Reviewing BTC Derivative Protocols: Who Holds the Most Potential Alpha?
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Reviewing BTC Derivative Protocols: Who Holds the Most Potential Alpha?
Why has BTC's ecosystem suddenly gained value recognition?
Navigating Web3 tides with focused insightsWhile the BTC ETF hype surges, the ecosystem of BTC derivative protocols is also rapidly evolving.
A protocol can only become a truly promising alpha if it simultaneously possesses speculative enthusiasm and legitimacy within the community.
In the crypto world, capital is never scarce—the real competition lies in legitimacy. This is crucial for identifying alpha.
The BTC community is extremely conservative and deeply believes in decentralization. In the eyes of BTC wizards, the more "halal" a protocol is—meaning the more aligned it is with community culture—the greater its chances of success. After all, the buying power and influence of BTC OGs are immense.
Therefore, we examine the designs of these protocols to understand their legitimacy and advantages.
First, remember the doctrine of BTC wizards:
Do not modify or upgrade the BTC network itself, as this would complicate the system and compromise the security of all BTC.
Do not increase the BTC block size, as this would make BTC more centralized.
Not your keys, not your coins—users should hold their own BTC and never entrust it to third-party institutions.
Before understanding these protocols, first answer one question: why has the BTC ecosystem suddenly gained value recognition?
This requires discussing two key technological upgrades:
First was the 2017 SegWit upgrade, which effectively expanded BTC's block data from 1 MB to 4 MB, though the extended space could only store signatures.
Then came the Taproot upgrade at the end of 2021, enabling advanced scripting within SegWit and allowing complex data to be written on BTC.
These upgrades brought massive improvements in programmability and scalability, enabling protocols with complex logic to emerge. This marked a new milestone for the BTC ecosystem and laid the foundation for the explosive growth seen in 2023.
Ordinals & BRC20
The Ordinals protocol completely ignited the BTC ecosystem. Its rapid development has mutually reinforced the adoption of Taproot. People can now encode NFT data and write it into the SegWit extension space (4 MB per block).
The NFT image itself is permanently inscribed into the BTC blockchain, making it more decentralized than ETH NFTs—no third party is required to view or transfer (essentially UTXO-based) this NFT.
Ordinals leverages BTC’s most fundamental functions, with NFT transfers fully handled by the BTC network, aligning perfectly with the ethos of BTC purists. This quickly sparked community excitement and widespread adoption. However, due to limitations in artistic utility, its potential remains constrained.
Soon, developers improved upon Ordinals by mimicking ERC20 and embedding full token functionality into BTC output scripts, giving birth to BRC20.
However, BRC20 only stores data in output scripts and cannot actually execute token functions like transfers or minting. Thus, we must rely on third-party sequencers to record ledgers off-chain and inscribe updated state data onto scripts.
As a result, the third-party sequencer becomes a weak point. BRC20 transfers do not occur on the BTC mainchain and must be split into two BTC transactions (first aggregated in the sequencer, then transferred), adding complexity and generating大量 spam transactions.
Thus, unlike Ordinals, BRC20 lacks broad acceptance across the BTC community and has faced criticism since inception. Yet due to tokens’ wide applicability and better liquidity, it has been embraced by speculators.
Due to low legitimacy and lack of support from core BTC communities, BRC20 and its successor protocols have seen no major innovations or new use cases.
To regain legitimacy, some developers began building decentralized sequencers such as #Trac. While this seems promising, I believe it remains limited by the overall framework and difficult to break through.
Atomicals & ARC20
The Atomicals Protocol is another derivative protocol that embeds data into UTXOs to create tokens.
Unlike Ordinals, originally designed for NFTs, Atomicals rethought from the ground up how to issue tokens on BTC in a decentralized, immutable, and fair manner.
Atomicals uses the smallest unit of bitcoin, the satoshi (sat), as the basic “atom,” where each sat’s UTXO represents the token itself: 1 token = 1 sat.
When verifying an Atomicals transaction, one only needs to query the corresponding sat’s UTXO on the BTC chain. ARC20 tokens inherit BTC’s atomicity, and their transfer computations are entirely processed by the BTC base layer.
Compared to BRC20, ARC20 greatly reduces reliance on third-party sequencers, significantly enhancing decentralization and aligning more closely with BTC community values.
Since UTXOs can be combined within BTC transactions, ARC20 offers better programmability. For example, because BTC itself consists of UTXOs, swapping BTC and ARC20 theoretically requires only rearranging UTXO inputs and outputs.
Another key improvement in Atomicals is POW integration during ARC20 minting: creators must use CPU power to brute-force compute a hash matching a specific prefix before they can perform an “IPO.” This is a more decentralized and fair distribution mechanism.
By binding directly to UTXOs, Atomicals elegantly avoids the complexity faced by BRC20, achieving greater decentralization, native BTC integration, and most importantly, stronger alignment with BTC culture.
ARC20 and $ATOM are still very early and await wallet and market maturity, but their legitimacy is already high.
At the level of possibility, there is real potential for genuine BTC-native DeFi.
It has not yet experienced large-scale speculation and still holds significant potential.
Rune & Pipe
Interestingly, although BRC20 evolved from Ordinals, it has long been criticized by its creator Casey as a heresy.
Yet amid the broader speculative trend, Casey proposed Rune—a dedicated inscription method for issuing fungible tokens (FTs).
In fact, Rune’s design may have been influenced by ARC20, choosing to directly write token data—including Token ID, output, and quantity—into UTXO scripts.
Clearly, Rune’s implementation closely resembles ARC20, delegating token transfers directly to the BTC mainnet. The difference is that Rune writes token quantities into script data, giving it higher precision than ARC20.
However, this also increases complexity, making it harder to leverage BTC UTXO composability as seamlessly as ARC20.
Rune was initially just a concept. The founder of #Trac built the first usable protocol based on it and launched $pipe. Thanks to Casey’s high profile, $pipe inherited the speculative momentum from BRC20 and completed its first wave of hype quickly.
Rune has stronger legitimacy than BRC20, but gaining acceptance from the BTC community remains challenging.
Lightning Network
The Lightning Network is the king of legitimacy in the BTC community. Since 2016, for a long time, over half of all BTC ecosystem developers were working on Lightning Network development.
At its core is the “payment channel” concept, originally proposed by Satoshi Nakamoto (maximum legitimacy). Two parties lock BTC via multisig and maintain an off-chain ledger to record transactions.
Interconnected payment channels form a network, enabling indirect parties to route payments through hops. The Lightning Network indeed scales BTC transfer performance and improves user experience.
Final BTC settlement occurs only on the BTC mainnet, and all coins remain secured under public-private key systems.
Designed purely at the cryptographic level, the Lightning Network requires no BTC network upgrades or block expansion, adds no redundancy, strictly adheres to “your keys, your coins,” and boasts nearly 15,000 nodes.
Therefore, despite relying heavily on third-party nodes for pathfinding, routing, and channel rebalancing off-chain, the Lightning Network maintains very high legitimacy.
However, its use cases are limited—only suitable for BTC payments, incapable of issuing tokens or supporting smart contracts—and thus almost immune to speculation.
Although the Lightning Network saw growth around 2020 and gained wider awareness through Nostr, it still hasn’t been widely adopted beyond the BTC community. After the Ordinals boom, its usage even declined sharply.
Halal, but too few use cases, unable to absorb BTC capital, hard to speculate on.
Taproot Assets (Taro)
In fact, the Lightning Network has continuously tried to expand its use cases. The popularity of BRC20 prompted Lightning Labs to release Taproot Assets—a protocol for issuing tokens on BTC.
Unlike BRC20, Taproot Assets only writes token metadata into the UTXO output scripts on the BTC mainnet, without storing code for token transfers, minting, etc.
Taproot Assets treats the BTC mainnet merely as a registration layer, not relying on it fully for operation. Thus, these assets must be deposited into the Lightning Network to be tradable.
Therefore, Taproot Assets tokens depend on third-party storage indexers—if these fail, the tokens are permanently lost.
Users must either run a full BTC node plus a Taproot Assets client themselves, or fully rely on a centralized server to trade Taproot Assets tokens—making this currently the most centralized BTC token protocol.
Accordingly, the launch mechanism for Taproot Assets has changed.
Users cannot self-mint tokens by sending transactions directly on the BTC mainnet. Instead, a project address issues (or registers) all tokens at once, then transfers them into the Lightning Network for distribution.
Thus, Taproot Assets tokens are not fairly distributed via open minting. They often require a centralized team to conduct airdrops, which may also reserve tokens for themselves—as seen with the recently launched $trick and $treat.
From a decentralization standpoint, Taproot Assets falls far short of Rune, ARC20, and even BRC20. But because it’s released by Lightning Labs—the “king of legitimacy”—and doesn’t burden the BTC network, the community at least won’t oppose it.
Yes, legitimacy is such an intangible thing—when the “pope” who holds话语权 says you’re halal, you are halal.
But note: changes in distribution methods and the emergence of project teams lead to a significant shift in speculative logic—greater emphasis is now placed on the team’s vision, which无形increases speculation costs.
RGB
RGB is a smart contract system built atop BTC and the Lightning Network, representing a more ultimate scaling solution—but progress has been slow due to its complexity.
RGB converts a smart contract’s state into a short proof and inscribes that proof into the output script of a BTC UTXO.
Users verify the contract state by checking this UTXO. When the state updates, a new UTXO is created to store the updated proof.
All RGB smart contract data exists entirely off-chain, managed by dedicated RGB nodes that store full contract data and handle computational loads. Users scan the entire BTC chain’s UTXOs to verify the determinism of state changes.
Each RGB smart contract maintains its own separate state history and data—meaning RGB has no concept of a shared chain. Unlike Ethereum, different contracts don’t share state.
To interact between multiple RGB contracts, the Lightning Network must be used—for example, swapping multiple RGB tokens.
Think of RGB as BTC’s L2. This design leverages BTC’s security to back smart contracts. However, as contract numbers grow, demand for UTXO data encapsulation increases, inevitably creating significant bloat on the BTC blockchain.
Since 2018, RGB remains in development with no speculative content. Tether, the issuer of USDT, is a major proponent, repeatedly stating plans to massively reissue USDT on BTC via RGB.
Although RGB relies on third-party nodes to run contracts, every state update recorded via UTXO makes it currently the most secure and BTC-native smart contract implementation, maintaining strong legitimacy.
RSK & RIF
RSK can be seen as a BTC L2—an EVM-compatible smart contract chain.
RSK writes nothing to the BTC network, so its operation and security are independent of BTC.
RSK simply uses hash locks to bridge BTC from the mainnet to its own chain for gas.
Additionally, RSK uses the same POW consensus as BTC, allowing BTC miners to simultaneously mine on RSK and earn transaction fees in $RBTC.
Clearly, RSK’s relationship with BTC is virtually nonexistent, with minimal ecosystem overlap. $RIF has little connection to RSK’s actual business—their price surge highlights the speculative fervor in the BTC ecosystem and the scarcity of viable speculation targets.
Stacks & SBTC & STX
Stacks can be viewed as a smart contract sidechain for BTC.
Unlike RSK, Stacks has its own block reward system, with gas and rewards denominated in $STX.
Stacks produces multiple “microblocks” during BTC’s 10-minute block intervals, and when a BTC block is mined, it batches and inscribes the hashes of these microblocks into a BTC transaction script.
Moreover, to become a Stacks node, miners must stake BTC on the mainnet to qualify. Rewards are paid in $STX, while staked BTC is distributed to $STX stakers. This effectively burns BTC to obtain $STX—an act that, to BTC maximalists, isn’t just unacceptable—it’s “outrageous.”
Despite legitimacy concerns, $STX has excelled in narrative positioning and enjoys excellent liquidity, delivering impressive price gains.
Recently, Stacks launched the SBTC network, which uses threshold signatures from $STX stakers to lock BTC on the mainnet and issue a 1:1 pegged SBTC asset on the Stacks chain for DeFi use.
This threshold-signature approach introduces BTC assets without third-party bridges. Compared to previous hash-lock methods involving third parties (“not your keys, not your coins”), it’s more decentralized and more halal.
With SBTC’s launch and Stacks’ upgrades, despite low legitimacy, these developments appear to be guiding $STX toward healthy speculation.
Rollkit by Celestia
$TIA is about to launch. @CelestiaOrg, a leader in modular blockchains, previously released Rollkit—a BTC-based rollup that writes L2 data into Taproot’s data fields.
Of course, this appears more like a proof of possibility and likely isn’t practically usable yet.
BitVM
BitVM is currently the most BTC-native, most promising, and technically hardest-core smart contract scaling solution.
Without modifying the BTC network, it enables BTC smart contracts by running a general-purpose VM via optimistic rollups.
The BTC network handles optimistic rollup fraud proofs, using basic hash locks and BTC script opcodes OP_BOOLAND and OP_NOT to implement simple logic gates.
By combining BTC logic gates into circuits, these circuits process fraud proofs on-chain.
Smart contract execution happens off-chain; only fraud proofs run on BTC.
If a rollup misbehaves, verifiers can initiate fraud challenges on the BTC network, with penalties enforced via direct BTC transfers—ensuring overall rollup security and providing “verifiability” to the BTC mainnet.
Building circuits from logic gates exemplifies extreme technical rigor—there’s a certain beauty in crafting a computer from redstone circuits inside Minecraft.
It perfectly resonates with hardcore BTC developers and the community, arguably becoming the king of legitimacy in BTC smart contracts.
Though still theoretical, BitVM has drawn attention from both BRC20/Ordinals speculators and BTC community developers. Many have joined its development, and a first version may launch within a year. Speculation will likely follow—BitVM is my top priority right now.
Summary
Summarizing the above BTC derivative protocols: BRC20, ARC20, Rune, and Taproot Assets as token issuance protocols:
ARC20 is the most decentralized, closest to native BTC DeFi, with significant potential—though currently less speculated on;
Taproot Assets, backed by Lightning Labs, is also strong, but changes in distribution alter speculation dynamics, placing more emphasis on project team vision;
BRC20 and Rune, proposed by the same person, currently depend heavily on the Trac team for decentralization and ecosystem growth.
For BTC scaling protocols—RGB, Lightning, Stacks, BitVM, RSK:
Lightning is unquestionably the king of legitimacy, though speculation must build on top of Taproot Assets;
RGB appears highly “halal” but remains unreleased, making it un-speculatable and largely ignored;
RSK and Stacks aren’t truly BTC-native; they’ve become popular BTC leverage plays purely due to narrative capture and liquidity—SBTC won’t bring real ecosystem impact;
BitVM attracts heavy interest from both speculators and BTC community members, making it currently the most promising protocol for realizing the BTC ecosystem. Though it requires patience, it presents speculation opportunities and could deliver the biggest alpha.
Ranking the above protocols by “halal-ness”:
Lightning > RGB > BitVM > Atomicals > TaprootAssets > BRC20 > RSK > Stacks
Finally
Under a rising-rate cycle with treasury yields near 5%, ETH’s position as a staking yield asset struggles, while BTC—backed by POW’s intrinsic value—becomes increasingly attractive. The ETH/BTC exchange rate continues to decline.
ETH’s dominance as a smart contract platform remains unchallenged—we still primarily use ETH-based DeFi, GameFi, and other complex applications.
Yet at the same time, BTC derivative protocols—including smart contract protocols—are catching up fast.
Though these protocols may seem primitive, archaic, cumbersome, and hard to use, they represent historic development opportunities. BTC technology has matured enough to advance further, and the community is gradually opening up to derivative innovations.
Backed by massive developer bases, capital, and attention, their potential may far exceed any other domain.
Could there be a future where BTC smart contracts surpass ETH’s?
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