Binance explores the evolution of Bitcoin

Although BTC has firmly ranked first in the list of popular cryptocurrencies by market value, the sustainability of the Bitcoin ecosystem has long been an urgent issue. Block rewards are halved every four years, and miners are less incentives to protect the network, which may affect the security model of the network. Although Bitcoin has maintained its leading position so far, how can it continue in the future?

As ordinal numbers and inscriptions appear in early 2023, perhaps solutions to these problems will also gradually emerge. We have not only seen the rise of "Bitcoin NFT" with our own eyes, but also witnessed the resurgence of the entire Bitcoin ecosystem, although not everyone favors these innovations. As Bitcoin’s activity and new use cases increase, it is significant to observe their impact.

Today, we will explore the next stage of Bitcoin’s evolution. We will discuss the current status of the Bitcoin ecosystem, including on-chain metrics and technology upgrades, as well as ordinal numbers and inscriptions. Please note: This article was adapted from a report released by Binance Research Institute on April 1, 2023. Therefore, this blog does not cover numbers and data after that day.

Bitcoin plays an important role

Although smart contract platforms such as Ethereum and BNB Chain continue to make headlines, Bitcoin’s market value has clearly been at the forefront. Although BTC's market dominance has declined from 60%-70% in 2020 and 2021, this earliest cryptocurrency still accounts for most of the market.

Bitcoin Layer 1 (L1) blockchain has relatively few smart contract functions, so this dominance confirms the firm belief of long-term Bitcoin holders in BTC. Because of the relatively lack of infrastructure, it also shows that users hold Bitcoin more value their original use as hard currency than their non-monetary use.

Although Bitcoin has made some innovations, it is far less innovative than smart contract giants such as Ethereum and BNB Chain. This is largely due to design and is due to the slow and cautious nature of the Bitcoin network, but it is an advantage for those who prefer to use Bitcoin as a hard currency. Anyway, this concerns those who question the sustainability of Bitcoin’s security model.

Bitcoin incentivizes miners to protect the network through two economic resources: block rewards and transaction fees. Block rewards are reduced by half every four years and will eventually be reduced to zero. In this way, the transaction fee, namely the security budget of the L1 blockchain, will eventually become the only compensation for miners. However, because Bitcoin has a limited range of use cases (mainly used for asset transfers), these expenses used to represent only a small percentage of miners' income and were a long-term concern. At present, Bitcoin’s annual security budget (block reward + transaction fee) is mainly composed of block rewards. The block reward is reduced by half every four years and will eventually be reduced to zero

In January this year, the Ordinals protocol was launched. Ordinal numbers allow the creation of "inscriptions" on the Bitcoin blockchain to burn arbitrary data (images, videos, texts, etc.), which is a digital artwork similar to NFT.

As of July 6, 2023, the total number of inscriptions has exceeded 15 million and is growing rapidly. The change has brought Bitcoin activity to a new level, and the attention of projects built around the Bitcoin network has increased. Not only has the Bitcoin memory pool, transaction fees and block size been affected, but people's awareness of Bitcoin has also changed. The focus of existing projects is increasing, while new developers are competing to flock to the ecosystem. The fundamental demand for Bitcoin block space suddenly surged.

Recent updates of Bitcoin network

We will briefly study two key points: on-chain indicators and technology upgrades. While we only have a general discussion of them, this will help us explore the evolution of Bitcoin.

On-chain indicators

Although the number of daily transactions was quite considerable in 2021, with more than 300,000 transactions at a high level, it was even more moderate in 2022. Most of the year, the number of daily transactions fluctuated around the 250,000 mark. In 2023, as the number of daily transactions rose again to the 300,000 mark, this trend has changed recently.

Similar to the number of daily transactions in Bitcoin, the active Bitcoin daily address fell sharply from its high in 2021 (peak of approximately 1.2 million). In 2022, Bitcoin’s daily active addresses fluctuated at the 900,000 mark. This year, Bitcoin’s daily active addresses increased slightly, and are currently about 1 million.

Technology upgrade

Bitcoin has experienced two major upgrades over the past six years: the 2017 Quarantine Witness (SegWit) upgrade and the 2021 Taproot upgrade.

SegWit is a soft fork made by Bitcoin in 2017. SegWit divides the transaction structure of Bitcoin into two parts: transaction data and witness data. The weight of witness data is only 25% of the transaction data weight. In this way, it becomes easier and cheaper to store information in the witness data of transactions. Essentially, SegWit greatly increases the maximum size of the Bitcoin block.

Taproot is a soft fork in 2021, including three distinct Bitcoin Improvement Proposals (BIP): BIP 340, BIP 341 and BIP 342. Each proposal adds privacy, scalability and composability of blockchain. The Taproot upgrade has brought two main achievements, one is to allow high-level scripts to be written in the witness part of the block, and the other is to eliminate data restrictions between the witness and the transaction part.