Understanding Nervos Network (CKB): A Comprehensive Overview

Key Insights

• Nervos Network expands on Bitcoin’s core technological primitives with a scalable Layer-1 blockchain that enables Layer-2 support for Bitcoin.
• To improve Bitcoin’s arbitrary programming limitations, Nervos Network leverages a custom model (Cell Model) for state storage and a custom virtual machine (CKB-VM) for transaction execution.
• Nervos extends Bitcoin's usability with RGB++, an asset issuance protocol based on the original RGB protocol that aims to position the L1 as Bitcoin's execution and data availability layer.
• Since the RGB++ protocol launched on the CKB mainnet, the network has seen a resurgence in transaction activity and nearly 400,000 new addresses in April, an 181% MoM increase compared to March.
• Work is underway to integrate a payment channel network with the Lightning Network, making CKB more scalable and applicable to various blockchain applications​.

Background

Bitcoin continues to gain adoption and recognition as the largest cryptocurrency. However, its success has also brought several limitations and challenges to light, especially regarding scalability. For instance, Bitcoin's blockchain was designed with a block size limit of 4 MB post-Segwit, restricting the number of transactions processed within a given timeframe. As the network grows, this constraint has led to longer confirmation times and higher transaction fees, making it less efficient for web-scale transaction volume. Beyond value transfers, Bitcoin's scripting language currently lacks the flexibility and expressiveness required for complex smart contract development compared to other blockchains.

Several Layer-2 (L2) and adjacent solutions like payment channels, sidechains, and rollups have been proposed to address these limitations. Most of them aim to scale Bitcoin by handling transactions offchain, attempting to increase transaction throughput without compromising the security of the base layer. For instance, the Lightning Network creates a second layer of payment channels, allowing near-instant micropayments. Another approach is sidechains – separate blockchains tethered to Bitcoin’s main blockchain, allowing for more extensive scripting possibilities and faster transactions. However, these solutions often have trade-offs, such as increased complexity, trust assumptions, and potential security vulnerabilities.

Nervos Network is one of several Bitcoin scaling solutions that takes a more native approach by modifying the UTXO model underpinning Bitcoin. It improves upon the RGB protocol to provide Turing-complete contract improvements to Bitcoin without cross-chain solutions. Nervos Network was founded in Q1 2018 by Terry Tai, Kevin Wang, Cipher Wang, and Daniel Lv as a Layer-1 blockchain aiming to improve scalability. To bootstrap the network’s development, the project team raised over $100 million from a seed round, private round, and public sale. In November 2019, Nervos Network’s Layer-1 blockchain, Common Knowledge Base (CKB), went live. In February 2024, Cell Studio, led by Nervos co-founder Cipher Wang, introduced RGB++, an asset issuance protocol for Bitcoin. Inspired by the RGB protocol, the RGB++ protocol uses CKB for data availability and execution, enabling smart contracts and asset issuance for Bitcoin. Since the RGB++ mainnet release in April 2024, CKB has seen an expansion in the number of projects leveraging RGB++ for asset issuance on Bitcoin. As of June 2024, over 15 existing ecosystem projects have led to a resurgence in activity on CKB.

Technology

Source: Nervos Network

Nervos Network utilizes a multi-layered architecture comprising a Layer-1 blockchain (Common Knowledge Base; short: CKB) that scales with payment channels and the RGB++ extension. The “Cell Model,” a modified version of Bitcoin's UTXO accounting model, and CKB-VM, a custom virtual machine, support the network’s layered design. The CKB-VM provides a flexible execution environment for transacting or building on the network. This design allows the network to scale vertically by running specialized components at each tier, similar to modular blockchains.

Common Knowledge Base

CKB is the foundational L1 blockchain of the Nervos Network, operating similarly to Bitcoin with a Proof-of-Work consensus mechanism. It uses an upgraded version of Bitcoin's algorithm called NC-MAX, which enhances network efficiency and responsiveness by speeding up transaction confirmation times and reducing orphan rates. Bitcoin targets a 10-minute block interval and adjusts mining difficulty approximately every two weeks. Whereas, CKB dynamically adjusts block intervals (roughly every four hours) to changes in network activity, allowing for optimized performance.

CKB leverages Eaglesong, an ASIC-neutral, custom-built alternative to the widely used SHA256 hash function, to cryptographically secure the network. Eaglesong is a sponge function based on several cryptographic elements optimized to offer the same level of security provided by alternative Proof of Work (PoW) hash functions while being specifically tailored to Nervos Network.

The Cell Model

Source: Nervos Network

The Cell model is core to CKB’s data structure, allowing any data to be stored and verified onchain. Bitcoin's primitive scripting language and UTXO model limit its ability to perform complex computations needed for smart contracts. Contrarily, CKB generalizes Bitcoin’s UTXO model by allowing more flexible data storage and verification. Unlike Bitcoin, which uses a single script to verify transactions, CKB introduces a dual script system in its cell model:

• A Lock Script that ensures that only authorized users can access and use the cell's contents, similar to Bitcoin's approach.
• An optional Type Script that sets rules on how the cell can be used or altered in future transactions.

This system allows CKB to support a wider variety of functions than Bitcoin’s limited options, making it more suitable for diverse applications. Each cell in CKB is a programmable unit that can hold different data types, like tokens, smart contracts, and specific application states. It can also run complex scripts similar to those found in Turing-complete languages. Cells operate independently, meaning they can be updated or referenced without affecting the rest of the blockchain, which enhances scalability through parallelization.

CKB-VM

CKB-VM is CKB's execution engine for running smart contracts and decentralized applications. The VM utilizes the RISC-V instruction set, a flexible and simple open-source hardware architecture set (ISA) that supports multiple programming languages, including popular ones like C and Rust. This broad compatibility differentiates the CKB-VM from other blockchain virtual machines often restricted to specific languages, opening it up to a wider developer community. The network also supports SDKs for key languages such as JavaScript, Rust, Go, and Java, facilitating development with familiar tools. This makes it easier for developers to create complex decentralized applications using familiar programming languages.

Additionally, the CKB-VM's architecture offers predictable gas costs, secure execution, and efficient integration with the Cell Model, which helps manage state and validate transactions effectively. The predictable gas model enhances user experience by avoiding unexpected fees and simplifies contract development.

RGB++

Source: Nervos Network

CKB scales Bitcoin with the RGB++ protocol, an asset issuance standard that extends Bitcoin’s capabilities on CKB. The RGB++ protocol enables complex smart contracts and asset management operations that are typically impossible on Bitcoin’s network. The original RGB protocol is an L2 solution designed to enable smart contracts and asset issuance for Bitcoin without altering its base layer. It operates by binding assets to specific Bitcoin UTXOs, allowing these assets to be transferred with the transfer of the UTXO itself. The RGB protocol primarily relies on client-side validation, where transactions are processed and verified offchain, reducing the load on the Bitcoin network. However, this approach has limitations, like the potential issues with data availability—since data is not stored onchain, it might not always be accessible when needed. Moreover, the reliance on client-side validation adds complexity and could hinder user experience.

Nervos Network addresses these limitations with its RGB++ protocol, which extends and enhances the principles behind the original RGB protocol by using CKB as a data availability and execution layer for Bitcoin. The protocol maps Bitcoin UTXOs to CKB Cells through isomorphic binding, enabling seamless integration with CKB's Turing-complete smart contracts. This is achieved by leveraging CKB's layered architecture and the Cell model, allowing Bitcoin assets to interact with decentralized applications on CKB. By leveraging RGB++, CKB enables more complex smart contract executions for Bitcoin that were impossible with the original RGB protocol. RGB++ also introduces onchain validation for critical transaction elements, improving security and data availability. Additionally, the protocol enables transaction folding, shared states with ownerless contracts, and non-interactive transfers without cross-chain transfers to and from Bitcoin.

Payment Channels

As a base layer chain, CKB can scale with payment channels such as Perun channels, a payment channel framework developed by Polycrypt. By processing transactions offchain and settling onchain these payment channels can support a wide range of applications, from micropayments to payment gateways, enhancing CKB’s performance. Perun channels leverage CKB’s Cell model, where a cell carries the capacity, Lock Script, Type Script, and data to manage channel state. While an implementation of the channel (PerunLockScript) can manage access rights to a channel's live cell, another implementation (PerunTypeScript) can handle the validation logic for state transitions. These transitions are automatically managed from when the channel is funded to when it is closed. As of writing, Perun channels are still in testing and are not yet live on CKB mainnet. There are also efforts underway by Nervos core developers to connect CKB to Bitcoin’s Lightning Network, enabling users to exchange BTC and CKB without the use of third-party intermediaries.

Tokenomics

Nervos Network’s native token CKByte (CKB) plays a essential role in maintaining the network’s security and incentivizing efficient storage. CKB serves the following key functions on the network:

• Grants tokenholders data storage rights.
• Is expended as network fees for transacting on the network.
• Is issued as block rewards to miners for securing the network.

Furthermore, there are three sources of CKB tokens: (1) genesis block, (2) base issuance, and (3) secondary issuance.

Genesis Block

At the mainnet launch in November 2019, the genesis block created 33.6 billion CKB tokens; 8.40 billion CKB tokens (25% of the issuance supply) were burned immediately. Of the burned supply, 5.04 billion CKB tokens were designated for the network’s storage use (“occupied capacity”), and the remaining 3.36 billion CKB tokens were designated as liquid assets (“liquid”). The purpose of allocating these burned tokens accordingly was so miners could initially earn at least 15% of the secondary issuance while the Treasury Fund would receive at least 10%. Of note, the Treasury Fund’s allocation of CKB tokens is currently being burned and can only be changed with a network hard fork.

The genesis supply was allocated as follows:

• Public sale (~21.50%): The largest portion of the Genesis block was offered to public sale participants in 2018 and was fully made available at the mainnet launch in November 2019.
• Ecosystem fund (17.00%): This fund supports third-party development within the Nervos ecosystem. At Genesis, 3% of this allocation was made available, and the remaining was released over two years, ending in December 2022.
• Team (15%): Reserved for the project team and vested over a four-year period which ended in May 2022.
• Private sale (14%): This was offered to private sale participants in July 2018. 66.60% was released at mainnet, while the remaining allocation was vested over a two-year period that ended in 2020.
• Founding partners (5%): This allocation was set aside for strategic partners who helped build the Nervos Network. It was subject to a four-year vesting schedule.
• Testing incentives (0.5%): These were fully distributed at the mainnet to participants in the network’s testnet and bug bounty programs.
• Burn (25%): At Genesis, this allocation was burned to enable constant secondary emissions to miners and the Treasury Fund.

Base Issuance

The goal of the CKB token’s base (primary) issuance is to bootstrap the network’s security at its early development stages. It is solely awarded to miners at a fixed rate per epoch for processing transactions on the network. The primary issuance is capped at a maximum supply of 33.6 billion CKB tokens and follows an inflation schedule similar to that of Bitcoin, halving every four years until it reaches the supply cap. In November 2023, the first halving occurred, decreasing the annual issuance rate from 4.2 billion CKB tokens to 2.1 billion CKB tokens.

Secondary Issuance

CKB manages state bloat through two methods. Firstly, to store data onchain, users must lock CKB tokens. Rather than directly charging a fee for users locking CKB tokens to pay for state rent, CKB indirectly charges fees through an inflationary mechanism known as secondary issuance. Each year, 1.344 billion CKB tokens are minted through secondary emissions and distributed to miners, Nervos DAO depositors, and eventually, an onchain protocol treasury. As such, the network’s secondary issuance introduces inflation targeted at users storing data, as locked CKB tokens are automatically exposed to value dilution, which is an indirect way of paying for State Rent. As of writing, over 600 million CKB tokens have been distributed to miners as state rent, ~1.15 billion CKB tokens have accrued to Nervos DAO depositors, and over 4.27 billion CKB tokens meant for the proposed Treasury Fund have been burned.

Nervos DAO

CKB tokenholders are natively protected against the dilutive impact of the network’s ongoing issuance model via the Nervos DAO. By locking CKB token holdings into the Nervos DAO smart contract, users can earn rewards from secondary token issuance, ensuring their holdings are hedged against inflation. Depositors receive rewards at an APR equivalent to the annual secondary issuance rate, although the rate will continue to decrease as the total supply increases. While tokenholders with a minimum balance of 102 CKB tokens can deposit to the DAO anytime, withdrawals can only occur at the end of the 30-day deposit cycle.

As of writing, over 9.2 billion CKB tokens have been deposited in the Nervos DAO. The deposit-to-circulation ratio on CKB stands at ~20.92% and has continued to trend downwards over the past two years. This downward trend could possibly be explained by an increasing amount of live cells on CKB.

Network Activity

CKB has seen consistent activity over the past year. Year to date, daily average transactions on CKB are 43,600. This is 110% higher than Q4’23’s daily average of 20,800. As for new addresses, the month of April saw heightened activity. There were 387,600 new addresses created in April, an 181% MoM increase compared to March.

Cell activity on CKB has been heightened since April, partly due to the launch of the RGB++ protocol. Cell activity is divided into live and dead cells. Live cells are available for future transactions, smart contract execution, and data storage, reflecting greater network activity and adoption. Dead cells, while no longer usable as transaction inputs, still contain valuable data that can be accessed and referenced, contributing to the blockchain’s history and data traceability. As of June 15, 2024, there were 1.6 million live cells. As for dead cells, there are 59.3 million dead cells on CKB as of writing.

The RGB++ protocol went live on April 3, 2024. Since then, over 13,200 transactions and 4,400 unique addresses have acted on the protocol. Activity has been trending downward throughout May and June, but additional ecosystem projects utilizing RGB++ should help reverse this trend.

Security and Decentralization

As a PoW network, miners secure CKB by solving cryptographic puzzles to validate transactions and add new blocks to the blockchain. For every block mined, the miner receives that block's full 'base issuance' reward and a portion of its 'secondary issuance' reward. Miners also earn proposals or commit rewards from transaction fees for processing transactions on the network. To manage changes in network activity without degrading performance, the network’s custom NC-MAX consensus protocol adjusts mining difficulty approximately every four hours based on the network's orphan rate. This way, the network can optimize block time while reducing the likelihood of block reorganizations, which could disrupt network stability.

Hashrate is the collective measure of the miner base’s computational power for a PoW blockchain. As such, the hashrate represents the security of the CKB network. Hashrate on the CKB network has been setting new all-time highs in 2024. On April 27, the CKB average hashrate reached 397.5 PH/s (petahash per second); the highest ever on the network. Part of this increase in hashrate is due to Binance launching a mining pool for CKB on April 18, 2024. Similarly to hashrate, average difficulty also set a new all-time high (3.96E on April 21) in 2024.

Ecosystem

Nervos Network continues to promote ecosystem development with funding, infrastructure, and tooling support. At the mainnet launch in November 2019, ~5.7 billion CKB (17% of the Genesis allocation - $62.4 million as of writing) was set aside to fund these initiatives. Over the years, several ecosystem development programs have been seeded from this fund to drive the network’s growth initiatives. One such initiative is the CKB Eco Fund (prev. InNervation), an ecosystem fund focused on incubating and investing in pre-seed and seed projects connecting CKB and Bitcoin using RGB++. The fund supports ecosystem projects building critical infrastructure and decentralized applications across various sectors, including DeFi, gaming, tooling, NFT marketplaces, and more. In January 2024, the CKB Eco Fund launched BTCKB, a development initiative to enhance integration between the Bitcoin and CKB blockchains through shared PoW consensus and the UTXO model. BTCKB intends to advance the capabilities of the Bitcoin blockchain by introducing new smart contract functionalities and leveraging BTC, Taproot, and RGB++ assets into the CKB blockchain. As part of this initiative, CKB Eco Fund has also incubated CELL Studio, a blockchain software company led by Nervos co-founder Cipher Wang that also spearheads the BTCKB initiative. CELL Studio develops infrastructure and applications that enhance and expand the Nervos ecosystem, similar to how ConsenSys has built foundational tools for Ethereum, such as Infura and Metamask. As of writing, notable ecosystem tools developed by CELL studio include:

• CoTA: Token aggregation protocol for fungible and non-fungible tokens on CKB.
• ForceBridge: Cross-chain interoperability protocol for bridging CKB to other networks. It currently supports Ethereum and BNB Smart Chain.
• Spore: Onchain Digital Object protocol backed by CKB.

Since the mainnet release of the RGB++ in April 2024, over 15 existing ecosystem projects have leveraged the protocol for asset issuance. Some notable projects include:

• UTXO Stack: a Bitcoin L2 “OP Stack” powered by the RGB++ protocol.
• JoyID: Non-custodial passkey wallet that leverages biometrics for user authentication and supports multiple networks, including Ethereum, Bitcoin, and RGB++ assets.
• HueHub: Decentralized exchange and launchpad with support for RGB++ assets on Bitcoin.
• Stable++: Decentralized stablecoin protocol with support for CKB and BTC.
• World 3: Autonomous Worlds game based on the RGB++ protocol and DOBs.
• Nervape: Multi-chain Composable Digital Objects Built on Bitcoin with “Base Assets” issued on Bitcoin and “Accessory Assets” issued on CKB.
• Haste: Asset management solution for RGB++ assets
• d.id: Decentralized identity protocol for Bitcoin.

CELL Studio’s development roadmap for RGB++ highlights the following notable plans for the rest of 2024:

• Release a cross-chain protocol for issuing RGB++ assets across UTXO chains.
• Bridge Atomicals, Ordinals, and other UTXO-based assets to CKB via the RGB++ protocol.
• Propose and implement RGB++ scaling solutions with support for multiple networks.
• Connecting RGB++ with CKB Lightning.

As part of the BTCKB initiative, CKB Eco Fund also intends to launch a bridge and UTXO-based DEX connecting BTC and CKB. Additionally, a proof of concept has been made to develop a payment channel network for CKB using the RGB++ protocol. This network will connect to the Lightning Network, making CKB more scalable and suitable for various blockchain applications.

Competitive Landscape

Nervos Network’s approach to scaling Bitcoin as an L2 is centered around enhancing Bitcoin's capabilities through its RGB++ protocol. Competitors like Stacks, offer a custom execution environment and programming language, while Rootstock, employs a federated peg for transactions between chains. In contrast, Nervos aims to enhance the native Bitcoin experience without adding significant complexity or compromising decentralization. With the RGB++ protocol, CKB can provide a smart contract execution environment for Bitcoin that is closely integrated with Bitcoin's original UTXO mode. This design may offer Nervos Network an advantage in appealing to Bitcoin users who are skeptical of solutions that deviate too far from Bitcoin’s original premises of decentralization and security.

Compared to a scaling solution like Lightning Network, CKB offers a broader range of functionalities with its smart contracts, serving developers building more complex applications on Bitcoin. While effective at facilitating fast and low-cost transactions, the Lightning Network does not support complex decentralized applications. Meanwhile, platforms like Liquid Network, Merlin Chain, and Bouncebit require trusting semi-centralized federations to manage the bridge between their sidechains and the Bitcoin mainnet. CKB’s approach avoids this level of centralization by leveraging offchain computation and onchain settlement.

Regardless Nervos' approach to scaling Bitcoin with the RGB++ protocol is not without limitations. The reliance on an external network, specifically the CKB blockchain, for data availability and asset issuance introduces additional complexities and potential delays​ for Bitcoin. Moreover, the lack of comprehensive development tools and solutions for multi-party interactions limits the protocol's ability to support decentralized applications effectively. Lastly, the transparency of transactions on the CKB blockchain compromises the privacy benefits originally offered by the RGB protocol​.

Closing Summary

The Bitcoin L2 landscape continues to evolve as the demand for scalability and functionality beyond Bitcoin's original capabilities grows. Various L2 solutions like Lightning Network, sidechains, and rollups aim to address these issues by moving transactions off the main chain, thereby increasing throughput without compromising security. However, these solutions often introduce new complexities and security challenges. Nervos is differentiated by extending the original principles of the RGB protocol through RGB++. This RGB++ approach offers a native extension to Bitcoin that integrates deeper smart contract capabilities directly related to Bitcoin's UTXO model. These capabilities, in turn, facilitate a more seamless and secure expansion of Bitcoin's utility. Additionally, work is underway to integrate a payment channel network that connects with the Lightning Network, making CKB more scalable and applicable for many blockchain applications​.

Ultimately, Nervos aims to strengthen its position within the Bitcoin L2 space by simplifying the user and developer experience. Additionally, Nervos could also prioritize RGB++ support for a broader range of asset types and complex applications, potentially increasing its utility within the Bitcoin ecosystem. By doing so, Nervos could play a pivotal role in the broader adoption and functionality of Bitcoin as a platform for decentralized applications and smart contracts.

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