Decentralized Signatures Can Bring Bitcoin Into a True Multi-Chain Ecosystem

• Bitcoin is evolving beyond a store of value, gaining new utility through recent innovations.
• The lack of smart contract functionality limits Bitcoin’s potential compared to platforms like Ethereum.
• New signature protocols enable cross-chain transactions, unlocking Bitcoin’s liquidity without third-party trust.

Bitcoin has proven itself as a store of value and is currently the cornerstone of a much more diverse Web3. Recent upgrades to Bitcoin have made it more versatile and efficient, providing greater utility.

However, significant limitations still hold back this digital renaissance: a lack of smart contract functionality for the Bitcoin ecosystem has created a barrier to more complex and diverse applications. This means the largest single asset in Web3 can’t operate like Ethereum and other smart contract platforms.

Fortunately, recent advancements in signature-signing protocols being deployed on blockchains like the Internet Computer are opening up the possibility of unlocking Bitcoin for the whole world without trusting third parties or changing the core code itself.

Recent Innovations in Bitcoin Utility

One look at the ecosystem’s recent leaps showcases how Bitcoin is evolving fast. There have been previous attempts to attach additional information to Bitcoin transactions, such as Counterparty, which was launched as far back as 2014. More recently we have seen the deployment of Ordinals, a protocol that was able to assign serial numbers and bits of data to individual Satoshis through a process known as “inscription.” This streamlined the creation of things like NFTs and other digital assets on the blockchain. 

Next was the development of BRC-20 tokens. Built on top of ordinal inscription, BRC-20’s sought to emulate what ERC-20’s on Ethereum could do, allowing for the creation of new fungible tokens on the Bitcoin network. This again added new functionality and expanded utility.

Most recently came Runes, which aims to go beyond BRC-20’s by leveraging Bitcoin’s native UTXO transaction model. The goal is to be more efficient and flexible than BRC-20’s, allowing for scaling without sacrificing functionality, but there are strong arguments for and against the use of both protocols. 

These developments have brought new use cases and applications to Bitcoin that were previously only available in other ecosystems. However, a major issue remains that is holding back the network and limiting its use in the wider blockchain ecosystem. 

What’s Holding Bitcoin Back?

Bitcoin is still technically limited compared to many other networks. For one, Bitcoin still cannot use general-purpose smart contracts. This severely limits the complexity, flexibility, and interoperability of applications that developers can build on the network. 

Bitcoin is also still painfully siloed. There is no simple, safe, or direct way that the blockchain can access liquidity on other networks or vice versa. This keeps the broader Web3 space fragmented, especially considering Bitcoin itself is one of the most liquid assets in the ecosystem.

While it is true that “bridges” have been introduced to address this problem by creating things like “wrapped” Bitcoin on other networks, they haven’t proven to be a secure and permissionless solution. In addition to additional fees and having to trust a third party, these bridges are also notoriously susceptible to attack . Instead, what is needed is a more direct way to unlock the liquidity between Bitcoin and other blockchains.

The Future Is Multi-Chain

This can be made possible by utilizing a technique that cryptographically confirms transaction signatures on Bitcoin through code alone. Bitcoin currently uses two types of signatures, ECDSA and Schnorr, for signing all transactions.

However, recent breakthroughs from the Internet Computer blockchain have enabled “Threshold” versions of the first ECDSA, and now Schnorr signatures (referred to as tECDSA and tSchnorr for short) are opening up the door for cross-chain transactions, allowing assets to flow to and from both L1 networks and L2s, all without bridging. 

In simple terms, this enables smart contracts from other blockchains to directly sign Bitcoin signatures in order to inscribe Ordinals, etch Runes, send and receive BRC-20 tokens, and more, all in a fully decentralized manner. Without trusting any third party, Bitcoin’s pool of liquidity is now unlocked, and complex DeFi applications can be built that work just as seamlessly and safely,

This shift brings smart contract functionality to Bitcoin without changing any part of its underlying architecture. Entirely new token ecosystems can be built and tailored for specific functionalities while always allowing Bitcoin’s core code to remain unchanged and focused on what it does best: secure, reliable transactions. This is what is essential for this space to continue to evolve. 

Making Bitcoin Smart

With these developments, Bitcoin is transitioning from a passive store of value to an active, smart utility platform capable of supporting various applications and financial services. This shift broadens Bitcoin’s appeal and also enhances its market position. 

It’s good for investors and general users, and it’s good for the miners that secure the Bitcoin network without threatening anything about how they operate.

After all, the higher the economic activity, the lower the reliance on only block rewards to sustain the security of Bitcoin. Ultimately, the development of threshold signing protocols opens up a whole new design space for developers to attempt building incredible things on the Bitcoin network.