In the history of finance, few events have had such a profound impact on the global economic landscape as the establishment of the Bretton Woods system. In 1944, before the smoke of World War II had dissipated, representatives from 44 allied countries around the world gathered in Bretton Woods, New Hampshire, to jointly build a new framework for international economic cooperation. The birth of this system aims to prevent economic instability and competitive devaluation, and avoid the tragedy of the Great Depression and war from happening again.
The core of the Bretton Woods system was to peg major currencies to the U.S. dollar, which was exchangeable for gold at a fixed exchange rate. This arrangement made the dollar the global reserve currency, providing much-needed stability to the global economy and promoting rapid economic growth. However, over time, especially in the late 1960s, the system began to face challenges. The United States' growing balance of payments deficit and dwindling gold reserves led to increasing imbalances within the system. On August 15, 1971, President Richard Nixon announced the end of the convertibility of the dollar into gold, a decision that effectively marked the end of the Bretton Woods system and opened a new chapter in the era of fiat currencies.
The popularity of fiat currencies provides greater flexibility for monetary policy, but also brings unprecedented challenges. Governments can issue currency without restrictions, leading to a series of problems such as inflation and currency depreciation. In today's highly developed globalization and financialization, the world is facing multiple challenges such as a debt of up to 307 trillion US dollars, excessive currency issuance, declining bank credit, and rising economic instability. Against this background, the global financial community urgently needs a new financial model that combines stability with technological advances in the digital age to cope with the increasingly complex financial environment.
Bitcoin: Digital Gold
Bitcoin, a decentralized digital currency, has been hailed as "digital gold" since its launch in 2009 by its founder, who goes by the pseudonym "Satoshi Nakamoto". It has many characteristics that make it an ideal choice for a global reserve asset: scarcity (up to 21 million coins), durability, portability, and easy divisibility. Bitcoin's blockchain technology ensures transaction transparency, security, and censorship resistance, making it a powerful tool to support legal tender and value exchange.
Although Bitcoin has been valued at over $1 trillion and has been widely recognized and used, it still faces many challenges in the mainstream financial sector. The most prominent of these are scalability and programmability limitations. Bitcoin's high degree of decentralization and security ensures its strong security, but also leads to slow transaction speeds and excessive resource consumption. Innovative technologies such as Ethereum provide more functionality to digital currencies such as Bitcoin by introducing smart contracts, giving rise to layer 2 solutions that aim to unify the technology and enhance Bitcoin's functionality.
Bitcoin Layer
Layer 2 solutions are protocols built on top of the blockchain (Layer 1) to enhance performance and enable more complex functionality. For Bitcoin, Layer 2 technologies such as the Lightning Network and sidechains address transaction speed, programmability, and scalability, while bridges facilitate interoperability with other blockchain ecosystems. These solutions enable Bitcoin to interact with other blockchain ecosystems and innovations such as Ethereum, enabling smart contracts and decentralized applications (DApps) that were previously impossible. However, these solutions also bring some problems.
Inherent Problems
The scalability layer involves bridging Bitcoin from its main network into these environments, creating security issues that undermine its decentralized ethos. For example, Wrapped Bitcoin (WBTC) is an ERC-20 token that represents Bitcoin on the Ethereum network. While it brings Bitcoin’s liquidity to more programmable financial platforms, it has several key issues:
Centralization Risk: WBTC requires users to trust centralized institutions to manage and protect the Bitcoin that backs WBTC. If these institutions act maliciously, users will have nowhere to turn, undermining the decentralized spirit of Bitcoin.
Custody risk: Centralized custodians that hold actual Bitcoin could get hacked or face regulatory pressure, putting users’ assets at risk.
Lack of transparency: Users must rely on the custodian’s transparency into the actual reserves backing WBTC, which may not always be reliable.
Cross-chain bridge hacks, such as the Nomad Bridge breach, highlight these vulnerabilities. Chainalysis reports that 13 cross-chain bridge hacks stole a total of $2 billion, accounting for 69% of the total funds stolen in 2022, with hackers linked to North Korea stealing approximately $1 billion. There are more than 70 cross-chain bridges, with more than $25 billion in locked funds and millions of daily transactions. The popular cross-chain bridge Synapse has seen more than $5 billion in transaction volume. The structure of cross-chain bridges is fragile, combining custodians, debt issuers, and oracles, each of which presents multiple attack vectors. For example, the Poly Network and Wormhole attacks exposed vulnerabilities in cross-chain communications, resulting in significant losses.
To mitigate these risks, it is critical for the development of Bitcoin to connect other innovation layers through information transmission rather than asset transfer, while decentralizing the staking on Bitcoin to avoid centralizing assets. This approach maintains the originality, security, and decentralization of Bitcoin while enabling broader financial applications in a scalable environment.
Bitcoin native DeFi, creating a new Bretton Woods system
Native Bitcoin refers to Bitcoin that remains on the main network while providing collateral for Layer 2 DeFi applications. Through BeL2, Bitcoin can participate in complex financial transactions without moving from the Bitcoin blockchain, thus maintaining its security and decentralization. This allows Bitcoin to serve as a versatile tool in the DeFi ecosystem, leveraging its inherent advantages while expanding its functionality into smart services such as swaps, lending, and stablecoin issuance.
Staking: BeL2 uses non-custodial native Bitcoin staking in decentralized wallets to provide security for the network.
Zero-knowledge proof (ZKP): It provides private and verifiable proof of Bitcoin staking transactions.
BTC Oracle: Connect BTC proof information to the second layer smart contract, and realize Bitcoin DeFi services without moving assets off the main network.
Arbitration Network: Leveraging decentralization and collateralized nodes to facilitate time-based execution and dispute resolution, enhancing trustless financial operations.
BeL2 transfers information rather than assets between chains, protecting the security and integrity of Bitcoin while supporting smart contracts and decentralized applications for complex financial transactions. This approach eliminates reliance on centralized entities and ensures secure, decentralized financial operations. By maintaining Bitcoin’s native nature, BeL2 ensures that the original blockchain remains the ultimate trust anchor for all transactions, thus maintaining the fundamental principles of Bitcoin’s decentralized ethos.
Native Bitcoin Loan Application Demo
Against the backdrop of BeL2’s transformative role in decentralized finance (DeFi), the BeL2 Lending Dapp Demo showcases its potential to enhance Bitcoin’s utility while maintaining security and decentralization. The demo is the first native Bitcoin lending protocol built on Starkwares Cairo programming language, allowing users to lock up their native Bitcoin as collateral without relying on Wrapped Bitcoin (WBTC) or cross-chain bridges. BTC remains on the Bitcoin mainnet, ensuring non-custodial and non-liquidable collateral.
Users lock their Bitcoin via custom transaction scripts, and the loan terms, including interest rates and collateral release conditions, are managed by smart contracts on the Ethereum Virtual Machine (EVM). BeL2’s arbitration network acts as an intermediary, facilitating communication between Bitcoin and the EVM chain and verifying transaction proofs. If a borrower, such as Alice, fails to repay the loan, the lender, Bob, can get the BTC back. If Bob refuses to cooperate to unlock the BTC after repayment, Alice can initiate arbitration, and the arbitrators will jointly sign to unlock the BTC.
This peer-to-peer system ensures fairness and security through zero-knowledge proofs and arbitration networks. Any malicious behavior by the arbitrators or parties involved is deterred by the ability to challenge and punish misconduct, ensuring that cooperation is the best outcome. This innovative approach allows Bitcoin holders to gain liquidity while retaining Bitcoin's core principles of decentralization and security.
Principles of the New Native Bitcoin Bretton Woods System:
• Decentralized global settlement: Native Bitcoin must serve as the global settlement layer, with all transactions secured on the Bitcoin main network, ensuring it remains the ultimate trust anchor for global finance.
• Financial Innovation and Stability: By combining native Bitcoin with smart contracts and DApps, we can support new financial products such as BTC-backed loans and stablecoins, providing liquidity and stability to the global economy while unifying every level.
• Trustless and transparent operation: Information transmission is achieved through zero-knowledge proof and decentralized arbitration network, ensuring trustless and transparent financial operation of Bitcoin native applications, reducing counterparty risk and enhancing transaction integrity.
BeL2’s vision is to become a decisive part of Bitcoin’s native infrastructure in a new Bretton Woods system. BeL2 is derived from the Elastos SmartWeb vision, which aims to create a decentralized Internet where data, applications and identities are secure, private and owned by the users. BeL2 is committed to becoming a key component of Bitcoin’s native infrastructure, transforming Bitcoin from digital gold to the cornerstone of a new global financial system.
BeL2 leverages Elastos’ secure infrastructure, using ELA as collateral for arbitrators to ensure robust and trustless dispute resolution. ELA, an asset that is securely merged-mined with over 50% of Bitcoin miners, adds an extra layer of security and decentralization to the BeL2 ecosystem, reinforcing both projects’ commitment to a secure and decentralized financial future. Want to learn more? Visit the BeL2 website and follow Infinity for the latest updates!
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