Asset tokenization on the blockchain
The vast majority of token and asset issuance on blockchain in recent years has always occurred on Ethereum or other blockchains alternative to Bitcoin. While certain altcoins may offer acceptable trade-offs for some use cases, the lack of technological frameworks to issue assets on Bitcoin is a significant shortfall. This is because Bitcoin guarantees security, resilience, censorship resistance, and network neutrality far superior to any alternative.
Client-side validation
From this need, back in 2017, the idea of RGB was born, a new protocol for issuing and transferring assets directly on Bitcoin, without any compromise on trust and security. To achieve this, RGB adopts a highly innovative design called client-side validation, which involves keeping all the logic related to asset transfer outside the blockchain and using the Bitcoin blockchain only as a security layer to prevent double spending.
This design offers many advantages. By reducing the use of the blockchain, it achieves: (1) greater privacy, as fewer details are visible to blockchain observers, (2) better scalability, since fewer bytes need to be input into the blockchain, and (3) more flexibility, thanks to not being constrained by Bitcoin’s consensus rules, and transaction validation logic happens off-chain.
How does the client-side validation model work in brief? It all starts with an asset issuance contract, which defines the name, max supply, transfer rules, and various metadata of a new asset, and assigns the total issued to an output of a confirmed Bitcoin transaction (UTXO) on the blockchain. From that moment on, the only entity that has the right to move the newly created assets is the one who owns the private key capable of spending the Bitcoin output to which the assets were assigned. To move the assets, the owner must create an RGB transaction specifying a Bitcoin output of the recipient to which the assets will be sent, and add a commitment (simplifying, a hash) of the RGB transfer within the Bitcoin transaction that spends from the output where the assets were previously assigned. Upon receipt, the recipient’s wallet will verify (1) that the RGB validity rules have been respected, and (2) that the commitment exists within the Bitcoin transaction, ensuring that there are no double-spending risks.
Scalability
In terms of scalability, RGB has two advantages over alternatives: compatibility with the lightning network (using a dedicated node) and the ability to batch transactions. Being RGB built directly on Bitcoin, it is possible to create payment channels denominated in assets (e.g., a stablecoin on USD), and route asset payments between different channels, similarly to how Bitcoin payments already operate on the lightning network. This allows for instantaneous payments with significantly reduced fees, enabling RGB assets to be genuinely used for even small payments. Thanks to batching, it’s possible to pay an arbitrarily large number of people simultaneously (even thousands) with the same commission cost as a simple payment to one person. This is particularly useful for exchanges and service providers processing numerous withdrawal operations in parallel. Using RGB can save a lot on fee costs compared to other protocols.
Use cases for RGB are generally similar to those of other asset tokenization protocols, but the features of privacy and enhanced scalability might pave the way for previously unexplored applications.
Furthermore, the development of the RGB protocol is already much more decentralized than most of its competing projects, as it is funded and led by a group of independent companies and developers collaborating with each other, including LNP/BP standards association, Bitfinex, Fulgur Ventures, Pandora Core, Bitmask and many other
For more information about RGB and how it works, you can visit the rgb.info website. To personally try out an RGB wallet, Iris Wallet is available for Android.
