OmniBOLT: Bitcoin-based smart asset circulation protocol

Author | Chainchen@Web3CN.Pro

1 Introduction

Before understanding OmniBOLT, we need to have a certain understanding of OmniLayer. OmniLayer is a protocol for creating and trading custom assets on the Bitcoin network. OmniLayer is neither a fork of Bitcoin nor an independent network, but a meta-layer on top of Bitcoin. It is essentially a software layer built on top of the Bitcoin blockchain that enhances Bitcoin with its own additional features. OmniLayer allows tokenization and execution of other smart contract functions on the Bitcoin network and benefits from its technology without building an entirely new blockchain.

However, in the context of the continued growth of decentralized finance (DeFi), OmniLayer must continue to evolve. The scalability problem of the Bitcoin network has become a stumbling block to the ecological development of OmniLayer. In order to solve this problem, the concept of OmniBOLT came into being. OmniBOLT is a protocol built on top of Bitcoin and the OmniLayer network, which aims to realize the rapid expansion of the Bitcoin network by promoting the circulation of OmniLayer encrypted assets in the Lightning Network. This new protocol can not only solve the scalability problem of the Bitcoin network, but also promote the development of DeFi in the Bitcoin network.

The Lightning Network is a technical solution being developed as a second-layer blockchain network protocol. Deployed on top of the Bitcoin blockchain, the Lightning Network utilizes advanced smart contracts to achieve higher transaction throughput while maintaining the peer-to-peer nature of the Bitcoin protocol. Similar to the Bitcoin network, the Lightning Network consists of nodes running specialized Lightning Network software. However, unlike the Bitcoin network, Lightning transactions are not publicly broadcast nor stored by all network participants. Private communication between individual Lightning nodes is possible. Therefore, it is a solution to achieve instant transactions and low-fee transactions of Bitcoin by creating payment channels. However, the existing lightning network only supports bitcoin transactions. With the development of OmniBOLT, it expands the concept of the lightning network layer, allowing any encrypted assets issued on OmniLayer to be traded in the lightning network.

2. How OmniBOLT works

OmniBOLT (Basis of Lighting Technology) is a protocol that defines the fast circulation rules of the smart asset layer on the Bitcoin network, especially the assets issued by the OmniLayer protocol. The emergence of OmniBOLT fills the gap in the existing Lightning Network in supporting non-Bitcoin asset transactions. OmniBOLT itself does not issue tokens. All tokens are issued on OmniLayer, and then enter OmniBolt through the P2SH channel. Therefore, tokens will be locked on the main chain, but can be redeemed on the OmniLayer main chain at any time. P2SH is the abbreviation of Pay to Hash. It is a bitcoin address format that allows bitcoins to be sent to script hash addresses. A script hash address consists of a P2SH prefix and a script hash. The script hash is the hash value of the script, which is used to control the use of bitcoins. P2SH addresses are more flexible than traditional Bitcoin addresses and can be used to support various functions of Bitcoin, such as multi-signatures, smart contracts, and the Lightning Network.

Let's walk through a simple example to illustrate how OmniBOLT works. Suppose both Alice and Bob use OmniLayer to issue their own assets, Alice issues asset A, and Bob issues asset B. Both Alice and Bob want to be able to trade their assets instantly, but they don't want to pay the high fees of the Bitcoin network. So, they decided to use OmniBOLT.

First, Alice and Bob create a channel on OmniBOLT, and they each deposit their assets into the channel. Alice and Bob can then exchange their assets instantly in the channel without waiting for confirmation from the Bitcoin network and without paying transaction fees on the Bitcoin network. The creation and maintenance process of the OmniBOLT channel is very similar to the payment channel of the Lightning Network, except that in the OmniBOLT channel, not only Bitcoin, but also any asset on OmniLayer can be traded.

Revocable Serial Maturity Contract (RSMC)

In order to prevent malicious adversaries from refusing to sign channel transactions, and to prevent malicious adversaries from refusing to sign channel transactions, so that funds are permanently locked in the channel (P2SH output), we introduce revocable "commitment transactions". This type of transaction was invented by Poon and Dryja in the Lightning Network white paper, and it allows users to reverse transactions before they are confirmed.

Commitment transactions work by depositing funds into a smart contract. The smart contract releases the funds to the user, but the user must first sign the transaction. If the user refuses to sign the transaction, the smart contract will reverse the transaction and the funds will be returned to the user.

Commitment transactions are a safe and efficient way to prevent malicious adversaries from refusing to sign transactions. It enables users to trade without the risk of funds being locked within the channel. Here is a concrete example:

Step 1: Alice uses the temporary private key Alice2 to construct a temporary 2-2 multi-signature address, denoted as Alice2 & Bob; and waits for Bob's signature.

Step 2: Alice uses Alice & Bob (multi-signature input) to construct a commitment payment C1a, one output of the payment will send 60 USDT to Alice2 & Bob, and the other output will send 40 USDT to Bob.

Step 3: RD1a is the first output of C1a, which pays Alice 60 USDT, but has a serial number to prevent Alice from taking the money immediately.

Step 4: Bob signs C1a and RD1a, and sends the data back to Alice.

Step 5: OBD constructs a refund transaction: C1a/RD1a.

Hash Time Lock Contract (HTLC)

"A two-way payment channel can only guarantee the safe transfer of funds in the channel. In order for the funds to go through multiple hops in the network formed by the channel and reach the destination, another structure is needed: a hash time-lock contract." - Poon & Dryja, Bitcoin's Lightning Network: Scalable off-chain instant payment

HTLC is another core to realize the lightning network. For A and C without payment channels, if they want to conduct transactions, they can borrow the payment channels between A, B and B, C to conduct transactions. If A needs to transfer money to C, then A can generate a random number as the hash preimage, and then use the payment channel between A and B to set the delay to T1. Only when the hash preimage is given correctly can the transaction be unlocked. As a service provider of the channel, a certain handling fee can be charged. B uses the payment channel between B and C to send the transaction to C, and sets the delay as T2. Because C knows the hash preimage, he can unlock the transaction and obtain A's transfer. After A is unlocked, the pre-hash image is exposed on the chain, so B can use the pre-hash image to unlock the locked transaction between A and B to obtain a handling fee, thus completing the construction of the Lightning Network.

Channel atomic swap:

To use OmniBOLT, users first need to create a channel. A channel is a smart contract signed by two users. Channels store the tokens that users want to exchange.

Once the channel is created, users can start exchanging tokens. To exchange tokens, users need to use a cryptographic hash function to establish a time window. A time window is a limited period of time within which users need to confirm receipt of the exchanged tokens.

If one party fails to confirm the transaction within the time window, the entire transaction will be invalidated and the funds will be returned to the original source. This feature eliminates counterparty risk, as both parties know that if they do not abide by the agreement, they will not be able to obtain tokens.

3. Advantages of OmniBOLT

The advantages of OmniBOLT are mainly reflected in the following aspects:

• Instant payment: OmniBOLT supports instant payment of smart assets issued on OmniLayer. This means that whether you want to trade Bitcoin, or any other asset on OmniLayer, you can do so instantly through OmniBOLT.
• Cross-channel atomic swap: OmniBOLT supports cross-channel atomic swap of different assets. This means, you can exchange one asset in one channel, and then another asset in another channel, all in one atomic operation without any trust.
• Decentralized exchanges: OmniBOLT supports the establishment of decentralized exchanges on Lightning Network channels. This means that you can build an exchange on the Lightning Network that allows anyone to instantly trade any asset on OmniLayer on the exchange.
• Mortgage loan contracts: OmniBOLT supports atomic swap-based mortgage loan contracts. This means, you can use your assets as collateral, get a loan, all in one atomic operation, without any trust.

All these advantages make OmniBOLT a powerful tool not only to solve the scalability problem of the Bitcoin network, but also to promote the development of DeFi. Compared with other scalability solutions, OmniBOLT has its unique advantages. First of all, OmniBOLT not only supports instant payment of Bitcoin, but also supports instant payment of various assets issued on OmniLayer, which surpasses the functions of other solutions. Second, OmniBOLT’s transaction confirmation speed is fast and fees are low, which provides users with a better experience. Finally, OmniBOLT supports more transaction types, including cross-channel atomic swaps, decentralized exchanges, etc., which opens up a new world of scalability for the Bitcoin network.

4. Use Cases

OmniBOLT has already been used in practice. Decentralized exchanges can use OmniBOLT to enable their transactions. These exchanges allow users to instantly trade any asset on OmniLayer in OmniBOLT channels without waiting for confirmation from the Bitcoin network or paying transaction fees on the Bitcoin network.

Additionally, OmniBOLT is also being used to implement mortgage contracts. DeFi projects can use OmniBOLT to implement their collateralized loans. Users can deposit their assets into OmniBOLT channels and then use these assets as collateral to obtain loans. All of this can be done in one atomic operation without any trust.

OmniBOLT's revolutionary Android wallet has been officially launched on June 14, 2023, allowing users to easily and easily transfer funds on the Lightning Network. In addition, more than 700 OmniLayer assets will be able to be transferred in the future, not just limited to Bitcoin, which greatly improves the scalability of Bitcoin to a certain extent.

5. Summary‍‍

The emergence of OmniBOLT provides a new solution to the scalability problem of the Bitcoin network, and at the same time opens up new possibilities for the development of DeFi in the Bitcoin network. By promoting the circulation of OmniLayer encrypted assets in the Lightning Network, OmniBOLT is expected to promote the development of the Bitcoin network to higher scalability and wider application scenarios.

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