Background

Satoshi created Bitcoin as a peer-to-peer cash system, a vision that many Bitcoiners see as the ultimate use-case for the cryptocurrency. However, from the early days, there has been a push to develop other asset types on Bitcoin's blockchain. Bitcoin serves as the network, a peer-to-peer ledger that tracks unspent transaction outputs (UTXOs), which are the records of all Bitcoin transactions. The term 'bitcoin' (with a small 'b') refers to the asset itself, which is transferred across this network. While 1 bitcoin will always equal 1 bitcoin, the question arose: what if we could build other asset types that could live and move on Bitcoin?

For example, Colored Coins emerged as an early attempt to create additional asset types on Bitcoin's blockchain. The concept was introduced by notable figures like Yoni Assia, Vitalik Buterin and Meni Rosenfeld around 2012. Essentially, Colored Coins are bitcoins with a "mark" that specifies their unique purpose or value, which can be tied to real-world assets like property, shares, or even collectibles, laying the groundwork for NFTs and fungible tokens on Bitcoin. While Bitcoin was not ready for a token economy in 2012, it has developed tremendously since then to get where it is today.

The Four Upgrades that Led to Today

1. Segregated Witness (SegWit): Implemented in 2017, SegWit was a critical upgrade that separated transaction signatures (witness data) from transaction data, reducing the size of each transaction. This increased Bitcoin's block capacity, allowing more transactions per block, and addressed transaction malleability—a vulnerability that could alter transaction IDs, setting the stage for further enhancements to Bitcoin's scalability and functionality.

2. Taproot: Activated in 2021, Taproot builds on the improvements made by SegWit, further enhancing Bitcoin's privacy, scalability, and flexibility. Taproot's integration of advanced scripting capabilities enables more sophisticated smart contracts and multi-signature setups. Together with SegWit, Taproot's enhancements facilitated the creation of new applications and protocols, such as Ordinals, by providing a more efficient and private transaction environment.

3. Ordinals: Leveraging the advancements from SegWit and Taproot, Ordinals introduced a new way to create and transfer unique digital assets, including non-fungible tokens (NFTs), directly on the Bitcoin blockchain. This protocol allows for the inscription of digital art, collectibles, and other unique assets, expanding Bitcoin's use cases beyond traditional currency. A key aspect of Ordinals is the introduction of BRC-20 tokens, which are fungible tokens similar to Ethereum's ERC-20.

4. Runes: Runes further extend Bitcoin's functionality by enabling the creation and management of fungible tokens on the Bitcoin blockchain. Similar to ERC-20 tokens on Ethereum, Runes allow for the representation and transfer of various assets, such as digital currencies, commodities, or real-world items. Ordinals, BRC-20, Runes and other protocols from the basis of Bitcoin finance - BTCfi. For the first time, Bitcoin has a token economy to call its own.