When Vitalik Buterin announced the launch of Ethereum in January 2014, he explained that his primary motivation for creating the protocol was to design a ‘foundational layer’ for other applications. The Bitcoin blockchain wasn’t originally designed for applications to run on top of it. He stated:
‘Bitcoin was designed to be a [Simple Mail Transfer Protocol] SMTP. It’s a protocol that is very good at one particular task. It is good for transferring money, but it was not designed as a foundational layer for any kind of protocols to be built on top’.
Buterin designed Ethereum to be a blockchain that would include the capacity to support a diverse list of applications. And true to his word, Ethereum has grown to host and run hundreds of third-party applications. Today, it is the blockchain of choice for developers around the world who want to build decentralized applications.
Except Buterin wasn’t entirely correct in his predictions about the Bitcoin blockchain. While it is best known for supporting its native currency, it does more. Several working third-party applications run on top of Bitcoin’s blockchain.
Most function through a process known as merged mining. This is when a second protocol is attached to the foundational protocol of Bitcoin and miners confirm transactions for both on the blockchain. To read the unique transactions associated with the additional application, nodes in the network install special client software.
The added layer gives Bitcoin extra capacity to perform tasks it otherwise couldn’t. The following are six widely adopted applications that run on top of Bitcoin.
1. Omni Layer
Omni Layer is a platform that allows users to create or represent assets such as stocks, commodities and even real estate on the blockchain. These assets can then be traded on the open market through the Omni decentralized exchange, with the Bitcoin network confirming the transactions.
The platform was launched in July 2013 as an open-source project under the name Mastercoin. It is recorded as the first project to ever run a token crowdsale—known today as an initial coin offering (ICO)—on the blockchain. It raised about 5,000 bitcoins by selling its native currency Mastercoins (now Omni coins) to investors.
The Omni Layer project is the brainchild of J. R. Willett, who published a white paper detailing it in January 2012. After the fundraise, the Mastercoin Foundation, a body created to oversee the project, hired Willett as a full-time chief architect. Mastercoin rebranded to Omni Layer in March 2015.
2. Rootstock (RSK)
Ethereum has popularized smart contract applications written on the blockchain, with hundreds of startups building solutions that incorporate it. Smart contracts are agreements written in code on the blockchain that self-execute when predefined conditions are met.
RSK, another application built on top of Bitcoin, comes with smart contract capabilities. It was launched in 2016 by an Argentina-based startup of the same name. The company formed a federation that created partnerships among brands in the Bitcoin space.
The open-source project raised capital from investors and implemented the project as open source. In May 2017, RSK released its first client software version that they codenamed Ginger. In December, they released the next version, Bamboo.
3. ColoredCoins
A ‘colored coin’ is a Bitcoin transaction that has been customized by adding metadata to it. Within the structure of Bitcoin, the ColoredCoin framework makes it possible to add information to a transaction and differentiate one coin from the rest. A coin that has been customized through the addition of metadata can be used to represent a real-world asset.
The idea for placing colored coins on the Bitcoin application came up as a realization by developers that they could add data to transactions and have coins represent whatever they wanted on the blockchain.
Enthusiasts of this use of Bitcoin have formed a loose organization, with the goal of expanding the use of the ColoredCoin framework. They have developed full node client software that helps users create, manage and trade digital assets on top of the Bitcoin blockchain.
4. Namecoin
While the internet is largely decentralized, centralized points can be targeted for censorship and other forms of attacks. One weak point is the domain name system (DNS).
Namecoin implements a decentralized system for issuance and management of domain names. It gives true ownership of domains to users and provides additional services, such as file signatures, notary services and proof of existence.
Launched in April 2011, Namecoin is among the first altcoins (alternatives to Bitcoin) created.
5. Counterparty
Counterparty is a layer on top of Bitcoin that enables users to create customized digital assets, as well as other applications that are powered and secured by the Bitcoin network. The assets can be traded through the Counterparty decentralized exchange.
Because Counterparty transactions are embedded in Bitcoin transactions, Counterparty nodes communicate through the Bitcoin network. Bitcoin nodes that are not part of the Counterparty network just ignore the data. Meanwhile, Counterparty nodes pay transaction fees just like other transactions on the network.
Decentralized cloud storage service Storj ran on the Counterparty protocol until it migrated to Ethereum in March 2017.
6. Factom
Managing, auditing and protecting the authenticity of data is a major challenge. Factom runs on top of Bitcoin and provides tools to make record keeping both transparent and inexpensive.
The project was initiated by Paul Snow and David Johnson in January 2014 under the name Notary Chains. Its first client software version was released in January 2015, followed by a token sale in March in which 2,278 bitcoins were raised by selling Factom’s native coin Factoid to backers.
Factom counts the US Department of Homeland Security as a client, among other public institutions around the world.
These six applications that run on top of Bitcoin create even more opportunities for innovation, as they are able to support applications of their own. For example, a data storage application known as Safe Network runs on top of the Omni platform.