Built on Bitcoin in 2022: Top Bitcoin Newsletter Publishes Its Year-End Review

Ethereum merged, decentralized finance (DeFi) imploded, FTX crashed and burned. Bitcoin, in the meantime, continued to build, said the Bitcoin Operations Technology Group (Optech) – a community of Bitcoin contributors – in its annual year-end review.

The paper covers dozens of milestones: from ambitious scaling proposals such as validity rollups and the Taro test software, to captivating events like the establishment of a Bitcoin legal defense fund by Block CEO Jack Dorsey and a controversial Lightning Network Daemon (LND) bug that left part of the Lightning Network in disarray.

Amid these developments, Optech highlighted three major themes that sparked both vigorous debate and vigorous coding: replace-by-fee, or RBF (a way to replace unconfirmed Bitcoin transactions), several soft fork proposals and 16 major Bitcoin ecosystem software releases.

Key milestones

Taro, a new piece of software (currently under early testing) that will allow Bitcoin developers to create, send and receive assets on the Bitcoin blockchain (think stablecoins on Bitcoin), may be the most interesting of the milestones.

Read more: Lightning Labs Releases Software to Allow Bitcoin Developers to Mint and Transfer Assets on the Blockchain

Others include validity rollups first floated by Bitcoin developer John Light. A validity rollup would combine large numbers of transactions off-chain, validate those transactions, then submit the validated batch as a single “rolled up” transaction to the Bitcoin blockchain.

Chaos broke out in November when Twitter user “Burak” (@brqgoo) exploited a bug that took down a large swath of the Lightning Network, raising questions about how the Bitcoin community should handle similar vulnerabilities in the future.

Finally, Jack Dorsey, together with Alex Morcos and Martin White, established the Bitcoin Legal Defense Fund. Dorsey announced the fund on the Bitcoin-Dev mailing list, describing it as “a nonprofit entity that aims to minimize legal headaches that discourage software developers from actively developing Bitcoin and related projects.”

Read more: Bitcoin After the Ethereum Merge: Experts Weigh In

Major themes

Replace-By-Fee (RBF)

One topic that seemed to polarize Bitcoiners all year long was the debate over Replace-By-Fee (RBF), a feature in Bitcoin Core that gives users the option to replace unconfirmed transactions with new transactions, as long as they’re willing to pay a higher fee for the replacement transaction. (Bitcoin Core is the dominant software used to connect to the Bitcoin network.)

Why would anyone want to replace an unconfirmed transaction? Imagine Bob desperately needs to send one bitcoin (BTC) to Alice during a period of peak transaction volume (say, during a surge in Binance withdrawals). Bitcoin transactions are typically confirmed – accepted into a block of transactions that gets added to the Bitcoin blockchain – every 10 minutes or so. It’s been over 30 minutes and three blocks have already been confirmed, but because the network is at peak volume, no miner has accepted Bob’s transaction because other transactions are paying miners much higher fees. (Bitcoin miners process transactions and secure the network.)

Bob’s unconfirmed transaction is officially “stuck.” With RBF, Bob can replace his original transaction and pay a higher fee to get it accepted by a miner.

There are two main flavors of RBF. Opt-in RBF allows Bob to mark or “flag” his unconfirmed transactions as replaceable or not replaceable. Full RBF simply makes all unconfirmed transactions replaceable.

Here’s where the controversy lies. According to some Bitcoin business owners, certain vendors are willing to accept riskier unconfirmed transactions because they deal with low value goods and services. Those vendors have strategically optimized their operations to minimize the risk from these zero confirmation (unconfirmed) transactions. The catch, though, is that optimization is only based on opt-in RBF and not full RBF.

Other bitcoiners argue zero-confirmation fraud is a risk independent of RBF. Whatever the case may be, full RBF (menu option “mempoolfullrbf”) was introduced in Bitcoin Core version 24.0 last month. However, it’s switched off by default, meaning node operators running the Bitcoin Core software must proactively switch it on if they want to make all transactions replaceable.

Soft fork proposals

Soft forks are upgrades to a blockchain that are backwards-compatible. Nodes (computers on the Bitcoin network) that don’t upgrade still view the upgraded chain as valid (all nodes are still one big happy family).

Conversely, hard forks result in a permanent change to the blockchain that isn’t backwards-compatible (nodes either accept the change or split off onto a separate blockchain).

Bitcoin developers prefer adding new features to Bitcoin via soft forks rather than hard forks (unlike Ethereum developers).

According to Optech, there was significant interest in soft fork proposals, especially around CheckTemplateVerifty (CTV), a proposal by developer Jeremy Ruben, and AnyPrevOut (APO), a proposal by developers Christian Decker and Anthony Towns.

CTV allows Bitcoin users to restrict or specify how their coins are spent, a concept known as a covenant. For example, a sender can use CTV to create a bitcoin cold storage vault that automatically releases a small amount of bitcoin to an assigned hot wallet on a scheduled basis (Ruben calls them structured liquidity vaults).

APO is a proposal for a new type of public key that allows certain adjustments to a transaction even after it’s signed. This could be applicable for use cases like Eltoo, a proposed enhancement to the Lightning Network (Bitcoin’s layer 2 scaling system).

Many of these proposals were discussed and updated but haven’t been implemented. Vibrant discussions are continuing.

Major Bitcoin ecosystem software releases

It was a busy year for Bitcoin builders. Optech lists 16 major software releases in 2022 from 8 Bitcoin ecosystem projects:

Of all these releases, Bitcoin Core version 24.0, which introduced full RBF, may have been the most impactful, or at least the most talked about.