Bitcoin Smart Chain | Image: Pete Linforth/Pixabay
Key Takeaways
- Bitcoin is natively not built to be a smart contract chain.
- ICP’s recent integration with Bitcoin claimed to facilitate advanced smart contract functionalities.
- External layers and sidechains enable Bitcoin to support more complex applications.
Bitcoin’s Taproot upgrade laid the groundwork for Ordinals inscriptions. Many in the Bitcoin community expect the network to debut DeFi capabilities and smart contract functionality directly onto its base layer with cryptographic advancement.
In April, a decentralized blockchain network Internet Computer Protocol (ICP) integrated threshold-Schnorr signatures to allow web3 applications on Bitcoin.
CCN spoke to Lomesh Dutta, Vice President of Growth at Dfinity, a contributor to Internet Computer blockchain, to understand if advancements in Bitcoin can make it smart.
Cryptographic Advancements on Bitcoin
The Internet Computer Protocol (ICP) recently introduced Bitcoin advancement which will potentially allow it to do more than just handle payments.
During the integration in April, ICP claimed that its programs could interact with Bitcoin directly. It used a cryptographic method called Schnorr signatures.
The threshold-schnorr method can offer potential enhancements to Bitcoin’s network by increasing efficiency and security, especially for multi-signature transactions. Traditional multi-signature transactions in Bitcoin require each participant to individually sign a transaction, which can be inefficient and costly as it increases the transaction size and potentially the fees. Threshold-Schnorr simplifies this by allowing a single signature to represent a transaction approved by multiple parties.
Dutta explains, “Bitcoin uses two different digital signature cryptographic schemes: ECDSA and Schnorr. In the most simple terms, a digital signature proves that the owner of the funds has authorized the spending of those funds i.e. if you have to send your Bitcoin to someone else it needs to be digitally signed by you (using your private key).”
Dutta states that a lot of recent developments on Bitcoin, including digital assets and features, are using Schnorr signatures. According to him, ICP is also adopting threshold Schnorr signatures to allow it to manage various types of Bitcoin-related activities securely.
The VP adds, “This means that you can build any form of advanced smart contracts on Bitcoin involving these assets (BRC-20, Runes, Ordinals, ARC-20, etc.) in an extremely secure way with 1-2s transaction finality and extremely low gas fees (fee could even be paid by developers, so bitcoin smart contract transactions can even become free for end users).”
When it comes to smart contracts capabilities, Bitcoin was never considered to be on the list. Ethereum became the first smart chain followed by other players like Solana and Cardano.
Dutta points out that while Bitcoin is a highly recognized and widely used cryptocurrency, it wasn’t created with the capability to support smart contracts directly. He adds that Bitcoin’s system has inherent limitations such as slow transaction processing, limited ability to handle large volumes of transactions, and high costs associated with transactions. Therefore, it is less practical for developers to effectively build and operate applications directly on Bitcoin’s platform.
According to the Dfinity VP, ICP is being used to address some of Bitcoin’s limitations. Firstly, ICP claims to check how much Bitcoin someone has and can also authorize Bitcoin transactions directly, without needing a middleman.
This means ICP can potentially manage, send, and receive Bitcoin and other Bitcoin-based digital items. Secondly, ICP claims to provide an environment for creating smart contracts by supporting developers and overcoming its design limitations around transaction speed, scalability, and costs.
When we asked Dutta what it could mean for Bitcoin, he said, “It enables a plethora of use cases that have never been possible on Bitcoin earlier such as decentralized exchanges (DEXs) offering BTC or BRC20 trading pairs, lending markets using Ordinals as a collateral, decentralized fundraisers accepting BTC, or Web3 SocialFi services allowing satoshis to be sent via chat messages!”
According to Dutta, recent developments like Ordinals and BRC-20 tokens are designed to add new functions to Bitcoin, allowing it to handle different types of transactions and services.
“More transactions also mean higher revenue for miners which is critical for the long-term security of Bitcoin (instead of simply relying on the assumption that price will continue to skyrocket),” he added.
Can Bitcoin Become a Smart Chain?
The answer to the question is No. Bitcoin itself isn’t built to function as a smart contract platform. Bringing smart contract functionalities directly to Bitcoin’s base layer isn’t straightforward due to its design and the census challenges within the community.
Therefore, sidechains like RSK and Layer 2 solutions like the Lightning Network bring additional functionalities to Bitcoin.
Dutta agrees that a smart Bitcoin is a far-fetched idea when he says, “We don’t need to change Bitcoin to enable these functionalities. As a matter of fact it would be subject to major political and controversial debates if one were to implement changes in the core bitcoin architecture.”
The VP suggests that to enable smart contract functionalities for Bitcoin, it’s better to use separate systems rather than changing Bitcoin’s core structure.
The executive explains that the systems operate alongside Bitcoin without the need for middlemen, relying only on the security of the blockchains themselves. He highlights a current issue where some groups use insecure, centralized methods, known as bridges, to add functionalities to Bitcoin.
Dutta notes, “Our biggest goal should be to stay away from these insecure bridges, a model that has lost billions of dollars for users.”
Looking forward, Dutta dubs Bitcoin and interoperability as two major themes. He states, “Bitcoin is the most popular digital asset, with the most liquidity and it will continue to be a dominant force in the web3 space.”
Dutta pointed out that different blockchains have distinct features that make them useful for specific purposes. For example, Ethereum is often used as a platform for executing and recording contracts and transactions. He emphasizes that Bitcoin, with its unique properties and recognition, will continue to be important and should be able to work in conjunction with other blockchains.
“The goal for the blockchain industry is to achieve this interoperability in the most secure manner possible. This will bring the trust of end users to our industry,” Dutta added.
Interoperability Rather Than Core Changes
Advanced cryptographic techniques, such as threshold-Schnorr signatures, are enhancing Bitcoin’s capabilities. However, it is not directly on its core layer.
While Bitcoin itself does not support these advanced functions natively due to its original design limitations, new technologies are allowing secure interactions with Bitcoin without intermediaries. Dutta highlights that these integrations enable the creation of smart contracts on platforms linked to Bitcoin, which can make transactions quicker and more cost-effective.
However, Bitcoin itself cannot transform into a smart contract platform at this stage. Yet, these external advancements are vital as they circumvent Bitcoin’s inherent constraints. By leveraging sidechains and Layer 2 solutions, Bitcoin can extend its functionality well beyond its traditional role as ‘digital gold,‘ supporting a broader array of applications.
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