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Unlocking DeFi on Bitcoin with the Core Network.

March 25, 2024

In conclusion

Unlocking DeFi on Bitcoin with the Core Network.

Just a couple of weeks ago, we introduced you guys to the Core Network, a powerful blockchain combining the powers of Bitcoin and the EVM to truly unlock a variety of applications for Bitcoin. 

You see, although Bitcoin started this industry, crypto took a life of its own after the launch of Ethereum. DeFi, alt L1s, modular chains, restaking, liquid staking, NFTs, gaming, AI, and whatever other ponzu you can name made us wife-changing money after the advent of smart contracts.

Through this phase of innovation and growth, Bitcoin as a chain remained relatively stagnant and isolated. 

There’s nothing inherently wrong with this. It has continued to work as intended and will continue to do so in the future (ONE CHAIR, in the words of Mr. Saylor). But now, smart contract platforms have found a clear product market fit. With Bitcoin having the largest pool of capital in crypto, it only makes sense to develop applications that can truly unlock all this value. 

Imagine what could happen to Bitcoin if there was a proper application ecosystem built on top of it. 

The Core Network aims to facilitate exactly that. 

Why DeFi on Bitcoin? 

Well, the answer is simple. 

There’s over $1 trillion in capital on Bitcoin waiting to be unlocked and utilized. 

The trickier part is how. For multiple years, people have been talking about figuring out ways to scale Bitcoin, which originally manifested a civil war now dubbed ‘the blocksize wars’. 

The crux of the problem is this: Bitcoin works perfectly as is. It is meant to be a store of value asset similar to what gold is, and the network facilitates permissionless peer-to-peer transactions. Powerful stuff. 

To ensure that the network stays sufficiently decentralized and preserves its strengths, there are certain tradeoffs made in terms of scalability and composability. Changing the base chain for scalability could be detrimental to its initial use case. So, let's rule out that scaling proposition. Hard forks like Bitcoin Cash and BSV, which ultimately failed, are enough evidence to suggest that changing the Bitcoin base layer is counterproductive. 

So, if changing the base layer isn’t an option, what do we do? Of course, we build on top of it, right? Ethereum roll-up style. WRONG. 

By building on top of Bitcoin, you also inherit its limitations which ultimately defeats the purpose. Study the Lightning Network. They aimed to build a payments network on top of Bitcoin but have broadly struggled to achieve this goal. 

The key to expanding Bitcoin’s capabilities is to target the incentive-aligned stakeholders.

The miners, nodes, and users are all aligned by incentives to keep the Bitcoin Network secure and decentralized, which ultimately makes Bitcoin, the asset, valuable. So, figuring out how to expand this incentive alignment of these stakeholders beyond BTC may very well be the key to bringing utility to Bitcoin. 

Core Chain achieves exactly that. 

Core Chain is a smart contract platform that aligns the incentives of both Bitcoin and Core stakeholders through its Satoshi Plus consensus mechanism to finally give the market a solution to unlocking Bitcoin’s capital. 

But before we dive deeper into Core Chain and how it finally unlocks DeFi on Bitcoin, let’s first dive into some of the competitors to properly understand Core Chain's value proposition. 

Competitive Landscape 

Bitcoin scaling has been the talk of the town for a while now. Feels like almost every day we see a new product announce their launch, and this is a good sign. 

But let's look at some of the more notable ones. 

Stacks Network 

Stacks is arguably one of the most popular Bitcoin scaling solutions at the minute. 

It markets itself as a layer 2 that brings smart contract utility to Bitcoin with its Clarity VM. While Stacks has done well thus far and taken advantage of being an early mover in this space, there are two major issues with it. 

The first is EVM compatibility. Stacks is not EVM-compatible and uses the Clarity VM with its own coding language. The EVM has by far the largest developer mindshare in all of crypto. So, to bring over devs to Stacks, they will have to learn a completely new coding language, which takes time, and all this effort is being put in to build on a chain that is not guaranteed to see the level of usage and liquidity as any other EVM chain. 

Another issue is long and unpredictable block times. Nobody wants to be kept waiting as they look to ape their favorite shitcoins, so this is also a deterrent for users. 

RootStock 

RootStock is an EVM equivalent smart contract chain that allows for the development of a wide variety of applications. While RootStock is a good step forward in terms of innovation, the issues it has are similar to the issues with Stacks. 

RootStock is simply EVM equivalent and not EVM compatible, which still puts an increased burden on the developers, albeit a lot less than Stacks. This may be part of the reason why it has struggled to gain adoption. 

Botanix

Botanix is building the Spiderchain, an L2 bringing the EVM to Bitcoin with its unique architecture. 

While we at blocmates love Botanix, there are still some potential issues with it. The main one being that the entire primitive itself is very experimental. It operates under some trust assumptions, which, when combined with a lack of field testing, means that there is a degree of uncertainty involved. That is uncertainty in terms of performance and uncertainty in terms of what trust assumptions exist. When compared to Core Chain, which has been live and secure for over a year, this risk is something most won’t be willing to take.

These are just a few of the players in this field, but it summarizes the general gist of the issues faced by most protocols. 

In light of the aforementioned issues, I think it’s time we talk about Core Chain!

The Core Advantage 

There are three main elements to Core Chain that give it an advantage in terms of unlocking Bitcoin’s capital. They are:

  1. Non-custodial Bitcoin Staking
  2. Core native Bitcoin Wrapping
  3. HTLC Atomic Bitcoin Swaps

Let's dive in

Non-custodial Bitcoin staking 

Core Chain’s methodology for Bitcoin staking revolves around time locks. Don't know what time locks are? Don’t worry fellow degen, we got you. 

It’s a Bitcoin-native way to cryptographically lock up the outputs of a transaction for a period of time in which they can’t be spent. 

Using time locks for Bitcoin staking is how the Core Network introduces Bitcoin holders to the Satoshi plus consensus model. Rather than having to give up custody of their coins on an external staking contract, they can place their Bitcoin in absolute time locks as part of a transaction, and the transaction can be designed to return the Bitcoin once the period has elapsed. 

For doing this, Bitcoin stakers will earn a yield in the form of CORE tokens.

The only thing they have to do is include the address of the Core validator that they would like to delegate to and the address they would like to receive their CORE rewards on in the transaction. 

So what’s the benefit of this? 

  • It caters to those users who have always held their Bitcoin assets on-chain and have not done much with it. These users typically do not trust external contracts, so being able to natively stake over a certain time period to earn rewards and then receive that BTC back is ideal for them. 
  • There are no new trust assumptions. BTC can be natively staked on Bitcoin and withdrawn back to their addresses. So, people rely on nothing other than Bitcoin's robust infrastructure. 
  • Now, Bitcoin holders can earn passive yield in a way that suits them 
  • The staking rewards system aligns cross-chain incentives. The reward pool integrates the contributions of both Bitcoin miners and CORE stakers to distribute rewards sustainably over an 81-year time period. Note that transaction fees will continuously be distributed to stakers.

Note that this is not yet live but will be part of the Satoshi Plus consensus very soon. 

Core Native Bitcoin Wrapping

A common way to bridge assets across chains is to lock the original token on the source chain and mint an equivalent amount of wrapped/synthetic tokens on the destination chain. WBTC on Ethereum is a great example of this. 

The issue with this is that wrapped assets often face centralization risks since the minting and locking are controlled by one entity. For an asset like Bitcoin and Bitcoin holders, decentralization is very important, so the bar is high in terms of figuring out a bridging mechanism that is sufficiently decentralized and secure. 

But of course, the gigabrains behind the Core Network may have the solution.

The coreBTC wrapping process is done with the help of two entities: lockers and porters. 

Lockers are the nodes responsible for holding users’ Bitcoin on the Bitcoin blockchain. Anybody can become a locker, but to become one, a certain amount of collateral has to be put up. The value of the collateral put up has to be higher than the value of the BTC locked with the lockers. This acts as a deterrent against malicious behavior because the collateral will get slashed if acting maliciously. 

Then comes the porter. 

The porter on Core Chain does exactly what a porter does in real life. Relay and transport things. The Porter identifies the BTC flowing into the locker contracts and, after sufficient confirmations on Bitcoin, submits the proof of the transaction to a smart contract on Core Chain. This smart contract then mints the coreBTC for the user on Core Chain. 

After the participant does his activity on Core Chain, he can redeem his coreBTC by submitting a request to the smart contract to burn a certain amount of coreBTC with the recipient Bitcoin address attached. Once this is verified, the coreBTC is burned, and the BTC on the Bitcoin blockchain is unlocked and sent back to the users' address. 

Now, let's introduce two more parties into the mix. Liquidators and guardians. 

Throughout the mining, redeeming, and intermediary process, liquidators are monitoring health conditions. As the value of collateral drops relative to the value of Bitcoin locked, liquidators start liquidating the collateral using coreBTC. 

The coreBTC is used to buy collateralized CORE tokens at a discount, and the coreBTC is burned, which pushes up collateral ratios and restores health. Additionally, it reduces the coreBTC supply, allowing lockers to take on more capital equivalent to the amount of coreBTC burned. 

The other party maintaining safety is the guardians. Anybody can permissionlessly become a guardian. They monitor the lockers and watch out for any form of malfeasance, such as not fulfilling a redemption request in time. If malfeasance is detected, they can trigger a Core Chain contract to slash some of the lockers’ collateral. 

HTLC Atomic Bitcoin Swaps 

This is a mouthful, isn’t it? So, wtf am I talking about here? 

Let’s start with HTLC. HTLC stands for hashed timelock contracts. It is a cryptographic technique that allows for locking transactions with an additional time constraint placed on spending. 

Using this, Core Chain can facilitate cross-chain swaps between Core Chain and any other chain, but most importantly, Bitcoin. In this system, either both parties get access to the funds, or neither do. 

Let’s take a look at a hypothetical example of how this works. 

Party A initiates the process by locking their assets in the HTLC. This contract will stipulate a deadline for transaction completion. Party B can monitor this on the chain and see that Party A has deposited the assets. In response, they also deposit their assets into this contract. The assets from both sides are now locked. 

To unlock the assets, party A must use the secret key that they received when the transaction was first initiated. By revealing the secret code, party A can claim Party B’s assets, and Party B can then use the now-known code to claim Party A’s assets. 

Either both get assets by the deadlines, or nobody does. Simple. 

The benefit of this system is that it offers composability and interoperability in a simple, secure, and trustless manner, staying true to Bitcoin's ethos while expanding upon its capabilities. 

Concluding Thoughts 

Unlocking DeFi on Bitcoin has been in the cards for several years now. So much idle capital just waiting to be unlocked.  

The issue is doing it in a way that doesn’t harm the core tenets of what makes Bitcoin successful. That is decentralization, trustlessness, and high network security. 

The combination of the three reasons mentioned in the section above is amongst the best attempts we’ve seen at trying to scale Bitcoin the ‘right way’. No changes to the base layer, no hidden trust assumptions, and no compromises on decentralization. 

Core Chain simply provides an effective way to not only further reward Bitcoin miners, the backbone of Bitcoin, but also gives Bitcoin users/holders a way to finally use their assets in a more efficient way. 

Unlocking Bitcoin’s capital is most certainly going to be a major narrative in the near future, and Core Network seems to be miles ahead in their field. 

The time to start paying attention is now. 

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