Staking has become an essential feature of many blockchain networks, allowing users to participate in network consensus and earn rewards. While Ethereum has been the leading blockchain network for staking, with over $80 billion worth of ETH currently staked, Bitcoin has also been expanding its use case boundaries and exploring staking as a way to provide users with additional earning opportunities. In this article, we will explore basic background of Bitcoin extensions, as well as the development history of Bitcoin BRC20, its current staking experiments and their drawbacks, and what StaFi can do for Bitcoin and BRC20 staking.

1. Ethereum and Bitcoin, POS vs. POW

Ethereum and Bitcoin are two of the most prominent blockchain networks, and while they share many similarities, there are also significant differences between them. One of the most significant differences between Ethereum and Bitcoin is their consensus mechanism. Ethereum uses a proof-of-stake (PoS) consensus mechanism, while Bitcoin uses a proof-of-work (PoW) consensus mechanism.

POS allows users to validate transactions and create new blocks based on the number of coins they hold and are willing to lock up. POW, on the other hand, requires miners to solve complex mathematical equations to validate transactions and create new blocks.

Another significant difference between Ethereum and Bitcoin is scalability. Ethereum is designed to be more scalable than Bitcoin, with the ability to process more transactions per second. Ethereum also supports smart contracts, which allow developers to build decentralized applications (dApps) on top of the blockchain. Bitcoin, on the other hand, has limited smart contract capabilities, which has led to the development of Bitcoin extensions.

2. Current Bitcoin Extension Solutions

There are many Bitcoin extensions such as No-upgradable Scaling, Side Chains, and On-Way Transfer solutions for Bitcoin blockchain to enhance its functionality. These extensions aim to address some of the limitations of the Bitcoin network, especially the limited smart contract capabilities and scalability issues.

2.1 No-upgradable Scaling Extensions

2.2 State Channel: Lightning Network

2.2.1 What is it, how it works?

The Lightning Network is a second-layer payment protocol that operates on top of the Bitcoin blockchain. It allows for fast and cheap payments between users without the need to broadcast transactions to the blockchain.

The Lightning Network works by creating a network of bidirectional payment channels between users. When two users want to make a payment, they first open a payment channel between them. This channel allows each user to send and receive funds from the other user. Once the payment channel is open, users can make as many payments as they want to each other without having to broadcast any transactions to the blockchain. When the users are finished making payments, they can close the payment channel and the funds will be settled on the blockchain.

2.2.2 Differences between Lightning Network and Side Chains

The concept of Lightning Network is to open a “green channel” outside the blockchain, so that a large number of high-frequency and small transactions are carried out outside the blockchain, and the final settlement data is placed on the chain, while the confirmation of off-chain transactions and payment channels are solved by technical means such as RSMC and HTLC.

Apart from that, the Lightning Network mainly solved the problem of low throughput and high cost of BTC settlement, but did not solve the problem of inadequate construction of BTC native applications, hence the concept of Bitcoin Side-chain was introduced in the same period. Simply put, developers then created a separate chain on which to do more smart contracts or other computational execution.The main interaction between the side-chain and Bitcoin is that the sidechain verifies the information on the main Bitcoin chain and then does the subsequent execution, and in turn the main Bitcoin chain cannot trust the side-chain or have all Bitcoin miners verify that the transactions on the side-chain have occurred.

So, generally speaking it’s probably in the form of a federated side-chain, similar to the way a group or a few members witness each other, so going for a two-way anchor.

2.3 Side Chains

Stacks, Liquidity Network, and RSK are all aim to enable smart contracts on top of Bitcoin. However, they differ in their approach to consensus, security and adoption.

• Stacks: Rather than deploying smart contracts directly on the Bitcoin chain, Stacks executes them on its own Layer 1 blockchain and uses only Bitcoin for settlement. Stacks’ technical architecture consists of a core layer and a subnet, and developers and users can choose between the two. the main Stacks network is highly decentralised but has low throughput, while the subnet is less decentralised but has higher throughput. For the POX Consensus mechanism of Stacks, STX staking involves locking up STX in a smart contract and earning Bitcoin rewards, which represent the value of the staked STX and can be exchanged on the Bitcoin. On the Other hand, Miners participate in the bidding process on the Stacks network by spending BTC, this bidding process takes place on the Stacks chain and new blocks are written to the Bitcoin layer.

• Liquidity Network: Liquid Network uses D-POS consensus mechanism and transaction fees on the Liquid Network are paid in L-BTC. To participate in Liquid Consensus, nodes must stake a minimum of 100,000 L-BTC. Staking nodes are responsible for validating transactions and generating blocks. They are also rewarded with a portion of the transaction fees collected on the network.

• RSK is a EVM compatible smart contracts platform, rBTC is the native token of RSK and it could be used as gas fees same like Liquidity Network. Bitcoin miners can choose to do the RSK merged mining without extra resources consuming and they could get extra RSK transaction fees.

3. Development History for Bitcoin BRC20

3.1 What is Ordinal and BRC20?

BRC20 is based on the Ordinals protocol, which was introduced in February 2022 and officially launched in January 2023. Ordinals allow for the creation of unique identifiers for individual satoshis, it uses a unique way of writing any segment of 4MB sized content data to Bitcoin, with each segment of data tied to a satoshi of Bitcoin. There are two main parts in the Ordinal protocols: Ordinal and Inscription.

3.1.1 Ordinal

There are a total of 2,100,000,000,000,000,000 minimum units of Bitcoin, known as Satoshi, and 1 BTC = 100,000,000 Satoshi. Ordinals distinguishes these Satoshi by numbering them sequentially, which is how the project “Ordinals: Serial Numbers” got its name.

There are various ways to number the Satoshi, such as directly by a purely numerical sequence number such as 2099994106992659, or by the block number + offset of each Satoshi’s location such as 3891094.16797. Once a Satoshi is numbered, any asset, such as an NFT (texts, pictures, videos and audios formats), Security Token, account or stablecoin, can be attached to the Satoshi using the serial number as the stable identifier.

3.1.2 Inscription

Ordinals refers to this “attach” action as inscribe, similar to the act of minting in ETH NFT. ordinals inscription content are stored entirely on-chain, in a taproot script-path spend scripts. Taproot scripts have very few restrictions on their content and receive a witness discount, making it relatively economical to store inscription content. taproot is the latest stage in bitcoin’s expansion after segwit, which was designed to increase the volume of bitcoin transactions, but objectively also created the conditions for ordinals to emerge.

3.2 Why now Ordinal?

The logic of Ordinals in the script relies on the “op_if” opcode in the Bitcoin script. “op_if” means that if there are “0” and “op_if” in the stack, then “0” and "op_if and “op_if” are present on the stack, then the whole section of code in between “0” and “op_if” is skipped and does not go onto the stack for actual execution.

Ordinals takes advantage of this - when it needs to attach an inscription, it first validates a signature, then writes “0” and “op_if” to the stack, and The data in between the “0” and “op_if” is skipped in its entirety as scripted, and this data is the Ordinals inscription.

In addition to the “op_if”, the existence of Ordinals is also related to a major technical upgrade to Bitcoin’s isolated witness. As we all know, Bitcoin uses the UTXO system of bookkeeping, and UTXO has its own scripted public key, which usually requires some data to be provided to complete the verification process programmed into the scripted public key for a sum of money to be unlocked. Originally, all the data used to pass the verification process would have been placed in the field where the script signature was entered. in August 2017, bitcoin adopted a soft fork upgrade called Segregated Witness (SegWit) which allows for more space in the block by placing data such as signatures, which take up a lot of storage space, at the end of the transaction script, within the bitcoin block size limit of no more than 4MB, thus allowing for more transactions for the purpose of scaling.

Since quarantine witnessing is a soft fork and not mandatory, the developers have made data storage on quarantine witnessing cheaper in order to attract people to use it. The size of the transaction is the basis for the fees charged for bitcoin, so the developers used a discount on the transaction size calculation for the isolated part of the witness - dividing the transaction data structure into two parts, the transaction data and the witness data, and calculating the size of the witness data using the virtual Byte ( vByte) units, with 1 vByte equivalent to 4 weight units (wu):

• Witness data: contains the script and signature data, each byte is counted as 1 wu

• transaction data: contains information about the sender, the receiver and the input and output, each byte counts as 4wu

In other words, the data weight of the witness part is only 25% of the transaction part, and the transaction fee is 25% accordingly, while the previous maximum block size is changed from 1MB to 1vMB, i.e. 4MB.

The real implementation of Ordinals, however, is also related to Taproot. In the witness isolation technology, there was a specific limit on the size of data per input, but in November 2021, Bitcoin saw another major upgrade to Taproot that removed the limit on the amount of data in the witness section, and the exact size of data was only limited by the maximum block size of 4MB in the isolated area, while allowing developers to write more advanced scripts in the witness section.

A series of technical upgrades allowed data that previously could not be placed on the Bitcoin chain to be stored on the chain, laying the groundwork for the implementation of Ordinals step by step.

After the release of Ordinals, the community first used the protocol to issue NFTs, especially after a well-known organization like Yuga Labs also issued a Bitcoin NFT based on BRC20, which attracted widespread industry attention and Mempool published a research report specifically on Bitcoin NFTs. But it was the BRC20 protocol, based on Ordinals’ issuance of tokens, that soon attracted greater market attention.

3.3 How does Ordinal works?

3.3.1 Functions

Basically BRC20 uses the feature that inscription can write any data in the block, and writes JSON data in it to issue tokens. These JSON defines some criteria of tokens, including asset name, issue amount and other information are written to the chain in the form of inscription. By comparison, Ordinals would be like writing words or drawing a picture on top of the banknote.

Following algorithm demonstrates how Ordinal being created and transferred:

# subsidy of block at given height
def subsidy(height):
  return 50 * 100_000_000 >> height // 210_000

# first ordinal of subsidy of block at given height
def first_ordinal(height):
  start = 0
  for height in range(height):
    start += subsidy(height)
  return start

# assign ordinals in given block
def assign_ordinals(block):
  first = first_ordinal(block.height)
  last = first + subsidy(block.height)
  coinbase_ordinals = list(range(first, last))

  for transaction in block.transactions[1:]:
    ordinals = []
    for input in transaction.inputs:
      ordinals.extend(input.ordinals)

    for output in transaction.outputs:
      output.ordinals = ordinals[:output.value]
      del ordinals[:output.value]

    coinbase_ordinals.extend(ordinals)

  for output in block.transaction[0].outputs:
    output.ordinals = coinbase_ordinals[:output.value]
    del coinbase_ordinals[:output.value]

3.3.2 Characteristics

Storage:

• All data for Ordinals inscriptions is stored on the chain and does not rely on external storage such as IPFS or AWS S3, the creator of the inscription must pay a fee proportional to the size of the content.

Format:

• Takes up space for other normal Bitcoin transactions, Bitcoin’s protocol does not impose type restrictions on this part of the data, Ordinals follows the MIME protocol and the data type can be images, but also video, text, identity or other;

Consensus:

• Bitcoin users need a special wallet and block browser (Ord Wallet) to index and track ordinal NFTs, but can use any bitcoin address to send and receive those NFTs. because electronic artifacts require taproot to be minted, Ordi Wallet will enable Taproot addresses by default.Also note: A satoshi with an inscription attached to it is still indistinguishable from any other satoshi from the chain, meaning it can be spent just like any other satoshi, and there is no difference in how it is spent. Right now, a satoshi can only be inscribed once, but Rodarmor is working on an upgrade that will allow users to re-inscribe a satoshi that has already been inscribed before (called “transcription”).

Requirement:

• Issuing Inscriptions maintenance requires bitcoin full nodes to view the current bitcoin blockchain state, as well as the ability to create Inscriptions and execute sat-controlled wallets to construct transactions sent to another wallet.

3.3.3 Recursive inscriptions

On Mon Jun 12th, 2023, Ordinals made one update named as Recursive Inscriptions. Recursive Inscriptions breaks the independent and unrelated inscription format, and opens up the possibility of free combinations through its self-referential nature.

According to developer Leonidas.og, inscriptions can now request the content of other inscriptions using a special “/-/content/:inscription_id” syntax, which directly allows users to create inscriptions on the Bitcoin chain with less space and lower cost fees.

Summary:

• In the past: to create an inscription for a PFP collection, an image needed to be uploaded and the user downloaded the image on the chain. And as the quality of the images increased and became more detailed and high-definition, the corresponding images had more memory and took up more space, and the fees and costs were higher.

• Now: the special id syntax used for recursive inscriptions essentially uses textual code to find images. Creating PFP ensemble inscriptions can be done by uploading images corresponding to features, including elements such as patterns, colors, and accessories. The corresponding elements already existing on the chain found by are then combined and stitched together without having to upload and download around the image.

• Immediate advantage: creating inscriptions this way is very small because it is called text code, which not only reduces significantly in cost and expense, but also allows the inscription size to break the 4MB limit of the bitcoin block size.

Potential Use Cases:

• Make it possible to create games and 3D models, metaverse that are entirely hosted on the Bitcoin blockchain. This would make games more secure and resistant to censorship. (inscription types have been added to the “JS” and “CSS” types).

• Being used to create more complex smart contracts in Bitcoin network.

3.4 BRC20

BRC20 is an NFT based on the Ordinal protocol. The design logic is that NFTs can be obtained by filling different messages based on sats, so when we fill the messages with a certain pattern or follow a uniform standard, we can produce homogeneous Tokens on the BTC ecosystem.

After Domo proposed the first brc-20 standard, he also issued the first brc-20 Token ORDI as an experiment, and this is seen as a prototype for the development of BRC-20.

3.4.1 BRC20 Functions

• deploy：Create a brc-20 with the deploy function

• Mint（inscription）：Mint an amount of brc-20’s with the mint function

• Transfer：Transfer an amount of brc-20’s with the transfer function.

Mint Function

{
"p": "brc-20",
"op": "mint",
"tick": "ordi",
"amt": "1000"
}
- **p:** The protocol name, which is "brc-20" in this case.
- **op:** The operation, which is "transfer" in this case.
- **tick:** The ticker symbol of the token being transferred, which is "ordi" in this case.
- **amt:** The amount of tokens being transferred, which is 500 in this case.

Transfer Function

{"p":"brc-20","op":"transfer","tick":"ordi","amt":"500"}

3.4.2 BRC20 Characteristics

1. because BRC20 is inherently a Sats inscribed message, BRC-20 itself does not have the ability to interact with smart contracts, and in contrast to ETH-20, BRC-20 Token can no longer be given a decimal point, nor can it be Burned and Locked, and it does not have functions such as approval or authorization.

2. The inability to interact with smart contracts means that BRC-20 Token issuance is not reserved for project owners or VCs, and that everyone is an equal participant in the ecosystem.

3. The core sats of BRC20 can be considered as the smallest unit of BTC, therefore, the natural value of BRC-20 Token is straightforwardly stretched, even if the narrative of individual BRC-20 projects is not sufficient, the description “BTC” is a real transaction, which ensures that BRC-20 Token will not have the same risk of going to zero as ERC-20 and more ERC-20 sidechains.

3.4.3 Other Protocols that based on BRC20

4. Current Bitcoin staking and BRC20 Staking Experiment

4.1 BRC-721K

BRC-721K is a non-fungible token (NFT) standard for Bitcoin ordinals, created by BITCOIN KNIGHT. It offers a suite of functions for token deployment, staking, unstaking, reward redemption, and transfer operations, enriching the interaction between BRC-20 and BTC NFT.

4.1.1 Usage Flow:

Deploy

{
  "p": "brc-721k",
  "tick": "KNGT",
  "op": "deploy",
  "max": "21000000000",
  "precision": "0",
  "asset_id": "e5eaf9dd7a1527eaf2561439ef0abb97b3d17a040b0c9d3d54cae825e36e3fa0i0",
  "reward_rate": "1.2"
}

Stake

{  "p": "brc-721k",  "tick": "KNGT",  "op": "stake",  "asset_id": "e5eaf9dd7a1527eaf2561439ef0abb97b3d17a040b0c9d3d54cae825e36e3fa0i0"}

Unstake

{
  "p": "brc-721k",
  "tick": "KNGT",
  "op": "unstake",
  "asset_id": "e5eaf9dd7a1527eaf2561439ef0abb97b3d17a040b0c9d3d54cae825e36e3fa0i0"
}

Claim

• The stake inscription number is #30000

• The unstake inscription number is #40000

• The reward rate is 1.2The asset quantity is 1

• The reward quantity is (40000 - 30000)*1.21 = 1200 $KNGT

{
  "p": "brc-721k",
  "tick": "KNGT",
  "op": "claim",
  "reward_quantity": "stake_inscription - unstake_inscription x reward_rate x asset_quantity"
}

4.1.2 Improvements of BRC-721K:

1. Gas Fee saving: Unnecessary activities such as staking and token deployment have been merged, as well as claiming and depositing, effectively reducing inscription waste and the frequency of user gas fee usage.

2. non-custodial staking: Users can passively earn rewards without having to move their assets out of their wallets through non-custodial staking.

3. Reward Mechanism: Staking rewards are no longer calculated based on Earth time but on the number of inscriptions inscribed before reward liquidation, representing the number of reward days.

💡 **Notes:**

didn’t find much information about BRC-721K mechanism, it’s official website explains very few basic codes, may have centralization issues.

4.2 Bitstake

4.2.1 Usage Flow:

Stake:

• Staking is done by incribing a transfer inscription & depositing tokens in the staking wallet address

• transfer the tokens to staking wallet & block time is captured upon transfer to calculate the yield

{
"p":"brc-20",
"op":"transfer",
"tick":"bYLD",
"amt":"100"
}

Unstake

• Let us assume we had staked 1000 $bYLD tokens for 100 blocks. The balance shown on staking dashboard will be 1000 * (1+0.0007*100) = 1070 tokens.

• User need to inscribe an untransfer op and send it to the staking address.

• Untransfer op is defined only for staking protocol, its not a part of original BRC20 design.

{
  "p":"brc-20",
  "op":"untransfer",
  "tick":"bYLD",
  "txn":"c63ac7663b77b01dc941fc990caf04bb48cb9aeeade8ddi0"
}

💡 **Notes:**

1. Need to use Bitstake wallet and get it’s yield reward, the yield is inflationary and Bitstake is developing the launchpad to makes rewards sustainable.

2. When the user staking or unstaking, they need to send their BRC20 to the staking address

3. Didn’t see the reward claim function

4.3 OKX BRC30

users can now stake their own BRC-20 tokens or bitcoin and receive BRC-30 tokens in return. BRC-30 tokens are an extension of the functionality of BRC-20 tokens, with an added description of the staking protocol. In this way, BRC-20 token holders can be rewarded for putting their digital assets to work, demonstrating their commitment to the community, and participating in the Bitcoin network.

4.3.1 Usage Flow:

Project team

• Issuing their own BRC-30 tokens by creating a staking pool, gaining seed users

Users

• Staking BTC earns other BRC-30 like abcd (newly issued BRC-30 token)

• Staking BRC-20 tokens earns other BRC-30 like abcd (newly issued BRC-30 token)

key features

• Staking: Users can stake their BRC-20 tokens or bitcoin to earn BRC-30 tokens.

• Minting: Users can mint BRC-30 tokens from their earned tokens.

• Withdrawal: Users can withdraw their BRC-20 tokens or bitcoin from staking.

• Transfer: Users can transfer their BRC-30 tokens to other users.

• BRC-30 is an open-source protocol, which means that anyone can develop applications that support it.

💡 **Notes:**

1. Seems the server in run on OKX platform;

2. Haven’t launched yet

Conclusion

In conclusion, staking has become an essential feature of many blockchain networks, providing users with additional earning opportunities and enhancing network security. While Ethereum has been the leading blockchain network for staking, Bitcoin has also been exploring staking as a way to increase network security and provide users with additional earning opportunities.

Bitcoin extensions, such as Taproot, PSBT, RGB and UXTO, RSK and Stacks, and the Liquid Network, aim to address some of the limitations of the Bitcoin protocol, such as limited smart contract capabilities and scalability issues.

BRC20 is a token standard that allows for the creation of tokens on the Bitcoin blockchain, which can be used for different purposes. Bitcoin staking experiments, such as L-BTC and STX, and BRC20 staking experiments, such as Bitstake and Cardano Knight Network, OKX BRC30 have shown promise, but there are still some drawbacks that need to be addressed, such as:

• Lack of liquidity: There is currently limited liquidity for BRC20 tokens, which makes it difficult for users to buy and sell them.

• Lack of interoperability between different token standards: BRC20 tokens are not currently interoperable with other token standards;

• Centralization problems: Some of the current BRC20 staking services are centralized, which means that they are not fully decentralized and could pose a security risk to users.

This is a quite interesting filed and there are few directions that StaFi could address some of the drawbacks of current BRC20 staking services, we will keep exploring in this field and may bring StaFier more interesting use cases in Bitcoin.

💡 **Notes:**

This is a rapidly evolving field, so some of the content above may be outdated or inaccurate at this time. We welcome all community members to join us in exploring this interesting new field and discussing the latest findings～

With the rapid development of Web 3.0, there is a sea of fragmented and anonymous user information that is scattered through different addresses on different blockchains. These do not properly match the user's on-chain identity information. However, many application scenarios require the user identity as a supplement. For example, the Sybil project initiated by Uniswap will allow Delegators to set up On-chain Identity to achieve better and more effective on-chain governance.

Although Sybil only supports simple functions such as binding wallet addresses to ENS and Twitter accounts currently, since the Sybil project was rolled out, it was quickly adopted by leading DeFi protocols such as Compound and Aave. This also indicates the strong market demand of an On-chain Identity in the Web3.0 world.

Coincidentally, in the article How Coinbase thinks about the Metaverse, Coinbase CEO Brian Armstrong believes that:

“In the Metaverse, our identities will have to include an easy login, a unique ID, an avatar that represents us, metadata that follows us, and Attestation so we can prove who we are.”

Moreover, Coinbase plans to cooperate with Ethereum Name Services to develop on-chain identity products in the Metaverse, which fully demonstrates that in the era of Web3.0, On-chain Identity will be an integral part with a huge scope for innovation.

Why We Need On-chain Identity

With the rapid development of Web 3.0, users can independently realize a true On-chain Identity with the help of blockchain technology, which will create the following values:

1. Self-Control. Decentralized identity can return the control of the ID to the user. In the past, users often only had partial access to the account, which would be controlled by the project party or modify the user's data through the background. This approach carried the risk of compromising the user's security.

2. Privacy. Users no longer need to register accounts with phone numbers, ID cards and other information. The use of decentralized identities by users means that users’ privacy will no longer be stolen by centralized platforms, eliminating the risk of using this data to commit untoward acts, such as harassment through exchange customer service.

3. Convenience. It enables users to access and participate in blockchain projects using only one decentralized identity. This lowers the threshold for users to enter the blockchain world, and also improves the user experience.

Privacy Vs. On-chain Identity

Many people may ask why people in the crypto world would pay extra attention to privacy. Who would be willing to bind identity information on the chain? At first glance, this question seems to be true. However, with the prosperity of the Web3 world today, we can cite numerous examples. As a use case, users will produce high-quality articles on Mirror, bind their address to the Ethereum Name Service domain name, and set up Crypto Punk as an icon to participate in the governance of some well-known communities. They will also vote and build their own influence.

The so-called DID and privacy are not in conflict. Just like in the Web2 world, many users have set up Twitter/Facebook public accounts, even including some celebrities who pay great attention to privacy.

Beyond Identity

Based on the On-chain Identity information, not only the user's on-chain identity can be realized, but also the credit score can be comprehensively built based on the user's bound social account information and multi-chain address information, similar to Alipay's Sesame Credit. In the Web3 world, no one has to rely on identity information to complete a DeFi application; an anonymous digital currency address is all that is needed. The digital currency address records all the historical transaction information of the user, such as participation in the mining of a DeFi project, a token swap completed on a decentralized exchange, or even a recharge or withdrawal information from a centralized exchange.

Therefore, we can build a DID-based on-chain credit system based on the on-chain transaction information of these users. The credit score obtained according to this credit system will comprehensively reflect the personal credit of the DID holder. The higher the score, the higher the credit. You can enjoy the benefits of credit in more places, such as the voting weight of participating in on-chain governance. You can also participate in the lending platform to enjoy lower interest rates or higher mortgage loan rates, and in IDO to gain more priority and quota.

On-chain Identity Landscape

Projects in the field of On-chain Identity have been in the spotlight recently, for an important feature of Web 3.0 is Sign In with Address. Through that, a large number of user activities will be recorded on the chain around the address, and hence be open to being publicly queried.

1. Layer 1: Open Standard. For example, the DID standard of W3C and that of the Decentralized Identity Foundation. They both have formulated DID-related standards, and the project is open source for the public. Neither of them has any token incentives.

2. Layer 2: Infrastructure. In Layer2, there are two subcategories: DID Dedicated Chain and Primitives. The DID Dedicated Chain projects, such as Ontology and Litentry, are characterized by public chain projects and Native Tokens that promote their DID standards and protocols. The Primitives project is characterized by the fact that many DID applications will realize On-chain Identity through them. It has the characteristics of the basic layer, as well as ENS that does domain name resolution for the Ethereum address information, and Ceramic that provides the underlying data frame for Identity on the chain.

3. Layer 3: DID DApps. They are projects focusing on DID applications that have emerged in the past year or two, such as Civic that integrates users' off-chain medical, financial, and KYC information, and Sismo.eth that focuses on zero-knowledge proofs to protect privacy.

4. Layer 4: Wallets. There are mainly wallets on this layer, because addresses and On-chain Identity verification ultimately need wallets such as Metamask.

Among all the above projects, those at the Infrastructure layer will capture the beta growth of On-Chain Identity, and so they are attracting the interest of Fi+ Capital. The Infrastructure layer is represented by ENS and Ceramic, and they both have created their own ecological projects. Spruce and Sismo.eth are both upper-layer applications based on ENS, while iDX is an Identity application based on Ceramic's bottom layer.

On-chain Identity In-the-end

If you want to ask what the final outcome of On-chain Identity is, my personal opinion is that On-chain Identity will not only be a passport in the Web3 world, but will eventually form a demographic portrait of the crypto-world. Let's take a look at the user behavior data of Web3.0 now:

1. The transaction history is recorded in various blockchain browsers, such as Etherscan.

2. NFT asset information can be viewed on the Opensea interface.

3. Asset Dashboard information on asset management platforms such as Zapper.

4. Social information on social platforms such as Inb0x.

5. The content information created is on the Mirror platform.

6. Social interaction through Web3 communities like Showme, BBS network and other SocialFi platforms.

7. The participating community DAO governance information is in Snapshot.

The current behavior data of Web3 users is still fragmented, scattered in various Web3 applications, and the behavior data of Web3 users will only be more abundant in the future. However, they are all unified under the user's wallet address, and the data is on the chain and can be checked publicly, unlike Web2 applications where data is sealed in each centralized server. Therefore, On-chain Identity will eventually integrate all on-chain behavioral data around addresses and form a demographic portrait of the crypto world.

Based on this portrait, the commercial value behind it will far exceed that of companies like Baidu and Facebook that monetize user portraits. This is mainly because On-chain Identity will open up the behavior data of users participating in all applications on the chain, while Baidu and Facebook can only be limited to a single or a limited number of giant apps to build user portraits.

The article Demistifying Digital Identity published by Ceramic demonstrates a dynamic and interoperable identity graph that On-chain Identity can finally describe (as the picture below shows). All the on-chain behaviors, social media data and other information of a user can be finally aggregated into a unified On-chain Identity, and a demographic portrait of the user is formed.

Parting Thoughts

In 2022, the adoption of on-chain IDs will accelerate with the further development and enrichment of Web3.0 applications. There may still be some uncertainties in the secondary market, but it is a safe guess that the world of Web 3.0 has begun to grow wildly. What Fi+ Capital needs to do is to constantly discover outstanding entrepreneurs and entrepreneurial projects, and help them grow in the aspects of technology and capital.

Therefore, Fi+ Capital will pay close attention to the application of the On-chain Identity sector, and actively support entrepreneurs in related fields. If you are cultivating projects in related fields and are seeking funding,

please contact us: contact@fiplus.io

Website: www.fiplus.io

Straight to the point, the cross-chain bridge will become an important infrastructure of the DeFi space. The bridge is the bottom layer of cross-chain DEXes, which will not replace the bridge and will be the final form on the user's end. As a result, cross-chain bridges will become the protocol layer in the end.

Cross-chain bridges

The success of the cross chain bridge depends on the liquidity, and the prosperity of the cross chain DEX depends on the routing strategy. In the future, multiple cross-chain bridge protocols will co-exist, and only the leading cross-chain DEXes will be operational.

There are two important reasons behind this. First, the form of Layer1s has been gradually stabilized leading to a flourishing ecosystem. Second, the Layer2 development of Ethereum has achieved significant results, and the development of multi-rollup will become the transitional state (or even the final state) on the scaling solutions, with core assets rapidly increasing with the development. Inevitably, the competition among different core assets will also become even more intense. Projects will increase their incentives to stimulate the flow of assets between different L1s and L2s . The interoperability problem between multiple chains will directly hinder the development of both L1s, L2s, or any such protocol in between.

The cross-chain bridge can solve interoperability problems, and so it has attracted much attention. Liquidity of assets can be directly obtained through the bridge within various Layer 1 and Layer 2 ecosystems in a barrier-free flow, which will bring more opportunities to the crypto space. Consequently, in the future, the cross-chain bridge will be an important DeFi infrastructure. Imagine how convenient it would be if the users were able to farm among different chains without having to go through a cumbersome token swap process. In addition, cross-chain bridge aggregator and the cross-chain DEX aggregator are new narratives, derived and built upon on the cross-chain bridge, we will see more in the coming days.

From the current point of view, in the initial stage of the cross-chain bridge, each L1 will establish the asset channel to Ethereum, namely the official bridge, in order to obtain ecosystem assets from the Ethereum ecosystem. By current estimation, official bridges have about $2.5B of assets locked in the cross-chain bridge. The core assets mainly include WETH/ETH and stablecoin USDC/USDT, as well as chain assets such as MATIC, AXS, etc.. After the migration of enough tokens from Ethereum, each chain will focus on building their own ecological projects. They initiate counterparty projects of the Ethereum ecosystem to strengthen the core of their own ecosystem. BSC's Pancake,Solana’s Raydium,Terra 's Anchor, etc., all follow this path.

However, these separate ecosystems have not built any barriers; instead, they have been promoting the activities such as liquidity mining, Airdrop, and Yield Farming that promotes the flow of assets. The demand for cross-chain bridges is obvious, and a large number of third-party bridges are beginning to appear to solve specific cross-chain problems, such as multi-chain support, security, effectiveness, ease of use and so on.

At the beginning of the development of third-party bridges, in order to obtain scalability, most of them will support EVM compatible chains, such as Multichain (former Anyswap), Celer, Synapse, etc., in order to attain faster development speed and more core assets.

However, with the development of Ethereum L2, some bridges are specially designed for Ethereum and L2 assets to cross the chain in order to solve the problem of long swap periods, such as Connext, Hop and so on. Considering that L2s do not issue coins, the growth of TVL of cross-chain bridges after issuing coins is expected. The future development trend must be multi-integration, i.e. the integration of EVM and L2, the integration of non-EVM and EVM. The ultimate destination of all cross-chain bridges will be as prosperous as L1s In the end.

In addition to its users, the most discussed thing about cross-chain bridges is its security model, or the way they manage to relay assets. Simply put, there are multi-signature models, MPC models, and light client verification models.

Divided by the signer, there are internal validator models and third-party validator models. It can also be categorized by whether they are permissionless, and whether the validators need to stake assets. In fact, the essence of categorization is the same as the way of dividing the degree of centralization, which defines how to manage assets with the degree of decentralization.

In my opinion,  the realization of cross-chain technology can not solve the problem of decentralization. Absolute decentralization will not exist, especially for more complex data cross-chain, and the current solution has more or less drawbacks.

Whether the Staker is set on Celer, Bonder of Hop, or Router to Connext, there is a problem of centralization to a certain degree, which is essentially similar to the ecosystem model of PoS chains. Cross-chain validation can be compared to a scaled-down version of the staking mechanism - no matter how it is designed and regardless of the reference standard definition, the definition of centralization is arbitrary, and the perfect centralization solution only exists in Utopia. Until now, the centralization problem of staking mechanisms is being strongly debated, and it is the rapid development of PoS that has diverted people's attention. Since absolute decentralization cannot be achieved, the discussion based on security issues may be meaningless. If the parties concerned are not corrupt, cross-chain development only needs to be established on a technical premise, i.e. not possible to be hacked and without any single point of failure.

In addition to the security model, most of the cross-chains face availability problems, including liquidity, commision fees, token unification and so on. Third-party bridges basically adopt the way of self-built liquidity, which is difficult to reach a high TVL. Moreover, it is difficult to have a good trading depth if the atomic exchange on the official bridge is used - it will face the problem of inconsistent time-lock and mintToken standards. Adding liquidity to the target chain seems to be a general solution, but this approach does not achieve scalability, and the project can only encourage some key pools to gather the initial liquidity. For example, the liquidity incentive on Celer is basically concentrated on ETH and USDC/USDT, and the incentive program is not sustainable. After the incentive is over, the money will turn to other mining programs. The use of the transaction fee model seems to be a good means, but at this stage can not meet the incentive needs. On the contrary, Connext has adopted a smarter approach, promoting various project parties to provide liquidity by way of protocol. although it remains to be seen whether it’s feasible. The market will have the final say here.

Furthermore, the bridge faces user’s learning cost issues. For example, some transfer-state tokens, such as AnyUSDT, hETH, etc., have been added in order to support certain functions, and there are also some stablecoins issued by protocol, such as Synapse's nUSD. A large number of new concepts make users feel lost. The ideal way is to hide all the logic behind the transaction through technology, leaving the user only a transaction page similar to that in Uniswap.

The Aggregator of the cross-chain bridge is a promising space, because it can meet the needs of Uniswap trading interface only. Furthermore, the Aggregator built on the cross-chain bridge deepens the function of the bridge, adds transactions, and enriches user paths. Cross-chain DEX is a multi-chain version of the 1inch DEX model. It not only integrates DEX, but also aggregates cross-chain bridges. Users can use both Swap&Bridge or Bridge&Swap, which can more effectively complete token swaps, but the problem with the aggregator is that it only optimizes paths/routes, and not liquidity. As a result, we will still encounter the embarrassing situation where no suitable trading pairs exist due to the absence of liquidity. Its success still relies on the richness of cross-chain bridges and DEXs in their respective ecosystems.

The core strategy is Cross-chain aggregator optimization, just like Yearn's mining strategy, which essentially increases the utilization rate of capital. The intelligent routing strategy determines user adoption. A simple example, If you want to swap the BNB on BSC to ETH on Ethereum, the route can be to first exchange BNB with ETH on BSC, and then change it to ETH on Ethereum through bridge setting. Or, you can first change BNB on BSC to BNB on Ethereum, and then Exchange BNB to ETH through DEX on Ethereum. In theory, the lower the transaction friction cost, the higher the chance of adoption. However, no matter which route the current aggregator uses, the friction cost is extremely high, sometimes reaching as high as 30%~50%!

Liquidity dilemma is the main problem of the current third-party bridges (Multichain liquidity $5B, Celer liquidity $118Mil, Hop liquidity $124Mil, Connext$17Mil), and it is also encountered by the cross-chain DEXes based on the cross-chain bridge protocol. I think any problems related to learning costs and using costs will eventually be resolved, but the liquidity dilemma now does not seem to have a sustainable strategy. Studies based on Uniswap’s dividend strategy, Sushi’s liquidity "predatory", andPancake’s own ecological development, etc. can help us learn more.

At present, although Multichain's liquidity is far ahead, compared with the current mainstream DEX, there is still a gap in transaction volume, but this gap is not significantly large (data on December 31, 2021, 24h transaction volume of Multichain is $133Mil, cBridge $22M, and Uniswapv3 on Coingecko just $1.4B) The trading volume reflects liquidity, and Multichain’s current liquidity is also the highest.

In the future, it is not easy to predict whether the leader will be able to maintain the advantage. The market is volatile, as liquidity is not a long-term protection barrier of a protocol; it is only a magic weapon for victory over a comparatively short period of time. The war of cross-chain bridges has just begun. There will be more cross-chain bridges in the future, but cross-chain DEX aggregators will only appear in the leading projects. Whatever be the case, betting on infrastructure will not be wrong.