Ever heard of the “Bitcoin write problem”? Without getting too technical, the bottom line is that Bitcoin has limited programmability. This is why we don’t see the same type of DeFi applications on Bitcoin that we see on other chains. However, for a decentralized economy to function properly, users need to be able to swap, borrow, and earn income from their holdings.
This limited programmability has led to the emergence of blockchains such as Ethereum, which offer more Web3 functionality and managed "wrapped Bitcoin" tokens to reflect the value of Bitcoin. However, compromises in security and reliance on centralized entities have led to countless hacks, bankruptcies, and billions of dollars in losses.
A solution is needed to leverage Bitcoin beyond the base layer. In this article, we explain why Web3 needs Bitcoin and introduce sBTC: a non-custodial Bitcoin-pegged mechanism that will become the backbone of decentralized finance.
Why Bitcoin Web3?
The Bitcoin blockchain has never suffered a single breach or hack in its 15 years of use and maintains a network value of over $1.2 trillion, four times that of Ethereum. Web3 requires the decentralization, security, and durability that only Bitcoin can provide.
Decentralization
Bitcoin's governance lies in the hands of its holders, miners, node operators and other network participants, with its rules encoded in its protocol. This decentralization was demonstrated when the Bitcoin community resisted changes to the protocol.
In contrast, Ethereum has a more centralized governance structure, with a charismatic co-founder and influential entities who can make changes to the Ethereum blockchain and monetary policy. This includes rolling back transactions that have already settled. This flexibility allows for experimentation, but also undermines the security and durability of blockchain, which are necessary to build trust in a public economic system.
Safety
Ethereum has transitioned from a Proof-of-Work (PoW) consensus mechanism to a Proof-of-Stake (PoS) mechanism to increase scalable functionality. However, PoS suffers from several fundamental issues that compromise security.
For example, the person who holds the token is also the person validating the chain. This results in a concentration of decision-making power and financial returns in the hands of the wealthiest currency holders, and a reliance on wealth assessment criteria that are determined internally rather than externally to the system. This could lead to further centralization as the largest holders will make decisions that benefit themselves – the long-term impact of this is unclear.
In contrast, Bitcoin's proof-of-work mechanism relies on external resources to verify blocks and reward users for honest verification. It provides a secure, tamper-proof and decentralized settlement layer that is valuable for a range of applications.
Durability
Bitcoin has a long history and is not easily changed, making it stable and reliable. Ethereum’s experimental spirit and frequent rule changes make it less reliable. The interconnected nature of Ethereum’s settlement and smart contract functionality poses challenges in ensuring system security. In contrast, Bitcoin’s minimal and pure settlement layer is considered sacrosanct and helps ensure the stability of the system.
Bitcoin was designed to be the base layer for high-value settlements. Now is the time to add layers to introduce the more powerful and expressive smart contracts required for DeFi applications.
Stacks Bitcoin Layers
"Layers" provide scalable Web3 solutions.
We have seen the Ethereum layer bring the entire decentralized application ecosystem and attract more capital and market value. Introducing layers to Bitcoin will also bring innovation and continued growth.
Currently, the number one project for Bitcoin Web3 is the Stacks Bitcoin layer, launched in January 2021. Stacks extends the functionality of Bitcoin, using Bitcoin's security as the anchoring base layer without making any changes to Bitcoin itself, to provide smart contract functionality to support decentralized finance (DeFi) and other projects powered by Bitcoin. Development of powered Web3 applications.
Proof of Transfer (PoX)
Using a unique consensus mechanism called Proof of Transfer (PoX), Stacks can read the Bitcoin chain state and anchor its own blocks to Bitcoin’s Proof of Work (PoW). When Bitcoin forks, the Stacks layer also forks, and has a built-in Bitcoin price oracle: Stacks miners spend Bitcoin to mine STX, and this spending rate is an excellent on-chain proxy for the Bitcoin to STX price.
It is now possible to leverage the advanced smart contracts required to leverage Bitcoin’s security, capital, and network capabilities without requiring any changes to Bitcoin itself.
clear language
Stacks uses the Clarity smart contract language, which is decidable and human-readable. Unlike Ethereum’s Turing-complete language, Clarity provides developers with a secure way to build complex smart contracts on Bitcoin. Ethereum’s Turing-complete language cannot be formally verified and could lead to more undiscovered vulnerabilities.
speed
Once the Nakamoto upgrade is completed, Stacks will receive a speed upgrade (up to 5 seconds block confirmation time) to help scale Bitcoin. One potential unlock is lightning-fast payments on the Stacks layer that benefit from Bitcoin’s finality. Additional layers called “subnets” built on top can further increase speed and scalable functionality, enabling lightning-fast payments with the finality of Bitcoin.
sBTC: Bitcoin’s Web3 Holy Grail
Although Stacks has made significant progress, there is still no way to transfer Bitcoin to and from smart contracts in a completely trustless manner. This has been Bitcoin’s “Holy Grail” problem for nearly a decade.
sBTC is a non-custodial form of pegged Bitcoin with 100% Bitcoin finality. sBTC will soon appear on the Stacks Bitcoin layer, enabling smart contracts on Bitcoin. Get ready for DeFi, NFTs, and DAOs that run entirely on Bitcoin, using Stacks as the invisible smart contract layer.
How does sBTC work?
sBTC works by using a synthetic asset model on Stacks. To obtain sBTC, users must exchange their Bitcoin for sBTC through smart contracts on the Stacks network, without relying on a centralized entity.
This is achieved using the PoX consensus mechanism that connects to Bitcoin and facilitates sBTC’s novel trustless peg design. Additionally, since sBTC is a 1:1 Bitcoin-backed asset, sBTC holders can represent their Bitcoin holdings as sBTC on the Stacks network.
This synthetic representation allows users to participate in DeFi activities, such as lending or trading, while still retaining ownership and earnings of their underlying Bitcoin. Additionally, aside from Bitcoin transaction fees, users will not pay any fees when converting between Bitcoin and sBTC.
If you need full programmability, sBTC is the closest currency to native Bitcoin. It has all the advantages of Wrapped Bitcoin (wBTC) without any of the disadvantages of wBTC. You no longer need to trust a custodian to back wrapped tokens and real Bitcoin at a 1:1 ratio like you do with wBTC.
Here’s a quick breakdown of the peg mechanism design, with its roots in security, decentralization, and usability:
transfer hook
First, users convert native Bitcoin to sBTC on Stacks 1:1 by sending the Bitcoin to a native Bitcoin wallet. The wallet is controlled by a decentralized, open membership group called “stackers” who lock STX tokens into Stacks’ PoX consensus mechanism. With Bitcoin rewards, stakers are financially incentivized to process pegs/sweeps through the capital they lock in the stake and the rewards they earn.
These rewards provide them with a strong financial incentive to participate in peg/exit without introducing additional peg fees. sBTC is then minted on top of the Stacks layer while still being secured by Bitcoin (because Stacks adheres to Bitcoin’s finality).
Source: sBTC White Paper
transfer hook
In order to peg and redeem native Bitcoin, users need to send a request to the staker, which is processed in the same way as a Bitcoin transaction.
More than 70% of the stakers must then collectively sign to destroy the sBTC and programmatically send the corresponding native Bitcoin back to the user’s Bitcoin address. This process may take up to 24 hours.
Source: sBTC White Paper
sBTC upholds the spirit of Bitcoin
The ethos of Bitcoin has always been to advocate self-custody.
"Bitcoin is a pure peer-to-peer electronic cash that allows online payments to be sent directly from one party to another without going through a financial institution." - Satoshi Nakamoto, 2008.
The sBTC white paper was written by the sBTC working group, which is open to the public and includes contributions from computer scientists at Princeton University, developers at the Stacks layer, and anonymous contributors.
In 2022, the failure of centralized entities such as FTX, Genesis, and Voyager caused more than $2 trillion in losses to users. These failures demonstrate the importance of reaffirming the spirit of Bitcoin: creating a truly decentralized and transparent system.
Based on these basic principles, sBTC solves the "Bitcoin writing problem", opens a new era of Bitcoin applications, and can quickly accelerate the Bitcoin economy.
sBTC is designed to be both decentralized and secure, especially when moving Bitcoin to another layer that supports smart contracts and decentralized applications (dApps).
The digital asset enables Bitcoin holders to maintain ownership of their Bitcoin holdings and benefit from the security of Bitcoin, while also gaining access to the growing Bitcoin DeFi ecosystem.
Will the stacker behave incorrectly?
sBTC is trust-minimized and incentive-compatible: these properties are the same as the security of Bitcoin itself. The group of stakers will be rewarded with Bitcoin for processing sBTC transactions.
Additionally, the threshold wallet is based on a 70% threshold. This means that over 70% of stakers would have to collude in a financially unjustified manner to attempt an attack. If at least 30% of stakers are honest, malicious pegs cannot occur.
Additionally, there is a recovery mode where Bitcoin rewards will be used to fulfill peg requests. Therefore, native Bitcoin will not be "stuck". Additionally, the process is completely transparent, so anyone can see on-chain how many Bitcoins are in the wallet, and how many sBTC were minted.
To ensure that the system maintains incentive compatibility, the maximum “active” ratio of circulating sBTC is 50% of the total STX locked. If the maximum ratio is reached, the hook will not be serviced until the ratio is restored. This means that even if the price of STX drops significantly relative to Bitcoin, incentive compatibility will still be preserved.
What is Stacks Nakamoto upgrade?
The Stacks Satoshi upgrade is a hard fork of the Stacks Bitcoin layer designed to unlock Bitcoin’s full potential by improving block creation speeds, Maximum Extractable Value (MEV) vulnerabilities, and Stacks’ transaction finality.
Faster block times: The Nakamoto upgrade decouples Stacks block production from Bitcoin block arrival times, allowing Stacks blocks to now be produced every 5 seconds.
Finality: The Stacks network anchors its chain history to the Bitcoin chain history to ensure transactions are irreversible. In addition, stakers monitor the behavior of miners on the network and ultimately decide whether to include a block in the chain.
MEV Protection: Upgrades ensure fair distribution of rewards and avoid Maximum Extractable Value (MEV) manipulation. MEV refers to the profit gained by re-sequencing unconfirmed transactions.
With the update, Stacks will become a more efficient and scalable functional layer for DeFi and Web3 on Bitcoin.
How the Satoshi Nakamoto upgrade paved the way for sBTC
The Satoshi upgrade introduced features to Stacks that allow trustless transfers of Bitcoin from Bitcoin to sBTC on Stacks via a peg/peg mechanism managed by a group of decentralized participants, sBTC signers, setting the stage for the launch of sBTC The path is cleared.
sBTC signers are Stackers who lock Bitcoin sent to them by users into a multi-signature wallet, then mint sBTC on Stacks and send it to users.
The Nakamoto upgrade also improves transaction speeds on the Stacks network, reducing settlement times from minutes to seconds. This makes sBTC faster and more efficient to deploy in DeFi protocols on Stacks.
In addition, this upgrade introduces an improved PoX consensus model that connects the history of Stack with the history of Bitcoin, so that in each new Bitcoin block, the status of the Stack network will also be recorded. This makes it impossible to change the history of the network without changing the history of Bitcoin.
In addition, stackers can monitor the behavior of miners and decide whether to add blocks to the chain, thereby enhancing the security of the Stacks network.
The Nakamoto upgrade provides sBTC with everything it needs to power DeFi and Web3 on top of the popular Bitcoin layer by providing a fast and more versatile infrastructure.
What’s next for sBTC?
The introduction of sBTC will emphasize that Bitcoin is more than just a store of value. sBTC is built as a decentralized and secure digital asset that will extend the functionality of Bitcoin.
In addition to launching on Stacks, sBTC will be available on Aptos Network and Solana to further enhance Bitcoin’s role in the growing cross-chain DeFi ecosystem.
With sBTC, builders can realize Bitcoin’s full potential as a fully programmable asset, paving the way for the creation of Bitcoin-backed DeFi, non-fungible tokens (NFTs), and more.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: (Blockbeats)
Original author: Su Xu, Xverse
