Ethereum has been considered the most well-established, open-ended decentralized software platform to enable smart contracts and distributed applications (dApps). Conversely, Bitcoin was created as an alternative to fiat currencies and is thus a medium of exchange and store of value.
But soon these considerations could change.
A few months ago, the Swiss company BHB Network launched an open proposal for a new asset protocol based on the Bitcoin Lightning Network (LN). The move will hopefully allow the development of best practices to issue, transmit and store “Bitcoin-based non-bitcoin assets.”
The effort is called RGB, while the Lightning Network aspect itself is called “Spectrum.” The protocol will work as a “Layer 3” solution allowing users to issue tokens on the Lightning Network. The project aims to leverage LN as a real platform for asset tokenization.
The project recently gained traction when the exchange Bitfinex confirmed their intention to issue the stablecoin Tether (USDT) on the Lightning Network sometime this year. Currently, Tether is issued on Omni Layer, Ethereum, and TRON and might soon be integrated on Blockstream’s federated sidechain, Liquid.
Tether could also be the first mainstream asset to be issued on the Lightning Network via the Spectrum protocol. Other companies have followed, committing to sponsor, support and adopt the standard including Bitrefill, Poseidon, Fulgur Ventures, and others. Such support could help the second layer protocol in furthering its adoption and eventually increase Bitcoin liquidity.
To better present this project, BTCManager took the opportunity to interview the Director of BHB Network, Giacomo Zucco.
How was the RGB project born?
Almost two years ago, the Swiss holding company Poseidon, owner of several projects related to the world of cryptocurrencies, contacted BHB Network for a 360-degree consultation for the Eidoo project, which back then was about to start a typical “ICO,” based on the “utility token” paradigma and leveraging Ethereum and ERC20 tokens.
Our output about the proposed token-model was actually rather negative, mainly due to two considerations:
1) Economically: we were skeptical about the “utility token” model and the ICO model in general.
2) Technologically: we were (and still are) absolutely convinced that Ethereum and ERC20 are not sustainable standards. They are extremely inefficient compared to centralized databases and suffer from huge privacy, scalability, and security problems.
The company then asked what could be a functional alternative infrastructure on which the tokens could be developed.
After getting some Bitcoin “wizards” involved, we established that all pre-existing methods for asset tokenization were suffering similar problems. Thanks to the design consultancy of Peter Todd, the actual coding effort of Alex Filini and the contribution of other startups such as InBitcoin and Chainside, we started to develop a new type of architecture to create a standard to issue, transmit, and store token “on top of Bitcoin.”
The main difference is that RGB, in particular, Spectrum, one of the protocol’s modules, will heavily piggyback on Bitcoin’s Lightning Network, leveraging its peculiar features and trade-offs.
In contrast, previous projects like Counterparty used on-chain Bitcoin transactions to store and pass information to all the other peers about an asset.
One of the main problems of this kind of solution is that it spams the blockchain creating a sort of free-riding problem and some conflict of interests between asset users and Bitcoin users. as the block space is a very scarce and precious resource, it soon becomes very expensive to run meta-protocols like Counterparty.
The Colored Coin projects were a special flavor of meta-protocol aimed at a minimal approach in which Bitcoin transactions are only used to trace assets but no subsequent logics are inserted. This makes it more modular and avoids the need to create a new token such as XCP. Counterparty had a more generalist smart contract logic that creates more security problems; it creates the need to create an additional token which theoretically gives more flexibility. But the general conflict over scarce block space was the same.
A second problem is related to verifiability. This problem is already present today with Bitcoin ownership in mobile or hardware wallets. Asset meta-protocols cannot use what is today (improperly) called “Simplified Payment Verification (SPV).” Basically, it works like this: instead of validating Bitcoin transactions yourself (which requires one to download and validate the whole blockchain, which can be impractical in some use-cases), you just trust that the majority of hashpower will only include valid transactions, because of economic incentives in best-case scenarios and in absence of attacks.
But Bitcoin miners aren’t supposed to care for (or even know of) specific asset rules! It is already dangerous to trust them with Bitcoin’s validation rules, thus we cannot trust them for asset validation rules. In general, miners should not even know which assets are present on the blockchain, or else they could have incentives to manipulate or censor transactions. In RGB, validity proofs are passed directly from payer to payee, peer-to-peer, without the miners even knowing it.
Every RGB node receives a small, compact “proof-chain” that can be used to validate everything asset-wise, without trusting miners or other parties.
The third problem is linked to privacy and fungibility. We know that the blockchain is a system that allows very little privacy and very little economic fungibility. Most of the research is going to improve these characteristics moving part of the Bitcoin economy off-chain, where privacy and fungibility are definitely better. If we consider that privacy and fungibility are already a problem for on-chain Bitcoin transactions, the same problem applies orders of magnitude for on-chain token transactions since tokens users provide a much smaller anonymity set! If tracking on-chain bitcoins used by millions of people is relatively easy, we can imagine how easy it would be to trace an asset used by just a small number of people.
RGB and Spectrum use the LN paradigm, in which the blockchain is used only to create and close channels, or to make large settlements. Even in the “on-chain” case, only the anti-double-spending system is actually on-chain, while the actual proofs of ownership for assets are always moved off-chain. This provides better scalability, as well as better privacy and fungibility.
Why did previous projects not gain traction and why should RGB instead become a standard?
I believe that it is not entirely true that previous projects have not gained traction. For example, ERC20 by Ethereum or Omni (formerly Mastercoin) have become a sort of standard for the launch, respectively, of ICOs and of Tether, the most prominent and most successful so-called “stablecoin” (I prefer the term “fiat-proxy,” since there isn’t anything intrinsically stable in fiat-denominated IOUs).
However, these models use standards that we consider unsustainable. ERC20 has gained notoriety for a simple question of time to market, in my opinion. When Counterparty was introduced, the interest in digital tokens was still low because there were no use cases apart from some digital collectible. When ERC20 arrived on the market, it was in the midst of the ICO frenzy. Everyone wanted to create and buy tokens. Most ICOs have failed and the corresponding tokens have all become useless, but from a speculative point of view, ERC20 actually did its job as a standard for that process. But it’s a very bad standard, from any point of view. And most likely an unsustainable one.
RGB has better chances to become a long-term standard because it is based primarily on the only “cryptocurrency” with realistic chances of becoming an actual monetary standard (Bitcoin). If this happens, the Bitcoin blockchain and the Lightning Network will become technological standards, giving many advantages to the protocols built on top of them.
However, even if Bitcoin will be a standard for digital gold, it remains to be seen whether decentralized standards for different kinds of assets will win over centralized ones.
Why would a centralized company adopt a decentralized protocol?
This is a very good question. A first reason could be interoperability with open standards, as we just said.
In 1995, if I had to create a closed company-network, it would be foolish to try to use the Internet, an open, decentralized, permissionless standard, and then add limitations that allow me to maintain greater control over the network itself. The best method would be to use a mainframe system directly which is by definition closed, secure, and efficient.
However, if we make a leap of 20 years into the future, to 2015, and we pose the same problem, the considerations to be made are different. If we create a mainframe there would be more costs such as hardware, software, libraries, standards, habits of my employees, and the cost of not having to leverage an open Internet infrastructure to create a web-based intranet.
Adopting an open standard in a closed circuit makes sense when the standard has reached such a high level of diffusion that it significantly reduces the costs of use and access.
So, if Bitcoin becomes an international standard, and if RGB then becomes a standard for the issuance of open digital tokens, then it might make sense for a private company to adopt this type of decentralized, open, permissionless protocol. Please note that this use case applies only ex-post and not ex-ante. It is not enough to introduce some protocol and say that it is actually advantageous. The standard must first succeed in establishing itself globally, only at that point could it be more efficient than centralized solutions.
There are some other marginal reasons, for which today it may already make sense for private companies to use solutions like the one offered by RGB. Both have to do with regulation.
The first could be to circumvent restrictions imposed by the regulator by demonstrating that there is no control over a decentralized infrastructure. The second touches on transparency and guarantees of non-manipulability or reliability of certain financial trades.
Could this Layer 3 compromise the Bitcoin Blockchain (Nodes, bandwidth, game theory) in any way?
No, that should not be the case, and this is one of the main features that set RGB apart from previous experiments.
Let’s consider nodes. A Bitcoin node should not know anything about the existence of RGB, as an LN node should not know anything about the existence of Spectrum.
Nodes that want to receive an RGB asset must provide a sort of peer-to-peer connection in which they will receive the proof for the asset they are receiving. The process is similar to a Lightning payment, where the payee receives a channel update directly from the payer. Transaction data is not broadcast but sent individually to the recipient. In the same way, whoever receives an RGB asset, with or without Spectrum, will receive a separate chain of proofs that guarantees ownership of that asset. There is no overloading of the Bitcoin or Lightning Network, that’s why we call it Layer 3.
In terms of game theory, the traditional protocol may present some problems. For example, if a Bitcoin transaction certified the passage of a Counterparty asset containing the representation of Apple’s shares, with a total value greater than the block reward, then the game theory could be damaged.
However, this does not trivially apply to RGB, because the strong level of privacy and the fact that it is not possible to track the presence of RGB assets on the blockchain means that miners cannot distinguish between normal Bitcoin transactions and transactions containing RGB assets. This was a design choice of the protocol, unlike with previous experiments.
Tether will probably be the first asset to be integrated on RGB. Are there other projects ready to integrate RGB protocol? When could Tether launch?
I can’t speak for Tether, however, Paolo Ardoino, CTO of Tether, has publicly stated that the hope is to have USDT on LN/Spectrum by the end of this year. Clearly, there are a number of variables to be taken into consideration, in addition to the coding part, such as adoption and presence of external wallets ready to integrate the protocol. Variables that are, unfortunately, unpredictable.
Bitrefill, which is supporting the project from a financial point of view, is also studying some specific token use case, but I cannot give any detail. When I first presented the RGB idea, I had some good discussion with the developers of the Bisq DAO, which is now using some sort of colored coin scheme for its token. This is still very early stage, though.
Another interesting reality is that of Ekon, who plans to integrate RGB for its titles in gold. In Italy, the interest comes from Marco Amadori and Federico Tenga, respectively from startups InBitcoin and Chainside, who have to manage some asset-related project on behalf of their customers.
I personally really hope to see Rare-Pepes on RGB someday.
Why are companies like Google, Microsoft, IBM interested in Ethereum or private blockchain solutions? Don’t their engineers realize the problems linked with the protocol?
It’s simply a marketing issue. The penetration capability of centralized projects is absolutely higher, marketing-wise, than that of effectively decentralized projects.
Ethereum people used a large part of the money raised with their ICO and pre-mine for marketing operations. Also, their message is oriented towards a sort of narrative that is not antagonistic to the institutional world. In contrast, Bitcoin is a project that has not raised millions for its launch and was made mainly by people working for a technical and economic purpose, and based their beliefs on the cypherpunk ethics to create a de facto non-regulable instrument.
Ethereum people has also used the marketing narrative of the “world computer,” trying to present “decentralization” as something efficient. This proved to be very effective in attracting those companies. Of course that’s not the case at all for Bitcoin-inspired systems, where “decentralization” actually stands for “replication” and “global consensus,” which is the very opposite of efficient.
Indeed, Bitcoin sacrifices efficiency in order to gain some government-resistance. Every Bitcoin clone, Ethereum included, inherited this very huge efficiency trade-off, even if their founders were not aware of this or were claiming otherwise. The so-called “world computer” is orders of magnitude less efficient than a centralized computer because it is a system in which every node must replicate every passage of every computation, forever.
What happened is that large companies, institutions, and governments perceived Bitcoin as a threat, while Ethereum, which managed to convey a more compliant and non-disruptive message, managed to penetrate more easily at an institutional level.
A similar situation was experienced by the Internet in the mid-1990s, when many companies, including Microsoft or IBM, were supporting and advertising solutions such as private Intranets or “walled gardens” instead. This rhetoric disappeared within five or six years. Those “wallet gardens” disappeared, and the Internet won.
There is another element to keep in mind when it comes to product marketing which is that of “novelty.” Ethereum appeared on the market as a “new” Bitcoin, and its centralized marketing department leveraged this novelty flavor a lot. However, this is turning against Ethereum. Platforms like EOS have proclaimed themselves as the “new” Ethereum, which is in turn now trying to rewrite all its architecture to save the narrative of an innovative and efficient platform. We will, however, see how long they can go on with this novelty-centered marketing take.
Giacomo Zucco was one of the first Bitcoin supporters in Italy and represents one of the most important figures in the Bitcoin maximalist community. As one can understand from the interview, Zucco has done impressive work bringing together some of the most talented developers in the world with a very specific goal: to create a protocol that further expands Bitcoin’s functionalities to issue, store, and transfer blockchain-based digital assets.
This project is unique in its kind and would represent a layer 3 solution built atop the Bitcoin Lightning Network thus strengthening the underlying infrastructure. Despite his distaste for token sales, Giacomo believes that if Bitcoin does a global currency, RGB and Spectrum will represent the standard for blockchain-based asset management.
BTCManager would also like to thank Giacomo Zucco for taking the time for this interview.