Introduction: The Historical Development of the Bitcoin Ecosystem
The recent surge in Bitcoin inscriptions has sparked excitement among crypto users. Originally regarded as "digital gold" and primarily a store of value, Bitcoin has once again captured attention due to the emergence of the Ordinals protocol and BRC-20 tokens. This has reignited interest in the development and potential of the Bitcoin ecosystem.
As the earliest blockchain, Bitcoin was created in 2008 by an anonymous entity known as Satoshi Nakamoto. It marked the birth of a decentralized digital currency challenging the traditional financial system. Bitcoin emerged as an innovative solution to the inherent flaws of centralized financial systems, introducing the concept of a peer-to-peer electronic cash system that operates without intermediaries, enabling trustless and disintermediated transactions.
The underlying technology of Bitcoin—blockchain—revolutionized the way transactions are recorded, verified, and secured. The Bitcoin whitepaper, published in 2008, laid the foundation for a financial system emphasizing decentralization, transparency, and immutability.
After its inception, Bitcoin experienced gradual but steady growth. Early adopters were primarily tech enthusiasts and cryptography advocates who began mining and trading Bitcoin. The first recorded real-world transaction occurred in 2010 when programmer Laszlo Hanyecz famously spent 10,000 Bitcoin to purchase two pizzas in Florida, marking a historic moment in cryptocurrency adoption.
As Bitcoin gained traction, related infrastructure began to form. Exchanges, wallets, and mining pools emerged to meet the demands of this new digital asset. With the evolution of blockchain technology and markets, the ecosystem expanded to include a diverse range of stakeholders, such as developers, startups, financial institutions, and regulatory bodies, further enriching the Bitcoin ecosystem.
The market, which had been relatively quiet in 2023, was revitalized by the Ordinals protocol and the explosive growth of BRC-20 tokens, leading to a "summer of inscriptions." This resurgence has redirected attention to Bitcoin, the oldest public chain, raising questions about the future of its ecosystem. Could the Bitcoin ecosystem become the engine for the next bull market? This report delves into the historical development of the Bitcoin ecosystem, focusing on its two core sub-sectors: asset issuance protocols and scalability solutions. It analyzes the current state, advantages, and challenges to explore the future of Bitcoin.
The Need for a Bitcoin Ecosystem
Bitcoin’s Characteristics and Development History
Before discussing why a Bitcoin ecosystem is necessary, it is essential to understand Bitcoin’s core features and development history.
Unlike traditional financial accounting systems, Bitcoin operates with three key characteristics:
- Decentralized Distributed Ledger: The core of the Bitcoin network is blockchain technology. This decentralized distributed ledger records all transactions on the Bitcoin network. The blockchain consists of blocks, each containing the hash of the previous block, forming a chain-like structure that ensures transparency and immutability.
- Proof-of-Work (PoW) Consensus: The Bitcoin network uses the Proof-of-Work mechanism to validate transactions and maintain the ledger. This requires network nodes to solve mathematical puzzles to verify transactions and record them on the blockchain, ensuring security and decentralization.
- Mining and Bitcoin Issuance: Bitcoin is issued through mining. Miners solve mathematical puzzles to validate transactions and create new blocks, receiving a certain amount of Bitcoin as a reward.
Unlike common account-based systems like PayPal, Alipay, or WeChat Pay, Bitcoin does not directly adjust account balances for transfers. Instead, it uses the Unspent Transaction Output (UTXO) model.
Here’s a brief overview of the UTXO model to help understand the technical solutions of ecosystem projects:
- Each Transaction Creates a New UTXO: When a Bitcoin transaction occurs, it consumes previous UTXOs and generates new ones, which can be used as inputs for future transactions.
- Transaction Validation Relies on UTXOs: During transaction validation, the Bitcoin network checks whether the UTXOs referenced by the transaction inputs exist and are unspent, ensuring transaction validity.
- UTXOs as Transaction Inputs and Outputs: Each UTXO has a value and an owner’s address. When creating a new transaction, some UTXOs are used as inputs, while others are created as outputs for future transactions.
The UTXO model offers higher security and privacy, as each UTXO has its own owner and value, allowing for finer transaction tracking. Additionally, the design enables parallel transaction processing, as UTXOs can be used independently without resource contention.
However, due to block size limitations and a non-Turing-complete scripting language, Bitcoin has largely served as "digital gold" rather than hosting a broader range of projects.
After Bitcoin’s inception, colored coins emerged in 2012, allowing certain Bitcoins to represent other assets by adding metadata to the blockchain. In 2017, the block size debate led to hard forks, resulting in chains like Bitcoin Cash (BCH) and Bitcoin SV (BSV). Following these forks, Bitcoin continued to explore scalability solutions. The SegWit upgrade in 2017 introduced extended blocks and block weights, expanding block capacity. The Taproot upgrade, starting in 2021, improved transaction privacy and efficiency. These key upgrades laid the groundwork for various scalability protocols and asset issuance protocols, including the now-famous Ordinals protocol and BRC-20 tokens.
Although Bitcoin was initially positioned as a peer-to-peer electronic cash system, many developers have sought to move beyond its role as "digital gold" by enhancing its scalability and enabling more applications on the Bitcoin blockchain.
Bitcoin Ecosystem vs. Ethereum Smart Contracts
During Bitcoin’s development, Vitalik Buterin proposed Ethereum in 2013, which was later co-founded by Vitalik Buterin, Gavin Wood, and Joseph Lubin. Ethereum’s core concept was to provide a programmable blockchain, allowing developers to build various applications beyond mere currency transactions. This programmability made Ethereum a smart contract platform, enabling the creation and execution of automated, trustless agreements without third-party intervention.
With this feature, Ethereum gradually became the leader in the crypto space, hosting various Layer 2 solutions, applications, and diverse asset types like ERC-20 and ERC-721. It attracted numerous developers to build and enrich the Ethereum ecosystem.
Given Ethereum’s capabilities for smart contracts and dApp development, why is there a need to return to Bitcoin for scalability and application development? The reasons can be summarized in three key points:
- Market Consensus: Bitcoin is the earliest blockchain and cryptocurrency, enjoying the highest recognition and trust among the public and investors. Its acceptance and credibility are unparalleled, with a market capitalization of approximately $800 billion, accounting for about half of the total crypto market cap.
- High Degree of Decentralization: Among mainstream blockchains, Bitcoin is the most decentralized. Its creator, Satoshi Nakamoto, remains anonymous, and the chain is entirely community-driven. In contrast, Ethereum still has Vitalik Buterin and the Ethereum Foundation guiding its development.
- Demand for Fair Launches: Web3’s demand is closely tied to new asset issuance methods. In traditional token launches, whether for fungible tokens (FTs) or non-fungible tokens (NFTs), projects are typically issued by centralized entities, and散户 returns heavily depend on market-making by projects and venture capitalists. The Bitcoin ecosystem, however, has introduced innovative fair launch mechanisms like inscriptions, giving散户 more say and attracting greater capital and wealth to Bitcoin’s ecosystem. The renewed interest in Bitcoin’s ecosystem is largely due to the fair launch characteristics of inscriptions.
This is why, despite Bitcoin’s lower transactions per second (TPS) and longer block times compared to Ethereum, many developers are eager to introduce smart contracts and build applications on it.
In summary, just as Bitcoin’s rise stemmed from value consensus—widespread recognition as a valuable digital asset and medium of exchange—innovation in the crypto world is closely tied to asset properties. The current热度 of the Bitcoin ecosystem is primarily driven by inscription asset types like the Ordinals protocol and BRC-20 tokens. This热度 has, in turn, benefited the entire Bitcoin ecosystem, drawing more attention back to Bitcoin.
Unlike previous bull markets,散户 now wield increasing influence. Traditionally, venture capitalists and projects dominated the crypto market, driving the development of many blockchain projects. However, as散户 interest in crypto assets grows, they seek a greater role in the market, participating in project development and decision-making. To some extent,散户 have fueled the resurgence and prosperity of the Bitcoin ecosystem.
Thus, while the Ethereum ecosystem offers greater flexibility in 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, holds an unparalleled importance in the cryptocurrency landscape. Therefore, continued attention and efforts to develop the Bitcoin ecosystem are essential to unlocking its full potential.
Analysis of the Current State of Bitcoin Ecosystem Projects
The development of the Bitcoin ecosystem highlights two main challenges:
- Low Scalability: The Bitcoin network’s limited scalability requires better solutions to host applications.
- Few Applications: The ecosystem needs killer apps or projects to attract more developers and foster innovation.
To address these challenges, the Bitcoin ecosystem focuses on three areas:
- Asset issuance protocols
- Scalability solutions: on-chain scaling and Layer 2
- Infrastructure projects like wallets and cross-chain bridges
As the Bitcoin ecosystem is still in its early stages, applications like DeFi are only beginning to emerge. This article will primarily analyze asset issuance, on-chain scaling, Layer 2, and infrastructure.
Asset Issuance Protocols
The resurgence of the Bitcoin ecosystem in 2023 is largely attributed to the Ordinals protocol and BRC-20 tokens, which expanded Bitcoin’s use cases from mere value storage and exchange to asset issuance.
Following Ordinals, various asset issuance protocols like Atomicals, Runes, PIPE, and others have emerged to enable users and projects to issue assets on Bitcoin.
1. Ordinals & BRC-20
The Ordinals protocol allows users to mint NFTs on Bitcoin, similar to those on Ethereum. Early examples like Bitcoin Punks and Ordinal Punks were minted using this protocol. Later, the BRC-20 standard, built on the Ordinals protocol, sparked the "inscription summer."
The Ordinals protocol was launched in early 2023 by Casey Rodarmor, a seasoned technologist who had worked at Google, Chaincode Labs, and Bitcoin Core. Casey’s interest in NFTs dates back to 2017, but he found Ethereum’s approach overly complex. Inspired by Satoshi Nakamoto’s reference to "atoms" in the original Bitcoin codebase, Casey sought to make Bitcoin fun again, leading to the creation of Ordinals.
The protocol works by:
- Assigning Serial Numbers to Satoshis: Each satoshi (the smallest unit of Bitcoin) is numbered, and these satoshis are tracked during transactions, making them non-fungible.
- Attaching Arbitrary Content: Text, images, videos, or audio can be attached to individual satoshis, creating unique Bitcoin-native digital artifacts—inscriptions (commonly known as NFTs).
The numbering system is not native to the Bitcoin blockchain but is maintained by off-chain indexers, meaning the community has created an off-chain numbering system for on-chain satoshis.
After the launch of Ordinals, various NFTs gained popularity, and the total number of Bitcoin inscriptions has exceeded 54 million. The BRC-20 standard, built on Ordinals, further fueled the ecosystem.
BRC-20 tokens are created by inscribing JSON data into the witness section of transactions, enabling token deployment, minting, and transfer:
- Token Deployment: The JSON data specifies "deploy," along with the token name, total supply, and per-mint limits. Indexers recognize this information and begin recording the token’s minting and transactions.
- Token Minting: The JSON data specifies "mint," including the token name and quantity. Indexers add the corresponding token balance to the recipient’s address.
- Token Transfer: The JSON data specifies "transfer," including the token name and quantity. Indexers deduct the sender’s balance and add it to the recipient’s address.
Since BRC-20 token balances are inscribed in the witness data and not recognized by the Bitcoin network, indexers must maintain off-chain ledgers. Essentially, Ordinals uses the Bitcoin network as storage, with on-chain metadata and operation instructions, while all actual computations and state updates are handled off-chain.
BRC-20 tokens now dominate the Ordinals asset types, accounting for over 70% of all Ordinals assets as of January 2024. The market capitalization of BRC-20 tokens has reached $2.6 billion, with leading tokens like Ordi at $1.1 billion and Sats at around $1 billion. The emergence of BRC-20 tokens has injected new vitality into the Bitcoin ecosystem and the broader crypto world.
The popularity of BRC-20 can be attributed to two main factors:
- Wealth Effect: The explosive growth of Web3 protocols and projects is often driven by the wealth effect. BRC-20, as a new asset class on Bitcoin, naturally attracts attention and captivates users.
- Fair Launch: BRC-20 inscriptions offer fair launches where no one inherently holds an advantage. Unlike traditional Web3 projects, fair launches allow散户 to compete on a level playing field with venture capitalists, encouraging broader participation. Even if some actors attempt to mint large quantities of BRC-20 tokens, they incur minting costs.
Despite controversy within the Bitcoin community—critics argue that Bitcoin NFTs and BRC-20 tokens increase block sizes, raising hardware requirements for node operators and reducing decentralization—the Ordinals protocol and BRC-20 have demonstrated new value propositions for Bitcoin beyond digital gold. They have revitalized the ecosystem, attracting developers to work on scalability, asset issuance, and infrastructure.
2. Atomicals & ARC-20
The Atomicals protocol was launched in September 2023 by an anonymous Bitcoin community developer. It aims to enable asset issuance, minting, and trading without relying on external indexing mechanisms, offering a more native and robust asset issuance protocol than Ordinals.
Key technical differences from Ordinals include:
- Indexing: Atomicals uses UTXOs as the unit for indexing instead of numbering satoshis off-chain.
- Content Attachment: Instead of attaching content to the witness data of individual satoshis, Atomicals inscribes content into UTXOs.
The protocol also introduces a Proof-of-Work (PoW) mechanism, allowing miners to adjust prefix character lengths to control mining difficulty, ensuring fairer distribution.
Atomicals supports three asset types: NFTs, ARC-20 tokens, and Realm Names. Realm is an innovative domain name system that uses domains as prefixes rather than suffixes.
ARC-20, the official token standard of Atomicals, differs significantly from BRC-20:
- ARC-20 uses a colored coin mechanism, with token registration information recorded on UTXOs and transactions handled entirely by the Bitcoin network.
- Transactions rely on the Bitcoin network, avoiding meaningless transactions and reducing network congestion.
- No off-chain ledgers are needed, enhancing decentralization.
- Transfers require only one transaction (compared to two for BRC-20), significantly improving transfer performance.
However, ARC-20’s mining mechanism may lead to market costs being borne by miners, diminishing the fair launch advantage. Additionally, preventing users from accidentally spending ARC-20 tokens remains a challenge.
3. Runes & Pipe
Concerned about the UTXO bloat caused by BRC-20, Casey Rodarmor proposed the Runes protocol in September 2023, based on the UTXO model.
Runes is similar to ARC-20, inscribing token data into UTXO scripts and relying on the Bitcoin network for transactions. The key difference is that Runes allows users to define token quantities, unlike ARC-20’s fixed precision of 1.
The Runes protocol is still in the conceptual stage. A month after its proposal, Benny, founder of Trac, launched the Pipe protocol, which follows similar principles. Benny also aims to support more asset types, such as those akin to Ethereum’s ERC-721 and ERC-1155.
4. BTC Stamps & SRC-20
BTC Stamps is an asset issuance protocol distinct from Ordinals. Since Ordinals data is stored in the witness section and could be "pruned" by full nodes or erased during network hard forks, Twitter user @mikeinspace created BTC Stamps to address this risk.
BTC Stamps store data in UTXOs, embedding it irreversibly into the blockchain. This ensures permanent, tamper-proof storage, valuable for applications requiring immutable records like legal documents, digital art authentication, and historical archives.
Technically, Stamps encode image data into base64 strings, appending them to the "STAMP:" prefix in transaction descriptors. The data is split and embedded into multiple transaction outputs, making it impossible for full nodes to delete.
SRC-20, the token standard under Stamps, offers enhanced security compared to BRC-20:
- BRC-20 stores data in the witness section, which may be pruned due to less-than-100% SegWit adoption.
- SRC-20 stores data in UTXOs, becoming a permanent part of the blockchain.
BTC Stamps support various asset types, including NFTs and FTs. SRC-20 tokens, as FTs, offer greater security and immutability but come with higher minting costs. Initially, SRC-20 minting fees were around $80, several times higher than BRC-20’s. After the SRC-21 upgrade in May 2023, fees dropped to $30, similar to ARC-20 but still six times higher than BRC-20’s current fees of $4–5.
Despite higher costs, SRC-20 requires only one transaction for minting and transfers, unlike BRC-20’s two transactions. During network congestion, this reduces time costs and gas fees for accelerating transactions. Additionally, SRC-20 supports four Bitcoin address types (Legacy, Taproot, Nested SegWit, and Native Segwit), while BRC-20 only supports Taproot addresses.
In summary, SRC-20 tokens offer significant advantages in security and transaction convenience over BRC-20. Their immutable nature aligns well with the Bitcoin community’s emphasis on security, and their divisibility provides more flexibility than ARC-20’s one-token-per-satoshi limit. However, transfer costs, file size limitations, and type constraints remain challenges for SRC-20.
5. ORC-20
The ORC-20 standard aims to enhance BRC-20 tokens’ utility and address existing issues. Currently, BRC-20 tokens can only be sold on secondary markets, with fixed total supplies and no mechanisms for staking, issuance, or other economic activities like ERC-20 tokens.
Moreover, BRC-20 tokens heavily rely on external indexers, posing risks of centralization and double-spending attacks. For example, if a BRC-20 token is fully minted, additional minting attempts are invalid but still recorded due to transaction fees, requiring indexers to determine validity. In April 2023, Unisat experienced a double-spending attack during its early stages, though it was promptly resolved.
ORC-20 addresses these issues by:
- Compatibility with BRC-20: ORC-20 is backward-compatible with BRC-20 while offering improved adaptability, scalability, and security.
- Flexible Naming and Data Formats: Unlike BRC-20, ORC-20 has no restrictions on names or namespaces and supports case-insensitive JSON data.
- Mutable Supply: ORC-20 allows changes to initial issuance values and maximum minting limits after deployment.
- UTXO Model: Transactions use the UTXO model, where senders specify amounts for recipients and themselves, mirroring Bitcoin’s UTXO mechanism. This prevents double-spending, as UTXOs can only be used once.
- ID Identification: Tokens are distinguished by unique IDs, even if they share the same name.
ORC-20 can be seen as an upgraded version of BRC-20, offering greater flexibility and richer economic models. Its compatibility with BRC-20 makes it easy to wrap BRC-20 tokens into ORC-20 tokens.
6. Taproot Assets
Taproot Assets is an asset issuance protocol launched by Lightning Labs, the development team behind the Lightning Network. Its key features include:
- UTXO-Based: Fully compatible with native Bitcoin technologies like RGB and Lightning.
- Customizable Token Quantities: Unlike Atomicals, Taproot Assets allows users to define token amounts, enabling multiple tokens to be created or transferred in a single transaction.
- Lightning Network Integration: Users can open Lightning channels with Taproot transactions, depositing Bitcoin and Taproot Assets into channels in one Bitcoin transaction, reducing costs.
However, Taproot Assets has some drawbacks:
- Trust Assumptions: Metadata is not stored on-chain, relying on off-chain indexers to maintain state. Data is stored locally or on "Universes" (servers containing historical data and verification information for specific assets), introducing trust assumptions.
- Not Fair Launch: Users cannot mint tokens themselves; instead, projects issue and distribute all tokens, transferring them to the Lightning Network. This centralizes control over issuance and distribution.
Elizabeth Stark, co-founder of Lightning Labs, aims to lead a Bitcoin renaissance through Taproot Assets while promoting the Lightning Network as a multi-asset network. Native integration with Lightning allows users to deposit Taproot Assets directly into Lightning channels for trading without cross-chain transfers, enhancing convenience.
7. Current State Analysis Summary
The emergence of the Ordinals protocol and BRC-20 standard sparked the inscription热潮, redirecting attention to asset issuance protocols on Bitcoin. This has led to a variety of protocols like Atomicals, Runes, BTC Stamps, and Taproot Assets, along with standards such as ARC-20, SRC-20, and ORC-20.
Beyond these mainstream protocols, others are in development, such as BRC-100 (a decentralized computing protocol based on Ordinals theory) and BRC-420 (similar to ERC-1155, enabling complex assets for games and metaverse applications). Even meme coin communities are exploring new asset protocols, like Dogecoin’s DRC-20, creating a diverse landscape.
Current asset issuance protocols can be divided into two camps: BRC-20-style and UTXO-style. The former includes BRC-20 and its enhanced version, ORC-20, which inscribe data in the witness section and rely on off-chain indexers. The latter includes ARC-20, SRC-20, Runes, Pipe, and Taproot Assets, which use UTXOs for data storage.
These two approaches symbolize different philosophies in the Bitcoin ecosystem:
- BRC-20: Emphasizes simplicity and elegance, offering a minimal viable product (MVP) with minimal code innovation.
- ARC-20: Focuses on problem-solving, addressing issues and optimizing through a bottom-up development approach.
Currently, BRC-20 holds the leading position due to first-mover advantage. Whether SRC-20, ARC-20, or other standards can capture the second spot or overtake BRC-20 remains to be seen.
Ultimately, the "inscription" trend has introduced fair launch models for散户, bringing significant attention to the Bitcoin ecosystem. According to OKLink data, Bitcoin miners’ fee income exceeded 10% from December 2023 onward, providing tangible benefits. Driven by the shared interests of the Bitcoin ecosystem, inscription ecosystems and asset issuance protocols are likely to enter new phases of exploration and development.
On-Chain Scaling
Asset issuance protocols have reignited interest in the Bitcoin ecosystem, but for sustained growth, scalability and transaction confirmation times must be addressed. Scaling solutions for Bitcoin primarily follow two paths: on-chain scaling (optimizing Bitcoin Layer 1) and off-chain scaling (Layer 2). This section and the next will explore both.
On-chain scaling aims to increase transactions per second (TPS) by adjusting block sizes and data structures, as seen with BSV and BCH. However, these lack consensus within the mainstream Bitcoin community. Among widely accepted on-chain scaling upgrades, SegWit and Taproot are the most notable.
1. SegWit Upgrade
Implemented in July 2017, the Segregated Witness (SegWit) upgrade significantly enhanced Bitcoin’s scalability through a soft fork.
SegWit’s primary goals were to address transaction processing limits and high fees. Before SegWit, Bitcoin transactions were constrained by a 1MB block limit, causing congestion and elevated fees. SegWit reorganized transaction data structures, separating witness data (signatures and scripts) into a new "witness section."
This introduced a new block size measurement unit called weight units (WU). Non-SegWit blocks have 1 million WU, while SegWit blocks have 4 million WU, effectively increasing block capacity beyond 1MB. This allowed more transactions per block, reducing congestion and fees.
SegWit’s importance extends beyond scalability. It facilitated subsequent upgrades like Taproot and enabled the Ordinals protocol and BRC-20 tokens by utilizing the witness section for data inscription. In many ways, SegWit laid the groundwork for the inscription boom.
2. Taproot Upgrade
The Taproot upgrade, implemented in November 2021, combined three Bitcoin Improvement Proposals (BIPs)—BIP 340, BIP 341, and BIP 342—to enhance Bitcoin’s scalability, privacy, security, and functionality.
Key advantages include:
- Schnorr Multi-Signature Aggregation: BIP 340 introduced Schnorr signatures, allowing multiple public keys and signatures to be aggregated into one. This reduces transaction data size, increasing network capacity and making operations faster and cheaper.
- Enhanced Privacy: BIP 341’s Pay-to-Taproot (P2TR) uses a new script type combining P2PK and P2SH functionalities. It adds privacy by making all Taproot outputs appear similar, obscuring differences between multi-signature and single-signature transactions.
- Advanced Smart Contracts: Taproot enables more complex smart contracts through "Tapscript," allowing developers to create conditional payments, multi-party consensus, and other functionalities, expanding Bitcoin’s potential.
In summary, SegWit and Taproot upgrades have improved Bitcoin’s scalability, efficiency, privacy, and functionality, laying a solid foundation for future innovation.
Off-Chain Scaling: Layer 2
Due to Bitcoin’s inherent structural limitations and decentralized consensus, on-chain scaling solutions often face community skepticism. Many builders have turned to off-chain scaling, constructing Layer 2 networks on top of Bitcoin.
Bitcoin Layer 2 solutions can be categorized based on data availability and consensus mechanisms: state channels, sidechains, Rollups, and others.
State channels allow users to create off-chain communication channels for high-frequency transactions, recording only final outcomes on-chain. They are primarily limited to payment scenarios. Rollups and sidechains differ in security inheritance: Rollups rely on mainnet consensus, while sidechains have independent consensus.
Additionally, protocols like RGB offer off-chain scaling solutions to enhance network scalability.
1. State Channels
State channels are temporary communication channels built on the blockchain for efficient off-chain interactions. They enable participants to conduct multiple transactions off-chain before recording the final result on-chain. This improves transaction speed and throughput while reducing fees.
The most prominent state channel project is the Lightning Network. Conceptualized in 2015 and launched by Lightning Labs in 2018, the Lightning Network is a state channel network built on Bitcoin, allowing users to open payment channels for fast, off-chain transactions.
Technically, the Lightning Network works as follows:
- Opening Channels: Parties open payment channels by locking funds into smart contracts on the Bitcoin blockchain.
- Off-Chain Transactions: Participants conduct numerous transactions off-chain, updating temporary fund allocations without on-chain recordings.
- Closing Channels: When transactions are complete, parties close the channel, broadcasting the final state to the Bitcoin network for settlement.
In case of disputes, such as incorrect state broadcasts, a challenge period allows parties to contest settlements. If a party broadcasts an outdated state, penalties