After the introduction of Ordinals, BRC-20 tokens, and most recently Runes, the next big wave of innovation in Bitcoin will revolve around Decentralized Autonomous Organizations (DAOs), asserted Aisling Connolly, senior researcher at the Dfinity Foundation, who said the technology is now well-suited to support DAOs and a more mature ecosystem, making trillion-dollar DAOs possible.
One of the best coordination tools
In a written response provided to Bitcoin.com News, the Dfinity Foundation scientist also praised the Bitcoin network for achieving a major milestone: the elimination of central trust points. The senior scientist said the achievement led to the creation of “one of the greatest coordination tools” in the world. However, Connolly believes that true decentralization will only be achieved when smart contracts are “governed in a decentralized manner and deployed autonomously.”
Meanwhile, when asked why Bitcoin enthusiasts favor the unspent transaction output (UTXO) model, it was explained that the model allows UTXOs to be bundled together into a single transaction, making it more predictable, so while the programming model of a UTXO-based system may be considered slightly more complex, Conolly said the benefits of efficiency and functionality “are considered to outweigh the costs.”
Speaking of decentralized finance (DeFi) on the Bitcoin network, the Dfinity scientist noted that recent advances on the protocol, such as Ordinals and Runes, enable the network to “accept data similar to NFTs and fungible tokens in other ecosystems.” Below, Connolly answered all your questions.
Bitcoin.com News (BCN): Bitcoin has always been a digital store of value, and its value has been proven, so why are developers rushing to build decentralized finance (DeFi) use cases with Bitcoin, essentially making it compete with Ethereum? In your opinion, does Bitcoin need DeFi or does its DeFi need Bitcoin?
Aisling Connolly (AC): Until recently, the Bitcoin protocol was unable to support functionality beyond basic storage and value transfer due to its simple design, however, Bitcoin DeFi has made many advances to become more realistic, with new meta-protocols (such as Ordinals and Runes) being developed to encode information in clever ways, thus extending Bitcoin to accept data similar to NFTs and fungible tokens in other ecosystems.
Infrastructure providers (such as alternative L1 and other layers) have made technical progress that allows Bitcoin to be used on other networks in a more secure way. DeFi builders are struggling with Ethereum’s high gas fees and low latency and questioning the security provided by more scalable networks. Building DeFi with Bitcoin is highly desirable and is now starting to become more realistic due to the above developments.
BCN: One of the main differences between Runes and BRC-20 tokens is that Runes uses an unspent transaction output (UTXO) model similar to Bitcoin, rather than the account model used by chains like Ethereum. Can you explain the UTXO and account models for our readers and explain why Bitcoin users believe the UTXO model is superior?
AC: In the UTXO model, the blockchain keeps track of individual coins, and like cash, transactions consume UTXOs (banknotes) and produce result UTXOs (payments and change). In the account model, the blockchain keeps track of balances associated with accounts, which is more like online banking, and transactions directly update the balances of other accounts.
Take Alice for example, she has 5 tokens and wants to send 2 to Bob.
In the UTXO model
Initially: Alice has a UTXO of 5 tokens
Transaction: Alice sends 2 tokens to Bob
Create a 2-token UTXO for Bob (payment)
Create a 3-token UTXO for Alice (change)
In the account model
Initially: Alice's balance - 5 tokens, Bob's balance - 0 tokens
Transaction: Alice sends 2 tokens to Bob
Alice's new balance: 3 tokens
Bob's new balance: 2 tokens
The UTXO model is thought to be better because, like cash, many UTXOs can be bundled together for a single transaction. It is also more predictable because Alice cannot make a transaction without her initial UTXO, but she can try to make a transaction from an account with a balance of 0, which will fail and result in a loss in gas fees. While the programming model of a UTXO-based system is slightly more complex, the benefits of efficiency and functionality are thought to outweigh the costs.
BCN: ICP is said to be able to talk directly to the Bitcoin network and with the recent announcement of Threshold-Schnorr integration, which will reportedly add functionality, can you briefly explain what this integration means for users as well as developers interested in building Bitcoin-native Web3 use cases?
AC: ICP has a variety of distributed signature services that allow smart contracts to conduct Bitcoin transactions in a secure manner, coupled with the fact that ICP runs a Bitcoin adapter on the network, which means that smart contracts can read, write, own and program Bitcoin. Users can then use Bitcoin using the power of the ICP network and complete transactions in just 1-2 seconds with almost negligible fees.
The new Threshold-Schnorr implementation will allow developers to build a full suite of DeFi protocols without relying on any centralized components or inefficient and insecure workarounds.
BCN: If the Bitcoin network can support NFTs and tokens, what other innovative applications do you think can be built using the original blockchain?
AC: If you think about the original goal of blockchain, it was to remove central points of trust, and Bitcoin does that very well, so we’ve built one of the greatest coordination tools in the world!
Decentralized infrastructure is a great first step that allows us to hold tokens, display our NFTs, and experiment with DeFi, however, to truly eliminate any central points of trust, smart contracts should also be managed in a decentralized manner and deployed autonomously.
I believe the next wave of innovation in Bitcoin will revolve around DAOs (Decentralized Autonomous Organizations). We’ve already seen a few DAOs emerge in the Ethereum ecosystem in 2021/2022, and we’ve heard rumors of the network state starting to emerge. Now that the technology supporting them is more advanced, the ecosystem is more mature, more serious entities have been formed, and the principles are more aligned, I can’t wait to see the first trillion dollar DAO.
BCN: The Internet Computer blockchain went live on the mainnet about three years ago, and you recently released a new roadmap. Looking ahead, what are your key areas of focus?
AC: This year we are focusing on Chain Fusion (our multi-chain technology stack) and decentralized AI. The original goal of the Internet Computer was to decentralize computing on the web. We first developed our own smart contract ecosystem and integrated it with Web2. Given that the ultimate mission is to make Web3 the standard for the future Internet, our current goal is to enable developers to easily and securely build applications on all blockchains (Bitcoin, Ethereum, etc.) and Web2 services (data feeds, email, etc.).
A large number of decentralized applications still run on centralized infrastructure, and our goal is to change this situation.
BCN: With the increasing integration of artificial intelligence (AI) and blockchain, do you think AI-driven smart contracts will change DeFi? If so, in what ways?
AC: AI will impact DeFi in many ways. If you look at the traditional financial industry, you will find that AI is used for fraud detection, anti-money laundering services, fee or rate calculation, and market analysis. All of these use cases can be immediately transferred to the DeFi field.
As DeFi technology develops, it is likely that new features and higher levels of automation will be built, and smart contracts can be programmed to provide personalized experiences, such as having AI portfolio advisors and algorithmic trading.
BCN: Although artificial intelligence (AI) has a bright future, it is not perfect. Since there is no real way to verify the source of data, AI models may be trained on malicious or tampered data, which may affect their accuracy. Many people have called for running and training AI models on the chain to establish trust and transparency. Do you think today's blockchain infrastructure can handle the large computing resources and data sets required by AI models?
AC: Verifiability of computation is one of the great benefits that blockchain brings to the Internet. This is also widely used in the field of artificial intelligence, at least on ICP, where smart contracts can support AI reasoning. Due to the higher computational requirements, AI training is also more difficult. Clever techniques can be used to reduce the scale and complexity of training, as well as other verifiability tools such as zero-knowledge proofs.
What do you think of this interview? Please let us know your thoughts in the comments section at the end of this article.
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