June 11, 2023

A look at innovation in the Bitcoin technology stack

Over the past ten years, Bitcoin has come a long way, and in comparison with its first implementation, quality and the reliability of current versions has improved markedly. Bitcoin quickly and organically attracted an army of developers who devoted thousands of hours to improving it, and, sometimes, updating the main part of the code. However, Bitcoin is still the same as before. Indeed, as in the case of the state Constitution, the main consensus that determines the monetary properties of Bitcoin, such as algorithmic inflation and a hard-coded proposal, remains unchanged. And, despite the fact that various factions tried again and again to change them - their hostile attacks still fail. All this is a rather painful process, but it only emphasizes two main advantages of Bitcoin: no one can dictate how it develops and the lack of centralized control that protects the fundamental monetary properties of this currency.

Curiously, these features are attractive.both for cipher banks and large investors. These are the rules that made Bitcoin a kind of money, unaware of example. At the same time, these same rules make software development on top of the main Bitcoin network much more complex compared to other digital assets. In fact, the Bitcoin constitution provides developers with a rather limited toolkit, but this is only so that they do not violate the basic monetary policy. Too much is at stake to rush and break something.

This means that innovation in Bitcoin requires creativity, patience, and most importantly, minimizing your own ego.

Incidentally, the fundamental rules laid downBitcoin’s constitution ultimately puts technology itself in the background. That's why Silicon Valley still has a hard time understanding Bitcoin's value. After all, this is not just technology, a financial instrument or a consumer offer - it is a whole monetary system that is only supported by technology. And any process aimed at changing the Bitcoin constitution can violate its fundamental monetary principles. That is why all significant technological innovations are implemented exclusively through additional modules.

What is the danger of a myopic look at Bitcoin?

It has been repeatedly noted that a modular approachBitcoin's innovation is similar to evolution for a set of different protocols on the Internet that specialize in different functions. Emails are processed via SMTP, web pages via HTTP, user device addressing by IP, and data packet routing by TCP. Each of these protocols has evolved over the years to provide you with the result you get at that very second.

In an excellent post by Spencer Bogart aboutthe birth of the Bitcoin technology stack - he claims that we are now witnessing the beginning of the development of our own set of Bitcoin punctures. In practice, the lack of Bitcoin flexibility at a basic level has given rise to a number of additional protocols that specialize in various functions. As an example, we can cite the Lightning BOLT standard, created to implement fast payment channels. Such innovations are bright enough, and, at the same time, relatively safe, since a modular approach minimizes risks for the main system.

Today, in the technological stack of Bitcoinso many things are happening that perhaps tracking down the emergence of new solutions has become incredibly difficult. The diagram below is an attempt to graphically display all relatively new initiatives and show a more complete picture of the technological stack in Bitcoin at the moment. Moreover, the information is not exhaustive and does not mean direct support for all initiatives. Nevertheless, it is extremely impressive that innovation is moving forward on all fronts: from second-level technologies to new solutions in the field of smart contracts.

Second level solutions

There has been a lot of talk aboutThe adoption of Lightning Network, the most outstanding second-level technology. Critics often point to an obvious decrease in the number of channels and the total number of reserved bitcoins on this network. These are two key indicators that are typically used to measure users' acceptance of a given technology. Although the community agreed on a similar model, it’s important to note that this is a fundamentally wrong approach, given how the Lightning Network actually works.

One of the most underrated benefitsLightning Network is its privacy. Since Lightning does not rely on checking its own chain, users can make private transactions using additional solutions such as Tor.

Not a simple guide to setting up and using the full Lightning Network node

At the moment, you can estimate the percentagePrivate use of the Lightning Network by comparing the number of private and public channels. Researcher Christian Decker estimates that 41% of Lightning's channels are private.

Activity in private channels is not fixedPopular Lightning Network researchers. Thus, an increase in the private use of the network leads to a distortion of public measurements, and, accordingly, the observers illusion that the level of technology adoption is declining.

Although, it is worth recognizing that the Lightning Network is everythingstill has to overcome the significant barriers to usability before it gets really widespread. But, now it is necessary to stop using erroneous indicators to assess the current state of the network. As Decker noted in his last speech at a conference in Berlin, even the above assessment of private and public channels is erroneous, because the implementation of Schnorr's signatures makes transactions for opening channels in Lightning indistinguishable from ordinary ones.

Another interesting event in the fieldThe second level of confidential solutions was the creation of WhatSat, a private messaging system on top of Lightning. This project is a modification of Lightning Deamon, which allows private messengers (messengers connecting users to communicate) to receive compensation for their services through micropayments. This decentralized, censorship and spam-resistant chat has been made possible by innovations in the LND client itself, such as recent improvements to Lightning-Onion, Lightning’s proprietary onion routing protocol.

The growing number of Lapps or Lightning applicationsApplications demonstrates a wide range of applications of these innovations, especially when it comes to user applications: from cloud computing based on Lightning VPS technology to an image hosting service that receives advertising revenue through microtransactions. And these are just innovations in the Lightning Network.

In a broader sense, second level solutionsare a set of applications that use the Bitcoin core blockchain as a judge, with which external events are consistent and disputes are resolved. Therefore, the topic of data binding to the Bitcoin blockchain is much wider than it might seem, and even large companies such as Microsoft have implemented a decentralized identification system on top of Bitcoin. Such initiatives increase the demand for solutions tied to the Bitcoin blockchain, and also play an important role in the development of the commission fee market.

Smart contracts

Also, there are a number of projects that are tryingreturn to Bitcoin the functionality of smart contracts in the most responsible and safe way. This is an important event, since, starting in 2010, some parts of the Bitcoin source code that determine what it is able to calculate have been removed from the main protocol. This happened after a series of fatal errors were revealed that forced Satoshi Nakamoto to disable some scripting functions of the programming language in Bitcoin.

Over the years it has become very clear thatthere are real risks that carry the functionality of smart contracts. The general principle is that the more functionality is put into a virtual machine (a collective verification mechanism that processes operation codes), the more unpredictable it will be.

But, more recently, new approaches tothe architecture of smart contracts in the Bitcoin blockchain, which are likely to not only minimize unpredictability, but also provide wide functionality.

Development of a new approach to smart contracts onBitcoin called Merkleized Abstract Syntax Trees (MAST) has led to a new wave of technologies that are trying to strike a trade-off between functionality and security.

The most notable solution is Taproot -elegant implementation of the MAST structure, which allows you to express the code of the entire application as a Merkle tree, and each branch of this tree represents a different result of code execution. Together with Taproot, the Tapscript language was born, which can be used to more easily express the cost conditions associated with each branch of the tree.

Peter Wuile introduced two BIPs for the future Bitcoin soft fork

Another interesting innovation is architecture.for the implementation of special agreements (covenants) specifying the storage conditions of bitcoins. Originally proposed by Greg Maxwell as a thought experiment in 2013, covenants are an approach that allows you to limit the consumption of residues even when changing their storage conditions. And, although the idea has existed for almost seven years - covenants were impractical to implement before the advent of Taproot technology. Now new operating code [opcode] OP_CHECKTEMPLATEVERIFY (formerly known as OP_SECURETHEBAG) uses this new technology to potentially ensure the safe execution of covenants on the Bitcoin blockchain.

At first glance, covenants are incredibly useful inthe context of lending, and possibly the creation of derivatives based on Bitcoin, because they allow you to create policies, for example, to return the overhead to a specific Bitcoin address. But, the potential of covenants in Bitcoin goes far beyond mere lending.

Covenants may provide for the implementation of suchthings, like bitcoin vaults, which are the equivalent of a second private key, which allows the hacked party to “freeze” stolen funds.

Also, there are many other uses.of this technology: Non-Interactive Payment Channels, Congestion Controlled Transactions and CoinJoins, which definitely deserve a separate post. You can learn more about this from Jeremy Rubin's BIP project. [eng].

It is important to note that Schnorr's signatures arethe technological foundation that makes all these new approaches to the implementation of smart contracts on Bitcoin possible. After activating the Schnorr signatures, you can begin to develop even more complex solutions, such as Scriptless Scripts, which will allow absolutely confidential and scalable smart contracts to be presented in the form of digital signatures, unlike operating codes [opcodes].

Schnorr Signatures and the Inevitability of Confidentiality in Bitcoin

Similarly, the idea of ​​submissionThe results of smart contracts in the form of digital signatures are used in Discreet Log Contracts technology, which is designed to increase the level of confidentiality and scalability.

Together, this innovative approach will allow the introduction of new types of applications based on smart contracts in Bitcoin.


Additionally, there are interesting developments inareas of mining protocols, especially those used by participants in mining pools. Despite the fact that the problem of centralization in mining may be somewhat exaggerated, it is worth admitting that the owners of mining pools have excessive power, which, in practice, can be decentralized. Now, it is the owners of the mining pools who decide which transactions will be included in the blocks, which, in fact, gives them significant power. At the same time, some operators abuse this opportunity: censor transactions, extracting empty blocks, and also redistribute the power of miners to other digital assets without warning.

But, there are technologies that can turnthis structure upside down. One of the most significant changes in bitcoin mining is the popular Stratum V2 protocol. This is a complete upgrade, on which the secondary BetterHash protocol is implemented, allowing miners to independently determine the composition of the mined blocks. Additionally, Stratum V2 allows you to improve the interaction and coordination between the participants of the mining pool.

BetterHash: decentralized bitcoin mining with new hash protocols

Another interesting innovation in mining, whichshould contribute to greater stability - this is a renewed interest in solving problems related to hashrate against the background of the development of "difficulty derivatives". They can be useful for miners who want to insure themselves against fluctuations in the level of mining difficulty. And although such derivatives have not yet been created - this is an interesting evolution in the mining industry.


Following our report on Schnorr's signatures -Some proponents of confidentiality-oriented coins were concerned about the fact that at some point in Bitcoin, sufficient anonymity could also be ensured. Yes, this may cast doubt on the value of such coins in the long run, especially since there are many more new protocols for Bitcoin that can increase the level of privacy. Although anonymity in Bitcoin is likely to remain more of an art than a science, interesting innovations have already appeared on the horizon that are worth mentioning.

Before delving into this topic, it is important to note that the main obstacle to transaction confidentiality is the fact that most solutions are simply not yet fully developed.

Enthusiasts interested inConfidentiality often focuses on the privacy of the blockchain itself and overlooks the network layer or vice versa. At the same time, both of these vectors suffer from insufficient maturity and elaboration, which simplifies the deanonymization of transactions. True, there are several projects that are working on this problem.

In terms of privacy, blockchains are interestingsolutions like P2EP and CheckTemplateVerify, as privacy is combined with efficiency. Additionally, a new approach like CoinJoin promotes the implementation of confidential transactions by motivating users with lower transaction fees. Although CoinJoin does not give full guarantees of anonymity, it is worth recognizing that unprotected transactions are also needed, because they allow you to evaluate the total turnover of coins in Bitcoin.

If lower transaction feereally become a motivator and lead to greater anonymity, as an example - UTXO output, which can become outputs in CoinJoin, then deanonymization through statistical cluster analysis will become even more subjective than now. Some companies that analyze blockchains have managed to convince law enforcement agencies that there is a high probability that the UTXO output belongs to a specific user, but this basic approach has become too unreliable. If most of the UTXO output becomes output in CoinJoin, this could disrupt the existing clustering approach.

Samourai Wallet Adds CoinJoin to Enhance Privacy

But before this happens, it will takedo a great job in the field of usability so that all users in Bitcoin, whether they have technical knowledge or not, have equal access to privacy mechanisms. In addition to P2EP and CheckTemplateVerify, SNICKER, a simplified “non-interactive” solution, has become a recent development in this area. [no direct interaction] CoinJoin option with reusable keysencryption, which is a new way to create “coin_join transactions” between untrusted peers. SNICKER has combined several technologies to provide access to transactions on the basis of CoinJoin without the need for trust or interaction between users.

Also, progress in protocol development is noticeable,aimed at privacy and efficiency at the level of P2P communication. In 2019, Dandelion's new protocol, aimed at increasing privacy, was successfully tested in several crypto networks. And although privacy is not the so-called “silver bullet” when performing transactions, especially when it comes to the full network spectrum as a whole, protocols like Dandelion can significantly increase user privacy by hiding the IP address that broadcasts the transaction.

And another protocol in the technology stackBitcoin, which definitely deserves attention, is a new transaction relay solution - Erlay. Despite the fact that Erlay is still at a very early stage of development, this is an important innovation, since it significantly reduces the requirements for network bandwidth when running a full Bitcoin node. In the case of implementation, Erlay will allow users to participate in transaction relaying, which is certainly useful depending on the high network bandwidth and the need for constant blockchain verification, especially, it is relevant for countries where Internet providers impose restrictions on network speed.


And all this is just the tip of the iceberg,It’s incredibly difficult to keep track of all the innovations taking place in Bitcoin, so this post is just a scratch on the surface. Therefore, the key conclusion suggests itself: Bitcoin in the aggregate is a constantly evolving set of protocols. And the modular approach to innovation described above is extremely important, because it plays a key role in minimizing authoritarianism in the evolution of Bitcoin and protects its fundamental monetary properties. It is recommended that you recall this article when someone says that Bitcoin is a static technology.

Posted by: Lucas Nuzzi