What Bitcoin Smart Contracts Will Mean for DeFi

Bitcoin is the largest cryptocurrency in the world, but it does not support Bridge Smart Contract Development Services. By directly integrating with the Bitcoin network, Internet Computer can unlock this liquidity while extending the functionality of smart contracts, supporting new DeFi implementations and dapp scenarios.

The ICP community’s recent approval of a proposed motion to initiate the Bitcoin Integration Update will allow smart contracts on the internet computer to send and receive bitcoins (BTC).

So why does it matter?

This means that BTC transactions made between internet computer smart contracts, which the protocol calls “boxes”, will take place on the Bitcoin blockchain. This is not packed bitcoin (WBTC), the conversion to an ERC20 token that can be used on Ethereum; these are actual BTC transactions that take place directly on the Bitcoin network.

More importantly, as these boxes can contain Bitcoin addresses, transactions can be made without the need to trust third parties.

Using bitcoin in smart contracts currently requires user transfer it to Ethereum, or one of the so-called “Ethereum killer” smart contract blockchains like Avalanche, Cardano, and Binance Smart Chain, using wrapped bitcoin. Cross chain bridge development protocols do the same thing for a variety of cryptocurrencies.

This is a problem, because it requires users to do something contrary to the basic idea of untrusted blockchain technology: trust trusted intermediaries called bridges.

unstable bridges

Currently, there are two options for making a bitcoin transaction through a smart contract. The first is to sell it for ether or another ERC-20 token, make the transaction, and then sell those tokens for bitcoin. The other increasingly popular alternative is to rely on a “cross-chain” bridge or protocol, which involves bitcoin or whatever other token you want to use on a different blockchain.

Bridging protocols are essentially gatekeepers that say, “Send us your bitcoin and we’ll lend you some wrapped bitcoins to use on Ethereum” or another blockchain that uses the Ethereum virtual machine to run smart contracts. When users want to cash out, they exchange wrapped bitcoins again for real bitcoins.

All of this Build a cross chain bridge relies on trusted intermediaries, which means it can go terribly wrong.

For example, check out the recent Poly Network hack in August. The bridging protocol for bitcoin and other ERC-20 tokens was attacked by a hacker who managed to drain $612 million in various tokens he held in trust for users, forcing him to shut down his cryptocurrency bridges. While the hacker was good enough to return it all, the hack is considered the biggest crypto heist of all time.

Unfortunately, chain bridges are inherently vulnerable. Prior to the Poly Network hack, the ChainSwap and AnySwap bridging protocols were hacked, with several million dollars worth of tokens stolen. In September, pNetwork was robbed of around $12 million worth of bitcoin wrapped as pBTC.

A Different Approach

The internet computer completely ignores bitcoin bridges. Your transactions take place on the Bitcoin blockchain, neither the data nor the token leaves it.

Dfinity founder and chief scientist Dominic Williams said in a video discussing the upgrade, calling the feature “extraordinarily exciting.”

Dfinity sees Internet Computer as the third great blockchain innovation.

“Now Internet Computer introduces an infinite blockchain with the speed, capacity, and usability to reinvent everything on the chain,” he added, noting that container smart contracts can serve HTTP requests and interactive content. “It is a blockchain that provide as continuous and unlimited capacity for hosted smart contracts. It creates the world’s first public blockchain network with web speed and web service, which can scale capacity on demand. «

Because the network can scale indefinitely and run at the speed of the web, it can host any number of smart ATM contracts, and thus any amount of data, completely on-chain. “Plus, you can run them simultaneously,” Williams noted, “which means you can process any amount of computation. That means you can build dapps on this scale. «

The impact of DeFi dapps would be far reaching. With the integration of Bitcoin, Williams said, “I think we’re going to see some extraordinary applications of the mix coming up very quickly.”

While the integration of Bitcoin offers many benefits (the protocol’s code base is stable and its enormous liquidity makes it valuable), the Internet computer doesn’t stop there. A proposal for integration with Ethereum is also on their resource roadmap.

Don’t read too much into the decision to start with Bitcoin, said Lomesh Dutta, vice president of growth at Dfinity. The main reason for delaying the Ethereum integration is that the Ethereum developers are working to move to a more scalable proof-of-stake governance system.

Integration with Ethereum is very important, Williams said, as it means that Ethereum smart contracts will be able to work with smart contracts on the internet computer and vice versa.

trust nobody

The Internet computer is also 100% hardware hosted, specifically designed not to run on virtual hosted nodes.

“There is no real dapp outside of the internet computer,” he argued, noting that most dapp interfaces are hosted in the cloud, usually by Amazon Web Services. This means that there is an AWS account with someone’s name on it, which in turn means that there is someone you need to trust.