How the RGB protocol is a game-changer for Bitcoin layer 2 solutions?

Author: BitpushNews Mary Liu

Although the enthusiasm around Ordinals NFT and BRC-20 has subsided, Bitcoin expansion will usher in a new wave of disruption. The assets minted by the Ordinals protocol have been criticized for their inefficiency and high cost. People hope to find a way to issue assets that will not burden the BTC network. One of the highly discussed solutions is the RGB Protocol.

Similar to the functions currently provided by Ethereum, RGB hopes to create and manage assets on the Bitcoin network in a more cost-effective and user-friendly way, including building decentralized applications (DApps), NFT, real-world asset tokenization, and more .

Origin of RGB protocol

The seeds of the RGB protocol can be traced back to 2018, when members such as bitcoin developers Giacomo Zucco, Peter Todd, and Alekos Filini began exploring new ways to create and manage assets on the bitcoin network. Their goal is to design a protocol that takes advantage of bitcoin's security and decentralization while supporting more complex features like asset issuance and smart contracts. RGB was originally launched by Giacomo Zucco as "BHB Network" and then relaunched in 2019.

How the RGB protocol works

RGB is based on the idea of client-side verification, which means that most of the data is stored off-chain, and only necessary transaction data is stored on the Bitcoin blockchain. This approach could help scale the network by reducing the amount of data that needs to be stored and verified on the blockchain, resulting in faster transactions and lower fees.

**The core idea behind the RGB protocol is to combine asset issuance, ownership and status updates with Bitcoin's UTXO model through client-side verification, instead of relying on full nodes of the Bitcoin network like BRC-20. **This method utilizes the security of the Bitcoin mainnet UTXO to provide security for off-chain asset issuance and contract logic.

According to its official explanation, the RGB protocol works as follows:

1. The asset issuer creates a new asset on the client side, generating a one-time seal and transaction commitment.

2. The issuer anchors the new asset to the Bitcoin network by embedding the commitment into the Bitcoin transaction output (UTXO).

3. The asset receiver verifies the validity of the asset by checking the commitment and verifying the one-time seal.

4. During the asset transfer process, the old one-time seal is destroyed, and the new one-time seal, commitment and transaction data are anchored to the Bitcoin network.

This process allows the RGB protocol to facilitate secure, decentralized and privacy-preserving asset transfers on the Bitcoin network.

Twitter user @trustmachinesco explains the process in a more intuitive way:

1. Matt issues 100 $MATT tokens for himself on the RGB network.

2. On the Bitcoin network, Matt’s token issuance corresponds to the Bitcoin UTXO (Unspent Transaction Output) A he currently holds.

3. Matt transfers 50 $MATT tokens to Pam.

4. On the Bitcoin network, Matt's token transfer corresponds to a new UTXO B, and the UTXO A in step 2 is destroyed.

5. On the Bitcoin network, Pam receives tokens corresponding to a new UTXO C, which represents Pam's current Bitcoin UTXO.

6. Similarly, when Pam transfers money, her original UTXO C is destroyed and a new UTXO D is generated.

As $MATT tokens continue to change hands, each transfer will be represented by a corresponding UTXO on the Bitcoin mainnet.

**The RGB protocol can also be seamlessly integrated with the Lightning Network, RGB is described as an L2 or L3 solution, when combined with the Lightning Network, RGB can act as an L3, enabling fast off-chain exchange of Bitcoin and RGB tokens to Enable more efficient trading and asset management. **

Applications

The NFT market Bitcoin Art and Assets (DIBA) is the first Bitcoin NFT market using RGB smart contracts and has officially launched on the mainnet. Instead of using Ordinals, the protocol leverages the RGB smart contract protocol to mint NFTs on top of the Bitcoin network. Founder and CEO Gideon Nweze believes that the RGB protocol allows for cheaper and more private transactions, making it easier to issue tokens on Bitcoin. This alternative could bring NFTs to Bitcoin without compromising block space and transaction fees.

Assets minted by the Ordinals protocol have been criticized for being inefficient and costly, which Nweze said is because Ordinals “writes” assets directly to the bitcoin blockchain, while RGB layers transactions on top of the network. He explained in his article: "If I were to build a house, I wouldn't put all the storage in the foundation, I would layer rooms and storerooms on top of it. Ordinal numbers are like trying to cram everything into foundation, and the smart contract puts everything on the floors above it."

DIBA investor and prominent venture capitalist Tim Draper believes that what Gideon and the DIBA team have built is “proof of Bitcoin’s underlying NFT.”

in conclusion

Bitcoin scaling is destined to be one of the most important narratives in the crypto space, and the RGB protocol will continue to improve with new stories and hype cycles in crypto.

It is worth noting that **RGB protocol can only mint NFT, not BRC-20 tokens. **Another emerging BTC scaling project is Trustless Computer, which utilizes smart contracts to mint BRC-20 tokens. According to its team, Trustless Computer is not a pure layer 2, but a "protocol within layer 1" that uses smart contracts to reduce the bandwidth required by tokens by 80% to 90%.

While some leading Bitcoin proponents, including Jan3 founder Samson Mow, believe the Ordinals and BRC-20 hype will end “within a few months.” However, creating protocols and assets on top of the Bitcoin network is the way to go, and the Ordinals hype will support Bitcoin in attracting more developers and capital to layer 2 solutions.

There are many features that the RGB team wants to do, and its impact on the Bitcoin network and crypto ecosystem will depend largely on whether it can be adopted by developers, businesses and users. An important part of the Bitcoin ecosystem, allowing more complex financial applications to be built on the Bitcoin network. **