy limitations. Creator Calle has looked into Chaumian e-cash to get some inspiration for a system where people pool in their money in order to maximize their transaction privacy. On the Lightning network, only the sender benefits from good privacy… while the receiver remains exposed. The major difference between Fedi and Cashu is that the former relies on a federation, while the latter optimizes individual self-custody. Cashu is also excellent to use with custodial Lightning wallets, to prevent the node operator from knowing who you are, how much funds you own, and with whom you’re transacting. This also removes the custodian’s power to censor users.
Initially, this article was meant to be a simple enumeration of the layers and protocols that make Bitcoin much more complex and capable than the mainstream media and the makers of ChatGPT portray it as. But the “pet rock with limited use cases” FUD is recurrent and take many shapes and forms – ranging from “Bitcoin is not Turing complete” to “Bitcoin offers no yield”. So it was important to highlight the efforts of Bitcoin maximalists who constantly improve and expand the network towards new frontiers.
ChatGPT takes the most painful loss with this one, as it was completely unable to provide nuance and made a fool of itself and its Worldcoin-shilling creators.