OmniBOLT Bitcoin-based Smart Asset Circulation Protocol

OmniBOLT Bitcoin Smart Asset Circulation Protocol

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1. Introduction

Before understanding OmniBOLT, we need to have a certain understanding of OmniLayer. OmniLayer is a protocol that allows the creation and trading of 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, which enhances the functionality of Bitcoin with its own additional features. OmniLayer allows for tokenization and execution of other smart contract functions on the Bitcoin network, benefiting from its technology without the need to build a completely new blockchain.

However, in the era of the continued growth of decentralized finance (DeFi), OmniLayer must evolve. The scalability issue of the Bitcoin network has become a stumbling block for the development of the OmniLayer ecosystem. To address this issue, the concept of OmniBOLT has emerged. OmniBOLT is a protocol built on top of Bitcoin and the OmniLayer network, aimed at facilitating the circulation of OmniLayer encrypted assets on the Lightning Network and achieving rapid expansion of the Bitcoin network. This new protocol not only solves the scalability issue of the Bitcoin network, but also promotes the development of DeFi on the Bitcoin network.

The Lightning Network, on the other hand, is a technology solution being developed as a second-layer blockchain network protocol. Deployed on top of the Bitcoin blockchain, the Lightning Network achieves higher transaction throughput using advanced smart contracts while maintaining the peer-to-peer nature of the Bitcoin protocol. Similar to the Bitcoin network, the Lightning Network consists of nodes running dedicated Lightning Network software. However, unlike the Bitcoin network, Lightning transactions are not publicly broadcasted and are not stored by all network participants. Individual Lightning nodes can communicate privately. As such, it is a solution that enables instant and low-cost transactions of Bitcoin by creating payment channels. However, the existing Lightning Network only supports Bitcoin transactions, and with the development of OmniBOLT, it expands the concept of the Lightning Network layer to allow for the trading of any encrypted assets issued on the OmniLayer.

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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, specifically 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 P2SH channels. Therefore, the tokens are locked on the main chain but can be redeemed on the OmniLayer main chain at any time. P2SH stands for Pay to Script Hash. It is a Bitcoin address format that allows Bitcoin to be sent to a script hash address. The script hash address consists of a P2SH prefix and a script hash. The script hash is the hash value of a script, which is used to control the use of Bitcoin. P2SH addresses are more flexible than traditional Bitcoin addresses and can be used to support various Bitcoin functionalities, such as multi-signature, smart contracts, and the Lightning Network.

Let’s illustrate how OmniBOLT works through a simple example. Suppose Alice and Bob have both issued their own assets using OmniLayer. Alice has issued Asset A, and Bob has issued 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 decide to use OmniBOLT.

First, Alice and Bob create a channel on OmniBOLT and deposit their respective assets into the channel. Then, Alice and Bob can instantly exchange their assets within the channel without waiting for confirmations from the Bitcoin network or paying transaction fees on the Bitcoin network. The process of creating and maintaining an OmniBOLT channel is very similar to that of a payment channel on the Lightning Network, except that in an OmniBOLT channel, any asset on the OmniLayer can be traded, not just Bitcoin.

Revocable Sequence Maturity Contract (RSMC)

To prevent malicious adversaries from refusing to sign channel transactions and locking funds permanently in the channel (P2SH output), we introduce revocable “commitment transactions”. These transactions were invented by Poon and Dryja in the Lightning Network white paper and allow users to revoke transactions before they are confirmed.

The way commitment transactions work is that users deposit 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 revokes the transaction, and the funds are returned to the user.

Commitment transactions are a secure and effective way to prevent malicious adversaries from refusing to sign transactions. They allow users to transact without the risk of funds being locked in the channel. Here is a specific example:

Step 1: Alice uses a temporary private key, Alice2, to construct a temporary 2-of-2 multisig address, referred to as Alice2 & Bob, and waits for Bob’s signature.

Step 2: Alice uses Alice & Bob (multisig input) to construct a commitment payment, C1a, with one output sending 60 USDT to Alice2 & Bob and another output sending 40 USDT to Bob.

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

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-Locked Contract (HTLC)

“A bidirectional payment channel can only guarantee the secure transfer of funds within the channel. To allow funds to be routed through a network of channels to reach their destination, another construction is required: the Hash Time-Locked Contract.” – Poon & Dryja, The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments

HTLC is another core component of the Lightning Network. For parties A and C without a direct payment channel, they can still transact by utilizing the payment channels between A and B, and B and C. For example, if A wants to transfer funds to C, A can generate a random number as the hash pre-image and set a time delay of T1 on the payment channel between A and B. Only by providing the correct hash pre-image can the transaction be unlocked. As the channel service provider, B can collect a certain fee. B can send the transaction to C using the payment channel between B and C, and set a time delay of T2. Since C knows the hash pre-image, it can unlock the transaction and receive the transfer from A. After A unlocks, the hash pre-image is exposed on the chain, so B can use the hash pre-image to unlock the locked transaction between A and B and collect the fee, thereby completing the construction of the Lightning Network.

Channel Atomic Swap:

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

Once the channel is created, users can start exchanging tokens. To exchange tokens, users need to establish a time window using cryptographic hash functions. The time window is a limited period of time during which users need to confirm the receipt of the exchanged tokens.

If either party fails to confirm the transaction within the time window, the entire transaction will be invalid and the funds will be returned. This feature eliminates counterparty risk, as both parties know that if they do not comply with the protocol, they will not be able to obtain the tokens.

3. Advantages of OmniBOLT

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

• Instant Payments: OmniBOLT supports instant payments for smart assets issued on the OmniLayer. This means that whether you want to transact Bitcoin or any other asset on the OmniLayer, you can achieve instant transactions through OmniBOLT.
• Cross-Channel Atomic Swaps: OmniBOLT supports cross-channel atomic swaps of different assets. This means that you can exchange one asset in one channel and then exchange another asset in another channel, all of which can be done in a single atomic operation without any trust required.
• Decentralized Exchange on Lightning Channels: OmniBOLT supports the establishment of decentralized exchanges on Lightning Network channels. This means that you can create an exchange on the Lightning Network that allows anyone to instantly trade any asset on the OmniLayer.
• Collateralized Loan Contracts: OmniBOLT supports collateralized loan contracts based on atomic swaps. This means that you can use your assets as collateral to obtain loans, all of which can be done in a single atomic operation without any trust required.

All of these advantages make OmniBOLT a powerful tool that not only solves the scalability issues of the Bitcoin network but also promotes the development of DeFi. Compared to other scalability solutions, OmniBOLT has its unique advantages. Firstly, OmniBOLT not only supports instant payments for Bitcoin but also supports instant payments for various assets issued on the OmniLayer, surpassing the capabilities of other solutions. Secondly, OmniBOLT has fast transaction confirmation speed and low fees, providing users with a better experience. Lastly, OmniBOLT supports more transaction types, including cross-channel atomic swaps and decentralized exchanges, opening up new possibilities for the scalability of the Bitcoin network.

4. Use Cases

OmniBOLT has been implemented in practice. Decentralized exchanges can use OmniBOLT to facilitate their transactions. These exchanges allow users to trade any asset on the OmniLayer instantly within the OmniBOLT channels, without waiting for confirmations from the Bitcoin network or paying Bitcoin network transaction fees.

In addition, OmniBOLT is also used to implement collateralized loan contracts. DeFi projects can utilize OmniBOLT for their collateralized loans. Users can deposit their assets into OmniBOLT channels and use these assets as collateral to obtain loans. All of this can be done in a single atomic operation without any trust required.

The revolutionary OmniBOLT Android wallet was officially launched on June 14, 2023, enabling users to easily transfer funds on the Lightning Network. Furthermore, it will also be able to transfer over 700 different OmniLayer assets in the future, not just limited to Bitcoin, greatly enhancing the scalability of Bitcoin.

5. Summary

The emergence of OmniBOLT provides a new solution to the scalability problem of the Bitcoin network and opens up new possibilities for the development of DeFi on the Bitcoin network. By facilitating the circulation of OmniLayer encrypted assets on the Lightning Network, OmniBOLT is expected to drive the Bitcoin network towards higher scalability and broader application scenarios.

References

https://omniboltofficial.medium.com/omnibolt-smart-asset-lightning-network-off-chain-contract-system-919f25f4f056

https://medium.com/omnibolt/part-i-omnibolt-detailed-introduction-178f00fe9364

https://medium.com/omnibolt/part-ii-omnibolt-detailed-introduction-3a98c0cd714a

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