The article focuses on modernizing tokens-on-Bitcoin protocols that offer the same security and convenience as Bitcoin. Older token protocols such as Counterparty and OmniLayer were not secure enough, making the creation of modernized protocols like RGB, OmniBolt, and Taro necessary.
Legacy Tokens-on-Bitcoin Protocol
The article explains how older protocols worked, putting metadata inside Bitcoin transactions to “colour” and signal them as token transfers. Despite being effective, this design had some drawbacks such as limited information quantity, resource-intensive scanning for token transfers, and bad privacy for users.
RGB proposes a more scalable, private, and future-proof solution by moving the token transfer validation work out of the global consensus layer and delegating it to the client receiving payment. The core idea is to use the Bitcoin blockchain for leveraging its proof-of-work and network decentralization only for double-spending protection and censorship-resistance.
How RGB Protocol Works
Tokens are always assigned to a Bitcoin UTXO and need a Bitcoin transaction to move them. RGB transfers do not need to be the same as Bitcoin transactions, enabling tokens to “teleport” from one UTXO to another without leaving any trail in the Bitcoin transaction graph. This design helps with scalability as users do not have to validate the entire history of the asset, but only transactions relevant to them. All RGB-specific payment data is transmitted off-chain through a dedicated communication channel.
Some Key Benefits
By moving the token transfer validation work off-chain, RGB is able to reduce the burden on the global consensus layer, making it more scalable than older token protocols.
RGB offers better privacy than legacy token protocols, as the token transfer information is not visible on-chain, and the communication channel between payer and receiver is encrypted and cannot be observed by blockchain observers.
The use of client-side validation and single-use seals makes RGB more future-proof than legacy token protocols, as it allows for easier upgrades and changes to the protocol without requiring a hard fork.
Compatibility with Lightning Network
RGB is designed to be compatible with the Lightning Network, which allows for fast and cheap off-chain transactions.
RGB leverages the security and decentralization of the Bitcoin blockchain, making it a secure platform for token issuance and transfer.