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Bitfinex blog: Is BitVM the Next Step Forward for Bitcoin Smart Contracts?


Posted at 15:36h in Education

BitVM is a computing model that lets you run complex contracts on Bitcoin without altering its fundamental rules. Let’s take a look at what it is and how it can revolutionise the way we use Bitcoin.

What is BitVM?

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For years, Bitcoin has been the digital gold standard for cryptocurrencies. But one thing it lagged behind in was its ability to handle complex, Turing-complete smart contracts. BitVM was created by Robin Linus, who also created ZeroSync, which is an implementation of Stark Proofs for Bitcoin.

BitVM, short for “Bitcoin Virtual Machine,” can be envisioned as a secure, isolated environment embedded within Bitcoin’s ecosystem. In this virtualised space, you have the freedom to operate any computational program or execute any smart contract. However, here’s the interesting part: rather than carrying out these computations directly on the Bitcoin blockchain, which could be both costly and slow, BitVM merely authenticates them. It’s akin to a virtual test lab that allows you to simulate a program’s behaviour and confirm its outcomes, all without imposing any load or changes on the actual Bitcoin network.

By serving as this middle layer, BitVM enhances efficiency and reduces the computational burden on the Bitcoin blockchain. This is particularly beneficial for operations that require complex computations or smart contracts, as it enables them to be validated off-chain before any irreversible actions are taken. This system thereby helps to maintain the integrity of the blockchain while also providing a platform for more complex, yet secure, operations.

BitVM and Ethereum’s EVM (Ethereum Virtual Machine) both offer smart contracting functionalities, but they differ in their approach and capabilities. Ethereum’s EVM is more versatile in supporting multi-party contracts and offers a broader array of computational tasks right on the blockchain, but this can lead to higher costs and a cluttered blockchain.

BitVM, on the other hand, primarily focuses on two-party contracts and performs most of its computational work off-chain. This results in a minimal footprint on the Bitcoin blockchain and reduced transaction costs. However, BitVM’s current design limits its applicability in complex, multi-party settings, a domain where Ethereum’s EVM excels.

How Does BitVM Work?

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BitVM operates on a simple yet powerful architecture involving two principal actors: the Prover and the Verifier. The Prover is the party that initiates a computation or claim, essentially saying, “Here’s a program, and here’s what I assert it will do or produce.” The Verifier, on the other hand, is responsible for validating that claim. This dual-role system enables a level of checks and balances, ensuring that the computational results are both accurate and trustworthy.

The ingenuity of BitVM lies in its handling of computational workloads. Unlike conventional blockchain operations, which put significant computational burdens on-chain, BitVM performs most of its complex calculations off-chain. This drastically reduces the amount of data that needs to be stored directly on the Bitcoin blockchain, enhancing efficiency and lowering costs. This off-chain methodology also provides greater speed and flexibility, as developers or users can run intricate programs or simulations without worrying about overwhelming the blockchain.

However, BitVM does employ on-chain verification when needed, especially in cases of disputes. Should the Verifier question the legitimacy of the Prover’s claim, the system will then refer to the unalterable, decentralised ledger of the Bitcoin blockchain to resolve the issue. This is accomplished through what are known as “Fraud Proofs.” 

If the Prover’s claim turns out to be false, the Verifier can submit a concise fraud proof to the blockchain, thereby exposing the dishonesty. This not only settles the dispute but also maintains the overall integrity of the system. By integrating both off-chain computations and on-chain verifications, BitVM has struck a balance that offers both computational efficiency and robust security.

Optimistic Rollups are a Layer 2 scaling solution for blockchains that enable more efficient computation and data storage by performing most operations off-chain while maintaining the same level of security as on-chain transactions. The fundamental idea is to assume that all transactions are correct (“optimistic”) unless proven otherwise. Only if a dispute arises is the relevant data and computation published and verified on the main blockchain. This significantly reduces the amount of data that has to be stored on-chain, thereby freeing up space and lowering transaction fees.

In BitVM, Optimistic Rollups can be particularly beneficial. Recall that BitVM primarily works with two parties: a Prover and a Verifier. Most of the computational work happens off-chain, reducing the amount of data that needs to be stored on the Bitcoin blockchain. When a transaction is initiated, BitVM can use Optimistic Rollups to bundle multiple off-chain transactions into a single on-chain transaction, further reducing the blockchain footprint.

Moreover, in the event of a dispute, BitVM’s use of fraud proofs dovetails well with the “challenge-response” system inherent in Optimistic Rollups. If the Prover makes a false claim, the Verifier can quickly expose the dishonesty by providing a succinct fraud proof. This fraud proof would then be scrutinised within the Optimistic Rollup framework, and if validated, the dishonest party would be penalised.

What New Capabilities Does BitVM Enable for Bitcoin?

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One of the most significant advantages of BitVM is its ability to facilitate more expressive and complex contracts. Traditional Bitcoin contracts have been largely confined to rudimentary operations, such as digital signatures and timelocks. BitVM revolutionises this space by offering a vast array of new possibilities for contract creation. 

Now, not only can users create contracts for financial transactions, but they can also construct them for more intricate  Decentralised Applications (DApps) such as Chess, Go, or Poker games, or pretty much any kind of DApp that currently exists within Web3. Moreover, BitVM’s architecture makes it possible to develop truly decentralised prediction markets, enhancing the scope and functionality of what can be achieved through Bitcoin smart contracts.

Another impressive feature of BitVM is its minimal footprint on the Bitcoin blockchain. By design, BitVM performs most of its computational work off-chain, thereby reducing the amount of data that needs to be stored directly on the blockchain. 

This has two major benefits. Firstly, it enhances the overall efficiency of the network as fewer resources are needed to verify transactions. Secondly, it prevents the blockchain from becoming cluttered with unnecessary data, preserving its streamlined operation and making it easier to manage and scale. This off-chain operation is particularly valuable in an era where blockchain bloat is a concern, maintaining the health and speed of the Bitcoin network.

Finally, BitVM incorporates robust fraud safeguards to ensure the integrity of transactions. Using a system of fraud proofs coupled with a challenge-response protocol, BitVM guarantees that all transactions are honest and transparent. In the event that someone tries to cheat or submit false claims, the system’s Verifier can quickly catch and expose the dishonest party by submitting a succinct fraud proof to the blockchain. This not only serves as a strong deterrent against fraudulent activities but also enhances trust in the system, making BitVM a secure and reliable platform for a wide variety of applications.

Nothing’s Perfect, What are BitVM’s Limitations?

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While BitVM offers a host of advantages, it is important to recognise its limitations as well. One of the most notable constraints is its design focus on two-party settings. This means that the system is currently not equipped to handle multi-party transactions or contracts, which limits its applicability in scenarios that require more complex interactions among multiple participants. 

As the world of Decentralised Finance (DeFi) continues to evolve towards more complicated ecosystems involving numerous parties, this limitation could hamper BitVM’s ability to keep pace with emerging needs and expectations.

Another limitation is the requirement for both parties to perform substantial off-chain computation. While off-chain computations contribute to BitVM’s minimal impact on the blockchain, they also place a computational burden on the individual parties involved. Users must have the requisite computational resources to handle these tasks, and this can be prohibitive for those using less powerful hardware or those who wish to participate in numerous BitVM contracts simultaneously.

Despite these limitations, it is worth noting that the technology is still in its very early developmental stages, as of now, it’s just a whitepaper. As it matures, it is likely that solutions will be found to address these challenges. Future versions of BitVM could potentially incorporate more advanced features that allow for multi-party settings. 

Concepts like linking multiple two-way channels to form a network—akin to Bitcoin’s Lightning Network—are already being considered as ways to expand the system’s capabilities. By adapting and evolving, BitVM has the potential to overcome its current limitations and continue to offer an increasingly versatile and efficient platform for Bitcoin-based transactions and contracts.

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