Bitcoin’s ecosystem is on the cusp of a ” Cambrian Explosion.”

Lisa Neigut is a Lightning Protocol Engineer for Blockstream’s Bitcoin infrastructure company. She presented about the “state” of the chain at CoinDesk’s Consensus conference 2023 last week.

According to Neigut, the catalyst for increased functionality will be new features such as covenants and script upgrades. Bitcoin smart contracts such as the bitcoin improvement proposal 118, also known as SIGHASH_ANYPREVOUT or APO in short, are covenants that limit how bitcoins ( BTC ) can be used. Blockstream has proposed introducing Simplicity as a new language for Bitcoin Smart Contracts.

The network has already experienced a technological renaissance due to the introduction by the Ordinals protocol of Bitcoin non-fungible Tokens (NFT). In less than five months, more than 3,3 million NFTs (or “inscriptions”) have been created.

Bitcoin development is slow, but Neigut claims that the Flywheel Effect will occur once certain functionality has been implemented on the base layer.

Neigut stated that “APO will, hopefully, unleash a Cambrian Explosion with these script updates, and new covenants.” “I think there will be a lot more layer 2 stuff in the future,” Neigut said.

The dominant blockchain in the world already boasts one of most diverse layer-2 ecosystems. Bitcoin has six major layer-2 protocols: the Lightning Payment Network, the Liquid Sidechain, the Fedimint, Cashu, and wrapped bitcoin (wBTC), as well as Bitcoin Statechains.

Bitcoin’s layer 2 ecosystem is diverse

Lightning Network is an off-chain scaling system for Bitcoin, also known as a payment channel.

Ryan Gentry, Director of Business Development at Lightning Labs’ infrastructure company Lightning Labs, stated during his presentation to Consensus, that Lightning was the only crypto network of its type. Gentry stated that “Lightning was unique.” There is no other widespread payment channel network that I am aware of in the entire crypto space. Lightning is the only network and it scales really well.”

Lightning’s Network Capacity, the total bitcoin amount in the system, is just over 5,425 BTC.

Blockstream released a White Paper in 2014 on sidechains. Blockstream has developed a fully-functional Bitcoin sidechain, a secondary blockchain which interacts with the primary blockchain. This is called Liquid. It allows users to create security tokens or other digital assets.

Fedimint Cashu

Both Federal Mint as well as Cashu, are Bitcoin custody protocol. The “Chaumian Mints” concept was originally created in 1983 by computer scientist and cryptographer David Chaum.

Chaumian Mints uses blind signatures to protect user privacy. Blind signatures are used to hide (or blind) a message before it is digitally signed. This preserves the anonymity of the sender.

Fedimint takes it a step farther by combining Chaumian Mints with Multi-Signature (Multisig) capabilities and Communities or Federations that assist their members in bitcoin custody, to create a Protocol that allows community-based custody.

Wrapping bitcoin

Wrapped tokens (or tokenized crypto assets) are synthetic versions of cryptoassets that aren’t native to the blockchains where they exist.

Wrapped bitcoin ( WBTC), is a ERC-20 token backed by one BTC. It’s typically used within the Ethereum Decentralized Finance (DeFi ecosystem).

Bitcoin statechains

Bitcoin statechains were created by the self-described “Bitcoin Sorcerer Ruben Somsen. Statechain users store bitcoins in a multisig 2-of-2 wallet that is controlled by both the user and a statechain federation. When a user wishes to send funds to a recipient, they hand their private key over (also known as the transitory keys).

Statechains provide a similar scaling benefit to Lightning, because they are performed off-chain.

What is coming next?

Lightning, for example, has been around since years. Cashu, for example, is still an experimental project. Neigut said that new developments such as Bitcoin’s Signet testnet, will not only test the robustness and speed of new proposals but also help to accelerate some of these experimental projects.

One of these proposals could be validity rollups. Bitcoin researcher John Light was the first to write about . A validity rollup would combine a large number of transactions off-chain and validate them, before submitting the validated batch to the Bitcoin blockchain as a “rolled up” single transaction.

Neigut said, “There is a lot going on with Bitcoin.” Miniscripts is a way to express and write Bitcoin contracts. CoinSwaps is a new way to exchange bitcoin that makes it harder for third parties to know who sent the coins to whom. “I’ve only touched the tip of the Iceberg.”

Bradley Keoun is the editor.