Author: Revc, Golden Finance
1. Introduction
Fractal, the popular Bitcoin expansion solution, broke through the $6 billion market value on the day of its listing, while it took Bitcoin nearly five years to achieve this achievement. This gives us a new perspective to think about the project launch mechanism. The market value of POW projects fluctuates dramatically with the recognition of the projects, while the market value of POW+pre-mining mixed projects is expected at the time of listing. This has triggered a series of thoughts: Will pre-mining lead to insufficient decentralization when the protocol is launched, and further affect the development of its ecology and mining return expectations? How to balance ecological community incentives and decentralization?
Within a week of its listing, Fractal’s average daily trading volume was $10 million, supporting a total market capitalization of $6 billion. In today’s sluggish market environment, what technological innovations did Fractal rely on to make the market pay for it, or was it just crazy market-making behavior? Let’s take a closer look at Fractal, the Bitcoin expansion solution.
2. CAT Protocol
The outbreak of CAT20 has made Fractal the focus of market attention again. CAT20 is the token launched by the CAT protocol of the Fractal network project. It has created 4.7 million transactions in two days and has nearly 35,000 total holder addresses. As a tokenization protocol, Bitcoin's scripting language can be used to define the characteristics and behaviors of tokens, thereby realizing the creation, transfer, and destruction of tokens.
Main features of CAT protocol:
Based on Bitcoin: The CAT protocol uses Bitcoin's UTXO model and scripting language to implement tokenization functions, ensuring security, decentralization and scalability.
Custom tokens: Users can create different types of tokens according to their needs, including transferable, non-transferable, with specific attributes, etc.
Security Mechanism: The CAT protocol uses a recursive contract mechanism to ensure the security of tokens and prevent malicious behavior and forgery.
Scalability: The CAT protocol can support a large number of tokens and transactions and has good scalability.
The implementation process of the CAT protocol can be divided into the following steps:
Creating tokens: Users can create new tokens by submitting a specific transaction that contains the token's properties and initial state.
Transferring Tokens: Users can transfer tokens to other people by specifying the new owner address in the transaction.
Merge tokens: Multiple tokens of the same type can be merged into one token.
Destroying tokens: Users can destroy tokens so that they no longer exist.
The CAT protocol uses a recursive contract mechanism to ensure the security of tokens. This mechanism verifies whether the status of the token is legal by embedding conditional statements in each transaction. If the conditional statement is not met, the transaction will be rejected.
The expansion idea of the CAT protocol comes from the Bitcoin opcode OP_CAT. OP_CAT is a proposed opcode in Bitcoin script, which aims to enhance the functionality of Bitcoin script by allowing the script to splice two elements in the stack. The current execution mode of Bitcoin script is linear, lacking loops and basic arithmetic operations, which limits its expressiveness. Bitcoin scripts cannot directly access certain data in transactions, which limits the complexity of smart contracts. OP_CAT can enhance the expressiveness of Bitcoin scripts by splicing data and implementing simple arithmetic operations, allowing Bitcoin to support more complex smart contracts. For example, safe contracts, Merkle tree verification, tree signatures, etc. Through OP_CAT, scripts can access more transaction data, thereby achieving more refined control. Recursive restriction clauses can also be implemented so that constraints can be passed across multiple transactions.
3. Fractal
Fractal (Fractal Bitcoin) is a Bitcoin network extension protocol. Fractal encapsulates the Bitcoin core into a deployable software package (BCSP) to run multiple instances on the Bitcoin mainnet. It achieves unlimited expansion through nested recursion while maintaining consistency with the Bitcoin core. It is similar to the virtualization of the operating system, providing isolation and flexibility.
Fractal reuses Bitcoin's consensus mechanism to ensure that all virtualized instances remain consistent with the main chain. It avoids consensus differences caused by forks and enhances the stability of the system. By instantiating BCSP multiple times, unlimited expansion in horizontal and vertical directions can be achieved. At the same time, the structural balance can be maintained to avoid excessive congestion at any specific layer. New instances may require protection mechanisms when they are started, such as security settings for specific block heights. The system's anti-attack capabilities are enhanced through merged mining and other methods. Fractal's distributed on-chain computing can establish a network of multiple BCSP instances, which is better than the computing efficiency of a single instance. Unlike on-chain sharding, BCSP instances can be deployed and monitored independently.
Fractal shortens the block confirmation time to 60 seconds or less, improving response speed. It increases storage space and reduces transaction costs, making it suitable for applications such as ordinal inscriptions. The cross-layer elevator (Elevator) can realize the direct transfer of assets between different layers without the need for additional relays. Fractal Bitcoin theoretically enhances the processing power of Bitcoin through virtualization and self-replication. It also provides new application scenarios for future development, such as the optimization of ordinal inscriptions and the construction of virtual worlds, and integrates the inscription community, allowing the value of ordinal inscriptions to spill over to the L1 network.
4. Thinking
First of all, virtualization instances are easier to understand, but the application of recursion in the Bitcoin network is obviously much more complicated. While reusing consensus reduces the complexity of the blockchain system, it also introduces new entropy. The following are my thoughts after reading the Fractal Lite paper.
Fractal uses the same PoW consensus mechanism as Bitcoin. BTC miners can seamlessly switch to Fractal block mining with current ASICs, GPUs, and other existing hardware, with a cycle of 3 blocks, of which 2 blocks are generated through "permissionless mining" and 1 block is generated through "merged mining". Permissionless mining allows anyone with the right tools and hardware to mine Fractal blocks, similar to the mining method of BTC. Merged mining is specifically for BTC miners, allowing miners to mine BTC blocks and Fractal blocks at the same time without taking up additional computing power.
In order to control the transaction confirmation time to around 30 seconds, Fractal may adjust the difficulty more frequently than the Bitcoin network. Due to the existence of the two mechanisms of permissionless and merged mining, the network computing power level is not stable enough, and the complexity of the difficulty adjustment mechanism may affect network security.
The merged mining mechanism also increases the initial reward burden of the network, requiring Fractal to maintain the coin price at at least US$25 in order to achieve 50% of the Bitcoin network's revenue per 1EH of computing power. If it blindly attracts computing power for the so-called network security, the token price may continue to perform poorly.
Bitcoin revenue per 1EH/10 minutes:
Assume that the packaging reward for each block is 0.3 bitcoins, the coin price is $60,000, and the total network computing power is 660EH.
(3.15+0.3)*60000/660 ≈ 313 USD
FB income per 1EH/10 minutes:
Assume that the packaging reward for each block is 5 FB, the coin price is $25, the combined computing power is 220E, and the unlicensed computing power is 30E
(25+5)*25*(600/30)/(220*1/3+30*2/3)≈160 USD
Note: The actual unlicensed computing power income may be higher, and the formula here is only a simplified expression.
The instantiated BCSP reaches consensus through recursion to ensure security, and the elevator ensures the cross-layer flow of assets, which is similar to an inserted ledger. It increases the computing power and storage capacity of the network, but recursive calls will generate a large number of function call stacks, which may cause stack overflows. Debugging recursive code is relatively difficult, and the function call process needs to be carefully tracked. As the network expands, new problems will arise that also need attention. The early startup of the instance requires specifying the block height. Is there any centralized operation and the risks that come with it in this process?
Can the instance have independent security, that is, independent difficulty adjustment mechanism and network rewards to attract computing power and expand new usage scenarios beyond ordinal inscriptions? However, the risk is relatively high at present.
5. Comparison of Bitcoin’s Scaling Solutions
The following compares the features and challenges of several major expansion solutions. Projects such as Fractal aim to enhance the expressiveness of Bitcoin scripts so that Bitcoin can support more complex smart contracts.
VI. Summary
Fractal's innovative design deserves recognition. While expanding the Bitcoin network, it also utilizes Bitcoin's existing code and ecosystem. Through recursion, it creates an expansion layer that is highly compatible with the Bitcoin main chain, greatly improving the network's transaction processing capabilities and speed, allowing Bitcoin miners and users to transition seamlessly. More expansion plans will emerge in the future, which is also a manifestation of Bitcoin's greater decentralization compared to other ecosystems.
But as the CAT protocol itself states, the current mainstream solution is still in the experimental stage, and attention should be paid to network security, especially changes involving the core mechanisms of the Bitcoin network, such as the difficulty adjustment mechanism, the computing power impact that the Bitcoin shadow chain may face, and the sustainability of the token economic model.
In addition, there is a consensus in the market that high-market-value, low-circulation VC tokens should not be brought into the Bitcoin ecosystem. Although the POW consensus mechanism is adopted, Fractal has 50% tokens pre-mined and distributed to ecological partners, BRC20 communities, large mining pools, wallet infrastructure and other game builders. The high cost of resource integration may also be a foreshadowing that restricts its development and reduces its decentralized attributes. Crypto projects should avoid the formation of crypto-elites or crony capitalism and carefully design token distribution mechanisms.