CKB Token: An Undervalued BTC-L2 Solution
Introduction
As a public blockchain, Nervos Network aims to address the scalability limitations faced by traditional networks like Bitcoin and Ethereum. The Nervos blockchain uses a Proof-of-Work (PoW) consensus mechanism and supports the development of smart contracts on its Layer-1 protocol. It also includes a range of Layer-2 scaling solutions to facilitate high-capacity use cases. Nervos’ native token (CKByte or CKB) allows users and developers to claim storage space on the Nervos blockchain in proportion to their holdings.
On February 13, 2024, Nervos Network announced the launch of a new product: RGB++. This marked the beginning of a transformation for Nervos Network, shifting from a Layer-1 focus to a Bitcoin Layer-2 expansion, leveraging its strengths to specialize in Bitcoin’s second-layer scalability.
Project Basic InformationProject Team
Core Team
- Jan Xie: Founder and Chief Architect. Also, the founder of Cryptape, a former researcher and developer at the Ethereum Foundation focusing on Casper and Sharding, co-founder of ethfans.org, and a former architect of Peatio.
- Inal Kardan: Co-Founder and Chief Executive Officer. Core developer for Yunbi & Peatio, and co-founder of Teahour. He has extensive development experience.
- Kevin Wang: Co-Founder. He studied Telecommunications and Networking at the University of Pennsylvania, earning a bachelor’s degree. He worked on enterprise data solutions at IBM’s Silicon Valley Lab. Kevin Wang is also the co-founder of the intent-driven decentralized solver infrastructure Khalani.
- Daniel Lv: Co-Founder and Chief Operating Officer. Former Chief Technology Officer of imToken (the world’s largest Ethereum wallet), former Chief Technology Officer of Yunbi, co-founder of ruby-china.org, and senior engineer at Intridea.
- Cipher Wang: Co-Founder. Attended Peking University. Chief Product Officer at Cryptape, and former director of the Blockchain Laboratory at the China Banknote Printing and Minting Corporation.
Funding Information:
Nervos Network has raised approximately $100 million through two rounds of funding.
Seed Round
In August 2018, Nervos Network raised $28 million in a seed round led by Polychain Capital, with participation from Sequoia China, Wanxiang Blockchain, and Blockchain Capital.
Series A Round
On October 16, 2019, Nervos Network completed an ICO on Coinlist, raising $72 million.
In total, Nervos Network raised $100 million across both rounds, with substantial investments from renowned institutions such as Polychain Capital, Sequoia China, Wanxiang Blockchain, and Blockchain Capital. This significant backing highlights the strong interest and confidence from prominent capital investors in Nervos Network.
Development Strength
Nervos Network was established in 2018 by founder Jan Xie. Key milestones in the project’s development are shown in the table below:
From the key milestones in the development of the Nervos Network project, it is evident that Nervos Network has been deeply involved in the UTXO model within the Bitcoin network, positioning itself as a leader in the field of UTXO model research. This focus has also created a technical barrier for Nervos Network. Additionally, judging by the timeline of achieving various critical technological milestones, Nervos Network has consistently completed the development of project technologies on schedule, showcasing the strong capabilities of the Nervos Network technical team.
Operating Model
On February 13, 2024, Nervos Network upgraded its operations by launching the RGB++ product, transitioning the project from a public blockchain to the current BTC-L2 track.
RGB
RGB Protocol is an extension protocol of the original BTC, essentially a layer-2 computational system. It adopts a similar approach to the Lightning Network: users personally verify and authorize asset transfers related to their own holdings, submitting the approved outcomes/commitments initiated by transaction originators to the Bitcoin blockchain.
The primary function of RGB Protocol is to map assets off-chain to Bitcoin’s UTXO model. Instead of publishing complete off-chain transaction data like the Ordinals protocol, RGB stores commitments of transaction data on the Bitcoin blockchain. Based on these recorded commitments, RGB clients can validate whether historical data provided by other clients is valid. Moreover, commitments alone cannot reveal the underlying data, thus preserving privacy. Compared to plaintext, committing to the blockchain saves space. RGB also utilizes Bitcoin’s UTXO characteristics for single-use expenditure, linking ownership of RGB assets with Bitcoin UTXOs. This leverages Bitcoin’s robust security to prevent double-spending of RGB assets, as long as Bitcoin UTXOs are not double-spent.
However, RGB faces significant challenges:
- As a smart contract system implemented under the Bitcoin blockchain, it relies on different clients storing historical data locally, with each client only retaining data relevant to themselves, unable to observe others’ asset statuses. This data isolation, while protecting privacy, complicates widespread adoption, resembling a P2P network composed primarily of OTC traders (ultimately stemming from unresolved issues at the DA layer).
- To successfully transfer assets to others via RGB, users must obtain mutual consent and confirmation, requiring both parties to be online simultaneously.
- Due to the lack of a globally visible data recording method, contract users must obtain knowledge of contract functionalities in advance from the contract issuer, typically via email or QR code scanning.
In conclusion, RGB operates in a relatively “primitive” mode in its current state.
RGB++
The Nervos Network extends the UTXO model with Cells, enabling the integration of off-chain RGB asset information into Cells. It establishes a one-to-one mapping between Cells on Nervos Network and Bitcoin UTXOs, facilitating a data custody and validation solution for RGB assets based on Nervos Network. This enhancement, known as RGB++, serves as a robust complement to the original RGB protocol, addressing usability issues.
RGB++ achieves this by expressing ownership relationships of RGB assets using Cells on the Nervos Network. Previously stored locally in RGB clients, asset data now resides on Nervos Network in the form of Cells, acting as a public database for RGB assets. Each Cell representing an RGB asset maintains a direct mapping to a corresponding UTXO on the Bitcoin blockchain, visibly displayed in the Lock field of the Cell.
Workflow related to commitments on the BTC mainnet remains unchanged, where RGB++ continues to publish Commitments on the Bitcoin blockchain, associating them with RGB asset transaction records on Nervos Network. Nervos Network assumes responsibilities previously handled by RGB clients off-chain, thus resolving issues of data isolation and the lack of global visibility of contract states in RGB. Additionally, RGB contracts can be directly deployed on the Nervos Network, offering global visibility for RGB Cells and eliminating the complex procedures during RGB protocol contract deployment.
RGB++ fundamentally balances privacy for usability, enabling scenarios that the original RGB protocol cannot achieve. Users preferring simplicity and comprehensive functionality may favor RGB++, whereas those prioritizing privacy and “Verify by yourself” security may prefer the traditional RGB protocol. This choice parallels Vitalik’s commentary on Ethereum Layer 2 solutions: opting for Rollups for security or non-Rollup solutions like Validium and Optimium for cost efficiency.
In summary, after launching RGB++, Nervos Network has shifted its project narrative, becoming a BTC-L2 solution. It primarily utilizes Cell to express ownership relationships of RGB assets, establishing a one-to-one mapping between Cell and Bitcoin UTXO. This approach addresses the original issues of data isolation and operational difficulties in RGB, enhancing the native Bitcoin experience without increasing complexity or compromising decentralization. Nervos Network achieves this by preserving the transactional purity of the Bitcoin UTXO model, making it feasible to deploy smart contracts on BTC-L2.
Technical Features
The Cell Model
The Cell model is pivotal to Nervos Network’s successful transition and the core of RGB++. The Cell model can be seen as an upgraded version of UTXO, preserving the transactional purity of Bitcoin’s UTXO model while offering data state capabilities similar to Ethereum’s account model.
The Cell model consists of four fields: Capacity, Type, Data, and Lock:
- Capacity represents the size of the on-chain space this Cell owns.
- Data refers to the dataset contained within the Cell, which can be read or modified.
- Type binds program code to the Cell, restricting conditions under which data can be modified.
- Lock represents the ownership verification logic of the Cell, similar to Bitcoin UTXO’s unlocking script.
These fields distinguish Cell as an upgraded UTXO, adding Capacity and Type fields, while Data can accommodate custom data types. Ownership changes for Cell are similar to Bitcoin UTXO, using unlocking scripts. The most significant aspect is the Data field, crucial for storing arbitrary data types like transaction history, addressing the data availability issues that plagued earlier RGB implementations.
This Cell model innovation enables Nervos Network to enhance Bitcoin’s native experience while facilitating complex data interactions akin to Ethereum’s smart contracts, bridging the gap between Bitcoin’s simplicity and Ethereum’s versatility.
The non-interactivity of transactions
An important issue with the RGB protocol is that the recipient must first send a message to the sender specifying the binding of one of their UTXOs with the RGB asset before an RGB transfer can be successfully implemented. This requirement necessitates multiple rounds of interactive communication between the recipient and sender to complete a typical transaction, which obviously increases user comprehension difficulties and product complexity. In contrast, RGB++ leverages the characteristics of Nervos Network as a data hosting and computing platform, allowing counterparties to asynchronously and non-interactively complete transfers.
Interaction with Bitcoin chain assets without the need for cross-chain transactions
Nervos Network, as a layer for off-chain settlements, aggregates a batch of transactions into a Commitment after multiple RGB transfers occur, and then publishes this batch transaction onto the Bitcoin chain in one go. With RGB++, which establishes an associated mapping between Bitcoin UTXOs and Nervos Network Cells, direct interoperability can be achieved without the need for cross-chain asset transfers. Using RGB++ transaction declarations, you can transfer your Bitcoin UTXOs to others, who can then transfer ownership of their CKB assets to you. This model offers significant possibilities and theoretically enables interoperability between BTC and Nervos Network on-chain assets without needing BTC asset cross-chain transfers.
Payment Channels
Nervos Network, as a foundational blockchain, possesses the capability to extend its functionality through payment channels, such as the Perun payment channel framework developed by Polycrypt. These payment channels enable off-chain transaction processing with on-chain settlement, supporting applications like micro-payments to payment gateways, thereby enhancing the performance of Nervos Network.
Perun utilizes Nervos Network’s Cell model, where Cells carry capacity, Lock Script, Type Script, and data to manage the state of the channels. One implementation, PerunLockScript, manages access rights to real-time Cells of the channel, while another, PerunTypeScript, handles verification logic for state transitions. From fund acquisition to closure, these transitions are managed automatically.
Core developers at Nervos are also working to connect CKB to Bitcoin’s Lightning Network, enabling users to exchange BTC and Nervos Network assets without relying on third parties.
Project Model
Business Model
Nervos Network’s economic model consists of three primary roles: POW miners, application developers, and blockchain application users.
POW Miners: Nervos Network adopts the Proof of Work (PoW) consensus mechanism, using an upgraded version of the NC-MAX algorithm, which includes the Eaglesong hash function to ensure network security. Eaglesong is a custom hash function that is ASIC-resistant and can replace the widely used SHA256 hash function. POW miners secure the chain and maintain Nervos Network’s operations by adhering to its consensus mechanism. They receive block rewards as economic incentives. Following the halving in 2023, the annual issuance of CKB decreased from 4.2 billion to 2.1 billion.
Application Developers: As a BTC-L2 project, Nervos Network’s success hinges significantly on the prosperity of its own ecosystem. Therefore, Nervos Network places a strong emphasis on ecosystem development, providing ample innovation space for developers. Application developers occupy certain on-chain space when developing projects and thus pay storage fees to Nervos Network, which also serves as a source of revenue.
This describes the key roles and economic incentives within the project and business model of Nervos Network.
Blockchain Application Users: The gas fees paid by users on Nervos Network are the primary source of revenue.
From the above analysis, it can be seen that the revenue sources of Nervos Network include:
- Gas fees paid by blockchain application users
- Storage fees paid by application developers
Token Model
Token Distribution
CKB’s unique economic model ensures that miners receive rewards indefinitely, regardless of transaction volume. This incentivizes them to secure the network while ensuring that CKB tokens can serve as hard assets, safeguarding the interests of long-term holders from dilution. The economic model of CKB generates a flywheel effect, where the demand for holding CKB blockchain assets directly drives demand for the CKB token. This creates a value capture mechanism for the native token CKB, ensuring that the security of the CKB blockchain grows proportionally with the value of the assets it protects.
CKB has no fixed supply limit. The total initial issuance of tokens was 33.6 billion, all of which have now been fully unlocked.
The distribution of CKB in the genesis block is as follows:
To provide sustained rewards to miners, the Nervos team has also designed secondary issuance. The purpose of secondary issuance is to collect state rent, ensuring that miners receive compensation for permanently securing the network regardless of on-chain transaction volume of CKB. Secondary issuance has no upper limit and follows a fixed issuance plan of 1.344 billion CKB per year. However, unlike the base issuance which is solely for miners, secondary issuance is allocated among miners, NervosDAO depositors, and the treasury fund.
The specific allocation ratio of secondary issuance depends on how circulating CKB is utilized within the network. For instance, if 50% of all circulating CKB is used for state storage, 30% locked in NervosDAO, and 20% held fully liquid, then 50% of secondary issuance will be allocated to miners, 30% to NervosDAO depositors, and the remaining 20% to the treasury fund. Currently, secondary issuance allocated to the treasury fund is burned, but this may change in the future through community-initiated hard forks.
It is important to emphasize that the inflationary impact of secondary issuance is limited and affects only on-chain state occupiers. This means that CKB can simultaneously function as a deflationary token for long-term holders and an inflationary token for blockchain users.
Nervos’ token economics aims to address the state explosion and value alignment issues plaguing mainstream blockchains. This is achieved through three main mechanisms: tying state growth to CKB token, privatizing state space, and introducing secondary issuance to transfer state rent from state occupiers to miners or state protectors.
Token Empowerment
- Transaction Fees: As a Layer-1 blockchain, Nervos’ native token, CKB, primarily serves as the network’s transaction fee, or gas fee. All operations within the Nervos Network require the payment of CKB.
- Staking: Users can stake CKB in NervosDAO and receive secondary issuance CKB tokens as inflationary rewards proportionally.
- Value Storage: Storing data on-chain or occupying state space requires locking CKB, creating a direct long-term demand for the token. This means that holding non-native assets on the blockchain necessitates possessing the native token, thereby increasing the native token’s value. This enhances miner rewards and improves the chain’s security. This incentive structure aligns better with the goals of value-preserving “asset storage” platforms like CKB, whose primary aim is not to handle as many transactions as possible but to reliably store and protect assets over the long term.
Token Price Performance
- According to CoinGecko statistics, CKB has increased in price by over 11 times in the past year since June 2023 (from a low of $0.0028 to a high of $0.0322), with primary trading venues being Binance, HTX, and other top-tier exchanges.
- Current Price and Market Data: The current price of CKB is $0.0115, with a circulating supply of 44,442,588,518 tokens, resulting in a market capitalization of $514.83 million.
- Trading Volume and Turnover Rate: CKB has a daily trading volume of $36 million, and with a circulating market cap of approximately $514.83 million, its turnover rate is 6.99%, which is relatively low.
Therefore, compared to similar projects, CKB is significantly undervalued.
On-Chain Transaction Volume
As shown in the chart, the on-chain transaction volume of the Nervos Network has remained at a stable level.
Mining Difficulty
The mining difficulty of the Nervos Network has been on an upward trend. Despite some price corrections, the difficulty remains high, indicating that more miners are joining the Nervos Network.
Number of Addresses
The number of addresses on the Nervos Network has consistently maintained a very high growth rate.
CKB Holdings Chart
From the chart, it can be observed that CKB held for over 3 years accounts for 48.77%, indicating a significant portion of users have a long-term bullish outlook on the development of Nervos Network.
Project Ecosystem
Nervos Network is committed to driving ecosystem development through sustained support in funding, infrastructure, and tools. Since the mainnet launch in November 2019, approximately 5.7 billion CKB have been allocated to the Ecosystem Fund. The CKB Ecosystem Fund provides initial funding for various ecosystem development initiatives aimed at expanding the network, with a focus on fostering and investing in early and seed-stage projects using the RGB++ protocol to connect CKB with Bitcoin.
The CKB Ecosystem Fund aims to facilitate the development of critical infrastructure and decentralized applications across multiple domains, including DeFi, gaming, tools, and NFT markets. In January 2024, the CKB Ecosystem Fund introduced the BTCKB initiative to enhance integration between the Bitcoin and CKB blockchains through PoW consensus and the UTXO model. The BTCKB initiative introduces new smart contract capabilities to integrate BTC, Taproot Assets, and RGB++ assets into the CKB blockchain, enhancing the functionality of the Bitcoin blockchain.
Since the launch of RGB++ mainnet, over 15 existing ecosystem projects have conducted asset issuances. Noteworthy ecosystem projects include:
- UTXO Stack: Bitcoin L2 “OP Stack” based on the RGB++ protocol.
- JoyID: Non-custodial wallet using biometric technology for user authentication, supporting multiple networks including Ethereum, Bitcoin, and RGB++ assets.
- HueHub: Decentralized trading platform and launchpad supporting RGB++ assets on Bitcoin.
- Stable++: Decentralized stablecoin protocol supporting CKB and BTC.
- World3: Autonomous world game based on RGB++ protocol and DOB.
- Nervape: Multi-chain composable digital items based on Bitcoin, with “base assets” issued on Bitcoin and “affiliate assets” issued on CKB.
- Haste: RGB++ asset management solution.
- d.id: Decentralized identity protocol for the Bitcoin ecosystem.
Project Risks
- Marketing and Community Consensus: The Nervos Network team primarily focuses on technical development, which has led to insufficient efforts in project promotion. Consequently, many users in the market are aware of Nervos Network but may not fully understand its superior performance capabilities. Additionally, community engagement and consensus among users within the Nervos Network community are not robust.
- Hybrid On-Chain + Off-Chain Technology: While the hybrid on-chain and off-chain approach of Nervos Network enhances user convenience, it also increases reliance on external networks for data availability and asset issuance. Any failures in off-chain networks could lead to asset loss and network downtime risks across the entire Nervos Network.
- Lack of Comprehensive Development Tools and Interoperability Solutions: Nervos Network lacks comprehensive development tools and multi-party interaction solutions, which limits its ability to effectively support decentralized applications. Moreover, the network’s focus on usability over privacy may compromise the privacy advantages initially offered by the RGB protocol.
Summary
RGB++ showcases the potential of CKB as a settlement layer under Bitcoin, a concept likely to be adopted by more Bitcoin Layer 2 solutions and asset protocols in the future. Leveraging POW, UTXO, and years of technical expertise, CKB may demonstrate its technological advantages in the competitive landscape of modular blockchains.
Nervos’ token economics directly addresses the challenges of state explosion and misalignment of value capture mechanisms. Linking state growth with its native CKB token effectively limits rapid blockchain state expansion. Treating state as a first-class private asset incentivizes optimization and efficiency, curbing unnecessary state growth. Moreover, Nervos introduces state rent to combat inflation among state occupiers, providing miners with predictable income streams to maintain blockchain security over the long term.
CKB blockchain employs a unique value capture mechanism where storing and operating on-chain data requires locking CKB tokens, creating direct long-term demand. This increases the token’s value, enhances blockchain security, and aligns with its goal of becoming an “asset storage” platform.
However, Nervos Network’s team primarily focuses on technical development, with shortcomings in project promotion leading to limited awareness of its superior performance in the market. Additionally, its community operations lack the formation of a strong consensus among users.
In conclusion, Nervos Network enhances the on-chain Bitcoin experience without increasing complexity or compromising decentralization. Positioned competitively in the BTC-L2 arena due to its extensive work with the UTXO model, Nervos holds promising potential for future development.
