The Ultimate Guide to the Wormhole Protocol – The BTC Blog

The Wormhole protocol makes use of OP_RETURN instructions as well as Proof-of-Burn to enable issuance of new tokens and digital assets on the BCH blockchain.

3.1. The UTXO model

As we mentioned before, early blockchain development saw people introducing non-transactional data into the chain by sending tiny amounts of Bitcoin. This did not only affect the block and the blockchain size, but it also dramatically increased the UTXO register and caused congestion on the BTC network.

The Bitcoin derived chains are based on the UTXO model, where records with the unspent output are analyzed on nodes to validate transactions and keep track of the current coin’s status. In the UTXO model, no Bitcoin is ever really, physically transferred. Imagine that your friend sent you 2 BTC. The transaction registered an output that the BTC in his wallet became ‘spent.’ At the same time, a new ‘unspent’ 2 BTC was created in your own wallet. This ‘new’ 2 BTC is now represented not as a number of coins but as one unspent transaction. If you then want to send someone 0.5 BTC, this process will create two transactions. One of 0.5 BTC spent, and one of 1.5BTC unspent that you ‘send to yourself’ so that you are left with a ‘new’ unspent 1.5BTC in your wallet.

The nodes check the unspent transaction outputs to confirm that specified coins have never been used as an input in another valid-output transaction. If they were used as an input, it means that the BTC in question has already been spent and can’t be used in another operation. The UTXO based model is faster and more efficient than other models. However, the more unspent transactions, the more work the nodes need to perform to confirm the current status of all the transactions and the coins.

3.2. The OP_RETURN Solution

The Wormhole protocol uses OP_RETURN code to circumvents the network congestion due to excess UTXO. This opcode allows for a transaction’s output to be invalid with any coin amounts automatically returned to sender. In other words, it does not create an unspent register or adds to networks overhead, but still allows users to write small chunks of information into the blockchain without transferring any coins.

This opcode is currently used by multiple second-layer and meta-layer apps to build functionalities on top of the BTC and BCH blockchains without burdening the UTXO network, for example, Coinspark, Eternity Wall, Colu, Docproof, Memo Social Network, Omni Layer, and as of August 2018 also the Wormhole Protocol.

The limitation of the OP_RETURN is the space available for users, which is only 40 bytes per transaction for BTC and up to 220 bytes for BCH. With a larger block size limit, BCH allows for more room and creativity to build DApps on its blockchain.

3.3. The Proof-of-Burn

The Wormhole protocol uses Proof-of-Burn which requires burning of BCH to create native platform tokens — Wormhole Cash (WHC). The WHC can be used to launch ICOs, contribute to projects, and pay fees similarly to how gas works for Ethereum network. As a second layer, the tokens don’t directly compete with BCH, but they stimulate and incentivize the system, and can potentially increase the adoption of Bitcoin Cash.

Proof-of-Burn relies on the principle of ‘burn to create’ which requires participants to send their BCH to a specified burning address for which no one has a private or public key. The current burn address for the Wormhole PoB is:

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The address conforms with the requirements of a burn address, in that it is fresh and new, and derived using a specific sequence of steps as explained in the Wormhole GitHub directory. This proves that the address has no known key. It’s also highly improbable to use brute force to find such key, as it would require computing power far beyond the current or even future world’s computing capacity.

By sending 1 or more of BCH to this burn address, you take them out of the circulation and allow the genesis of WHC tokens. The potential of rollback issues, if less than 1BCH would be sent to the burn address, is solved by requiring of 1000 validations for valid WHC tokens to be created.

3.4. Wormhole Tokenization and ICO Functionality

Wormhole saw the burning of over $1.2M in BCH and creation of 150+ tokens in the first days after the platform launched in August 2018. In October 2018 ViaBTC, the world’s third-largest mining pool raised over 30 million by issuing a mining token on the Wormhole network.

The network continues to update its token creation algorithms which can now produce any tokens compatible with ERC20, and later next year, also ERC721 tokens.

Types of tokens available on the Wormhole Network include:

• Fixed number of tokens that all belong to the issuer upon creation.
• Managed number of tokens that can be increased or decreased.
• Crowdfunding tokens generated during an ICO using a Wormhole crowdfunding algorithms.

Any Wormhole account may create various types of tokens and many tokens at the same time, but the crowdfunding algorithm only allows for one active ICO, with a specified number of tokens available for investors. Similarly to the Ethereum network, Wormhole has settings for automated early bird pricing and token cap cutoffs. The ERC20 compatible tokens can be purchased using WHC which is then immediately credited to issuer account. Once the number of tokens exceeds the specified ICO cap, any subsequent the transactions fail and money return to senders.

In comparison to Ethereum, the BCH network holds a few advantages, as it is built on the Bitcoin Cash blockchain which some argue makes ICOs safer, more efficient, and congestion free. The network provides a more reliable payment system with fewer issues stemming from insufficient gas fees.

As a meta-layer, the Wormhole protocol not only benefits from BCH’s scalability, transaction speed, and block size, but it can selectively process only the Wormhole protocol transactions on its nodes making it infinitely more efficient.