🟣 Bridging BTC: From multisigs to BitVM
Ethereum-like rollups for Bitcoin, with less trust
Macauley Peterson & Donovan Choy
September 11, 2024
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Welcome back to 0xResearch. Here's what we’ve got for you today:
BitVM, bridges and BOB
Chart: ENS chugs along
Governance: Aave looks to onboard cbBTC
Listen & Read: Analyst roundup
Bitcoin L2 week, day 3.
How do we bridge between Bitcoin and other networks?
That was the question that started my conversation with Alexei Zamyatin, who has been involved in Bitcoin and interoperability research since 2015.
"We actually proved that it's impossible to bridge without a trusted third party," he said, before setting off on a history lesson on the spectrum of bridging solutions.
Zamyatin holds a PhD in computer science from Imperial College London and is known for his work on trustless cross-chain bridges and L2s. He launched BOB, a hybrid layer-2 using both Bitcoin and Ethereum, earlier this year.
Here are the highlights (lightly edited for clarity):
"From the theoretical perspective, you always trust someone. There always needs to be someone somewhere that is online…and in the ideal case, this could be yourself."
"There is, on one side, a single custodian bridge, where you trust one person. And you can distribute that more by taking it to multiple custodians — a multisig. We can make these multisigs very big by using threshold cryptography...so we can scale them to more signers. Like compare when we can do 15-to-20 signers in a normal multisig, [or] 30, 50, 60 using threshold signing, but that's all the same model of an honest majority — as long as the majority of them are honest, that bridge kind of works."
"And then at the far end, there are light client designs — so two chains could verify each other."
"That's the ideal case because in this model, we just trust the two chains to be operating correctly, then you need someone just to forward these proofs — anyone can do that."
"But it doesn't work for Bitcoin, because this assumes that we have smart contracts in both networks, and so far this never was possible on Bitcoin."
"In the middle somewhere, we have game theory, where we could say, well, on the multisig side, let's introduce some stake, so if the majority misbehaves…they get slashed, so they lose at least something."
The slashable asset securing the bridge should not be the same as, or tightly correlated to, the native asset.
"That's what we essentially described in our design in 2018…[to] build the bridge from Bitcoin to Ethereum and other networks where anyone can become a custodian, and they stake collateral, [ether] and stablecoins and liquid restaking assets to make it more capital efficient. And if they steal the bitcoin, they lose the collateral. As long as the collateral is worth more than the bitcoin, well, you're not going to steal."
But there’s a problem. "It’s very capital inefficient because now you're locking Bitcoin, and they have this collateral lock up as well…it just doesn't scale.":
"Until recently [it] was the best, the most secure bridge design. We only had big multisigs or collateral designs which don't scale."
Now, however, Zamyatin says that’s changed.
"BitVM basically takes us to these light client bridges."
"BitVM2 is an improved version of BitVM that, in short, gets us very close to Ethereum rollups in terms of security and practicability. Anyone can challenge now, and we only need three transactions on Bitcoin to fully complete the challenge."
"I would challenge you;"
"you will respond by revealing some computational data, and;
"then I need one more transaction to disprove."
"If you zoom out again, basically BitVM puts this almost at par with the Holy Grail of trust-minimized bridging. We have a light client in BitVM. So we have — let's say BOB in our case — would verify the Bitcoin transactions when people bridge in…and then BitVM would verify the state of BOB — of the rollup — so that when somebody is bridging out, they actually did burn the wrapped asset. We check in BitVM as well that, on Bitcoin, they receive the correct amount of BTC."
"And that allows us, even if only optimistically for now, to reduce the security model from an honest majority in a multisig, to [one where] we only need to assume that one operator in this BitVM is honest, and anyone can challenge these operators."
"In BitVM, so long as there is one honest person online in Bitcoin, you cannot steal the funds."
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ENS chugs along:
Though new ENS name registrations today are a fraction of what we saw at the peak of the last bull cycle, the domain protocol still continues to see a monthly average of 20-50k ENS domain registrations, based on Dune.
ENS made headlines yesterday after it announced an integration with US-based payments platforms PayPal and Venmo to enable the easy sending of crypto payments without numerical wallet addresses for US users.
The domain protocol is also planning to spin off its own L2. A leading Ethereum L2, Base, meanwhile recently introduced its own L2-specific human-readable usernames or "Basenames," built on Ethereum Name Service infrastructure.
— Donovan Choy (X: @donovanchoy | Farcaster: @donovan)
Aave to onboard cbBTC
BitGo’s wrapped bitcoin (WBTC) may finally be seeing some real competition.
Aave’s latest governance proposal by Aave Chan Initiative is looking to onboard Coinbase’s upcoming tokenized bitcoin "cbBTC" to Base L2 and Ethereum mainnet. According to the proposal, cbBTC will be live "in the coming weeks," with about $150k of incentives set aside to be allocated over three months.
Coinbase first teased the launch of an alternative wrapped bitcoin last month after BitGo faced a wave of backlash from its announcement of a "strategic partnership" that involved TRON founder Justin Sun.
When asked on the Bell Curve podcast about Aave’s position on WBTC, Aave Chan Initiative founder Marc Zeller said they were adopting a wait-and-see approach, while considering alternatives for Aave users.
— Donovan Choy
Here is a summary of key insights from Blockworks Research Analysts’ most recent podcast:
Thoughts on Maker DAO’s rebrand to Sky?
Ryan Connor: Most rebrands tend to be investor-focused rather than consumer-focused, like Facebook’s rebrand to Meta, or Google’s rebrand to Alphabet. The Maker rebrand to Sky also changes the token name, which affects consumers. Sky is a cool name, and Maker DAO is the worst name on the planet if you want to connect with investors because folks outside of crypto are not familiar with a DAO structure.
Are L2s parasitic to Ethereum L1?
Daniel Shapiro: It was believed a couple years ago that L2s would not be very parasitic because the net benefit of having a cheaper execution environment would drive significantly more transactions, which would then in turn increase L2 rent paid to Ethereum. This has changed post-EIP-4844. There hasn’t been enough demand for Ethereum. Users have to increase by 10,000x on L2s in aggregate for real value to be returned to the L1 from a pure monetary premium perspective.
Does Telegram’s recent legal troubles invalidate the TON thesis?
Ryan Connor: The leaked financials of Telegram in a recent Financial Times piece showed that Telegram needed crypto to monetize. Its recent legal troubles affect the messaging app’s ability to monetize, which unfortunately extends the time horizon of any investor’s TON thesis.
Danny Knettel: Interestingly, Telegram’s success is also related to other chains like Solana and Ethereum. The most successful Telegram DEX bot apps from Ethereum and Solana are charging about a 1% take-rate and have done over $30 billion in aggregate trading volume.
Vertex has established itself as a formidable player in the perps DEX landscape. Its strategic approach to chain expansion by focusing on EVM-compatible networks and leveraging incentive programs has proven largely successful. The reduced time-to-launch for each new chain integration highlights the team's growing expertise and the scalability of their technology. As Vertex continues to expand, it’s well-positioned to capitalize on the increasing fragmentation of the perpetual DEX market, potentially consolidating liquidity across multiple chains through its Edge technology.
The S&P 500 and NASDAQ closed higher, with gold hitting a new all-time high. However, ETH's price declined 26%, marking its third consecutive month of decline. This drop was partly due to outflows from recently launched US spot ETH ETFs, which have seen over half a billion dollars in outflows since their launch. However, after three months of outflows, Ehereum saw $2.3 billion of stablecoin inflow during August, signifying investors adding cash during a downturn. The Ethereum ecosystem faces challenges including a fragmented ecosystem, imbalanced L2 alignment and competition from other L1s like Solana. Ethereum is preparing for its next major upgrade, Pectra, while the community debates moves to enhance the L1 directly through various proposed modifications.
We’re asking all the hard questions at Permissionless.
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The insights, views and outlooks presented in the report are not to be taken as financial advice. Blockworks Research analysts are not registered broker/dealers or financial advisors. Blockworks Research analysts may hold assets mentioned in this report, further outlined in the Firm’s Financial Disclosures.
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