Author: Vishal Kankani, Head of Multicoin Capital Investment Team; Translation: Golden Finance xiaozou
On March 9, 2024, Multicoin announced that it led a $7 million seed round of financing for Arch, a Bitcoin native application platform. Arch unlocks the potential of bridgeless decentralized finance (DeFi) on Bitcoin, the world's most valuable blockchain. Other investors participating in this round of financing include OKX Ventures, Big Brain Holdings, Portal Ventures, CMS Holdings, Tangent, etc.
For nearly a decade, Bitcoin has operated like digital gold. Although there have been discussions about enhancing smart contract capabilities for more than a decade, related efforts have fallen into obscurity, partly because a large part of the Bitcoin community believes that the corresponding trade-offs may jeopardize Bitcoin's ultimate mission of becoming the largest non-sovereign currency.
At that time, the mainstream view in the Bitcoin community was to abandon all programmability and other chain expansion-related innovations, and to maximize the potential without sacrificing the ultimate vision of non-sovereign currency. The emergence of Ethereum and other smart contract platforms is optimistic about this opportunity.
Smart contract platforms have been around for a decade. Some smart contract primitives, such as decentralized exchanges, lending markets, and stablecoins, have achieved product-market fit. They are seen as essential building blocks for a well-functioning blockchain ecosystem.
Prior to the Taproot upgrade in November 2021, Bitcoin’s smart contract functionality was very limited. The Taproot upgrade makes it easier for developers to write complex script functions by increasing the witness field space to about 4MB. This allows developers to write scripts like:
Atomic swap transactions
Multi-signature wallet
Conditional Payment
Later, in July 2022, Casey Rodarmor released "Ordinal Theory", a satosh numbering scheme that allows tracking and transfer of individual satoshs, unlocking the ability for users to "inscribe" arbitrary data directly into Bitcoin transactions, including images, text, games, etc., thereby unlocking full-chain NFTs on Bitcoin. These NFTs don't have to be jpegs or songs, but can also be state proofs of other chains.
The impact of the Taproot upgrade and Ordinal Theory is huge, and today, developers are experimenting with Bitcoin on a large scale that has been long overdue.
1. Current status of Bitcoin development
At the time of writing, there are more than 50 teams working on various research — rollups, drivechains, sidechains, etc. — to scale Bitcoin and make it more programmable. Most of these projects call themselves “Bitcoin Layer 2,” which is a loose term in some cases. Some of these projects are available today, while others are still to be achieved in the future, such as BitVM, OP_CAT, etc.
In this area, each team has a clear set of design trade-offs. Several important design-related variables are:
Hosting Model
Programmability
Extensions
We believe that in the short term, the first two points are the right trade-offs:
Built natively on Bitcoin — can support interactions with DeFi without the constraints of additional trust assumptions beyond Bitcoin.
Focused on making Bitcoin more programmable in a self-custodial model.
The typical bitcoiner is a security fanatic. When it comes to Not your keys, not your coins, Bitcoin users are the most paranoid users on the planet. Bitcoin holders should not be expected to move their BTC to a new multi-signature, give up even a little self-custody, or worse, take on bridging risk. We believe this because WBTC and tBTC have been around for years, but cumulatively account for less than 1% of the total Bitcoin supply. There is simply not enough market demand to take on bridging/centralization risks to achieve programmability benefits.
Additionally, we also see that the majority of TVL on Ethereum resides on L1, rather than L2 like Base, Arbitrum, or Optimism.
To truly unlock DeFi on Bitcoin, developers need to come to the user base - Bitcoin L1.
Why focus on programmability instead of extensibility?
As a developer, if all you want is to create a fast blockchain, there are alternatives like Solana that have thriving developer ecosystems and more mature market infrastructure. Even with the most charitable view of the current state of Bitcoin technology, we are not ready for a high throughput chain without sacrificing custody, which, as mentioned above, is not possible for most bitcoiners. In this regard, most developers building on Bitcoin are "aligned with Bitcoin" and want to build the most secure blockchain in the world, not multi-sig masquerading as L2. Within the current technical capabilities of Bitcoin, we believe the right order of operations is to prioritize programmability and push speed and scale further down the roadmap.
2. Bitcoin native applications on Arch
Arch is building the first Bitcoin native application platform. The Arch network is currently in the testing phase and is expected to be launched on the mainnet in a few weeks.
Arch is a decentralized execution layer focused on enhancing Bitcoin’s programmability. It makes several interesting tradeoffs in Bitcoin’s expressive design:
It acknowledges that most Bitcoin holders will not give up custody to move to multi-sig (almost all Bitcoin L2 is trusted multi-sig).
The core architecture allows spot takers to interact with applications without taking on new trust assumptions; however, makers will face additional trust assumptions (makers are typically professional profit-seekers who explicitly take on risk, rather than principled users who hold Bitcoin for self-sovereign reasons).
Technically, Arch introduces smart contract-like functionality to Bitcoin Layer 1 through a complex architecture that leverages a decentralized network of validator nodes and a purpose-built zero-knowledge virtual machine (zkVM) called ArchVM. The following is the general life cycle of a transaction (technically relevant) on the Arch network:
ZKVM: The core of the Arch network is zero-knowledge proofs (ZK proofs), which verify transactions and ensure provably secure application execution. ZKVM is a dedicated virtual machine that executes applications and generates cryptographic proofs that prove the correctness of the execution. It is powered by Risc0.
Decentralized Validator Network: The generated ZK proof is then verified by Arch's decentralized network of validator nodes. This network plays a vital role in maintaining the integrity and security of the platform. By relying on a decentralized architecture, Arch is committed to ensuring that the verification process is not only secure, but also resistant to censorship and central point failures.
Integration with Bitcoin Layer 1: Once the ZK proof is verified, the validator network can sign the unsigned transaction. These transactions, including state updates and asset transfers determined by the application logic, are eventually transmitted back to Bitcoin. This last step completes the execution process, and all transactions and state updates are finalized directly on the Bitcoin blockchain.
While other projects position themselves as Layer 2, we believe Arch is clearly native to Bitcoin. Arch uniquely positions itself as a Bitcoin native application platform, running directly on Bitcoin Layer 1. Arch's direct operation of the Bitcoin main layer eliminates the complexity and inefficiencies that L2 solutions typically face, allowing users to directly benefit from Bitcoin's security and liquidity while exploring the expansion capabilities brought by Arch.
3. Develop and build on Arch
In the short term, DeFi applications such as lending, decentralized exchanges, and Ordinal markets are obvious to build on Arch. It would be great if we could also exchange assets, lend collateral, and earn BTC without trust.
Additionally, it would be great if high-end collectibles could reside entirely on the most valuable blockchain known to mankind (Bitcoin). We expect that the world’s largest digital collections will reside on Bitcoin, which is itself a huge technological breakthrough and will usher in the era of Internet-native finance. Many Ordinals collectors clearly value this.
Several projects in the Bitcoin ecosystem have already begun migrating to Arch. Recently, Bitcoin lending market Liquidum began integrating liquidity pools, using Arch to support instant liquidity loans and fungible token pools - something that Bitcoin, or even Discrete Log Contracts (DLCs), do not natively support. As of this writing, there are more than 20 projects being developed on Arch's devnet, ranging from stablecoins, decentralized exchanges, lending marketplaces, and more. As excitement around Bitcoin grows, the Arch Foundation plans to support the growth of the ecosystem and fund a range of projects through an upcoming hackathon.
4. The next chapter of Bitcoin
With the Taproot upgrade and Ordinal Theory behind it, we are witnessing unprecedented interest in the Bitcoin ecosystem. For the first time in 15 years, there is an active and tangible effort to make Bitcoin more programmable without compromising its vision of non-sovereign money.
Arch is the first Bitcoin-native application platform to unlock bridgeless DeFi on the world's most valuable blockchain. Arch was created as a direct response to the Bitcoin community's desire to leverage Bitcoin's underlying security and liquidity to enable more sophisticated applications, as seen on other programmable chains such as Ethereum and Solana. By providing a Bitcoin programmability platform, Arch aligns with the vision and principles of the Bitcoin community and provides an innovative approach to enhancing Bitcoin's utility while maintaining its integrity.
Arch invites people to rethink the world's largest and most secure blockchain and bring advancements and innovations from other blockchains back to Bitcoin.
