Learn About UTXO - The Key to Expanding Bitcoin L2

What is UTXO? This is a question that more and more people are interested in as the Bitcoin community searches for solutions to expand network capacity. While Ethereum’s account-based Layer 2 solutions are rapidly developing, they face inherent security and user experience barriers. These limitations have created a demand for an alternative approach— a true Layer 2 compatible with Bitcoin’s unique UTXO architecture.

UTXO Model vs. Account Model: Two Ways to Manage Blockchain Assets

Currently, blockchain records transactions using two main models: UTXO (Unspent Transaction Output) and the account model. Let’s compare them.

The account model used by Ethereum is quite easy to understand. It functions like a real bank account— the system only needs to track your total balance. If you have 1,000 yuan and spend 600 to buy something, your balance automatically updates to 400 yuan. Management is very straightforward and intuitive.

So, what is UTXO in this comparison? It works differently. Imagine a real wallet containing multiple bills of different denominations. Each bill you own (unspent) is a UTXO. When you receive 10 BTC and do not spend it, those 10 BTC become your UTXO.

When you make a transaction, for example spending 600 yuan from a 1,000-yuan bill, you “consume” the original UTXO and create two new UTXOs: one for 600 yuan (payment) and one for 400 yuan (change). This is the essence of UTXO— each transaction involves destroying old UTXOs and creating new ones.

eUTXO: Upgrading to Unlock Smart Contracts

Building on UTXO, the concept of eUTXO (Extended UTXO) has been developed by Cardano and Ergo. Instead of just recording amounts, eUTXO can contain complex data and conditional logic— for example, funds that can only be used for specific purposes or when certain conditions are met.

This way, each transaction not only transfers funds but also executes smart conditions, offering greater flexibility but also increased complexity. eUTXO acts as a bridge between the simplicity of UTXO and the programmability of smart contracts.

BRC-20 and the Challenges of the Account Model on UTXO

The emergence of BRC-20 is an attempt to run an account model on the UTXO platform. Essentially, BRC-20 embeds JSON data into Bitcoin transactions to create tokens. It’s like writing on a banknote to mark a different value.

However, Bitcoin cannot interpret or compute the data written on these transactions— similar to a bank recognizing only the denomination and ignoring notes or annotations. Therefore, BRC-20 relies on off-chain servers to calculate balances and maintain token ledgers. This introduces significant centralization risks, as these servers lack consensus mechanisms like PoW or PoS.

Other protocols like ARC-20 and Runes try to improve this by directly linking token counts to the satoshi amounts within UTXOs, reducing dependence on off-chain systems. However, this approach faces technical limitations— Bitcoin’s minimum output size is 546 satoshis, preventing tokens from being infinitely divisible, which impacts liquidity.

RGB and RGB++ – Redefining Layer 2 for Bitcoin

Recognizing these limitations, the Bitcoin community has sought solutions. RGB is a protocol designed to run private, scalable smart contracts on UTXO-based blockchains. However, RGB is still under development (v0.11 is ongoing).

Nervos’ CKB recognized this potential and proposed RGB++— a technical modification of RGB optimized for Bitcoin’s Layer 2. The core idea is “isomorphic commitment,” mapping Bitcoin’s UTXO to CKB’s Cells (a form of extended UTXO).

A key difference of RGB++ is that it does not use any cross-chain bridges. Instead, all RGB++ transactions occur simultaneously on Bitcoin and CKB, with public verification happening on CKB rather than through external clients. This approach is much more user-friendly, eliminating the need for standalone wallets or transaction data storage.

Philosophically, RGB++ represents an advanced approach— focusing on intent-centric scalability rather than traditional asset locking. Instead of trying to “lock” BTC into Layer 2 with complex mechanisms, RGB++ emphasizes building purpose-driven applications on Layer 2.

A New Direction for Bitcoin Layer 2 in the Future

Although RGB++ remains a concept and requires time for detailed implementation, it signifies a new exploratory path with promising potential for Bitcoin Layer 2. It enables developers to build complex applications while maintaining the security and simplicity of the UTXO model.

With the Lightning Network limited to payments, the demand for sophisticated DeFi applications on Bitcoin is increasing. RGB++ and other isomorphic Layer 2 solutions could be the key to unlocking Bitcoin’s true ecosystem potential— going beyond simple token inscriptions. The future of Bitcoin Layer 2 still holds many possibilities for growth.