WTF is BitVM?

Bitcoin has undeniably been the pioneer in the crypto space and it started a movement to reshape the way in which our financial system works. Since its inception in 2008, Bitcoin has not only introduced the world to the revolutionary concept of decentralized finance but has also established a new paradigm for innovation, security, and peer-to-peer transactions. Despite its groundbreaking impact, Bitcoin has very marked limitations.

The very architecture that ensures Bitcoin’s security and decentralization is also the one that hinders scalability and usability. Over the years, these limitations have become more apparent, leading to challenges in transaction throughput, speed, and overall flexibility. This has made significant innovations within the Bitcoin ecosystem increasingly difficult to achieve, until now.

Let’s dive into BitVM, a new system that promises to bring smart contract capabilities to the Bitcoin ecosystem. We will see how it works and how it can possibly revolutionize the cryptocurrency landscape, bringing new utilities into Bitcoin.

What is BitVM?

BitVM is a computing method to execute Bitcoin contracts without altering the core rules of the Bitcoin blockchain. Instead of running computations directly on Bitcoin, BitVM proposes verifying them, drawing parallels to the approach by optimistic rollups.

It is a two-person system for executing complex computations off-chain, providing a robust system of accountability for both parties involved in transactions, and enhancing scalability without requiring changes to the network's consensus rules.

BitVM is built upon the interaction between two entities: provers and verifiers. 

• Entities called “Provers” will claim a function that yields a specific output for given inputs. If the output was incorrect, another entity, the “Verifier”, can challenge the prover with concise proof and potentially penalizing the prover.

Originally, Bitcoin didn’t have support for smart contracts but BitVM improves this aspect by enabling more sophisticated contracts combined with off-chain computations, opening up the landscape for applications.

BitVM’s architecture is heavily inspired by optimistic rollups and relies on fraud proofs and challenge-response protocols, without needing Bitcoin consensus to be modified.

• They achieve this through the previously mentioned Prover and Verifier relation where the entities engage in a series of transactions, allowing for dispute resolutions.

So now we know what the technical foundation of BitVM looks like and how the involved parties interact with each other. But, how are transactions processed?

Processing Transactions

BitVM combines off-chain computation and on-chain verification that is enabled by a challenge-response mechanism designed to solve disputes. Let’s dive into the step-by-step process of how a transaction is processed.

1. The Prover and Verifier agree on a program to be executed. The program is a compilation of binary text that contains scripts for logic (like smart contracts, a set of steps).

2. Both parties pre-sign a series of transactions that are structured to support and enhance a challenge-response game. The transactions are “conditioned” for potential future disputes.

3. After the set up, parties start the off-chain execution process. They exchange data required to execute the program while keeping the blockchain transaction minimal.

4. They are able to make on-chain modifications and deposits to “formalize” or update the contract’s activation/execution.

5. The Challenge-Response mechanism efficiently settles disputes by allowing verifiers to present evidence of the prover’s incorrect claim.

• The Verifier selects specific aspects of the prover’s claim to challenge.

• The Prover is required to respond by revealing information that justifies their original claim.

• The process can involve many rounds, each narrowing down the initial validity claim.

Why BitVM?

Other scaling solutions like Lightning Network, Rootstock, or Stacks do not comply with the characteristics of a rollup. In reality, they stick more to the idea of a sidechain.

You may ask, what’s the difference?

In the crypto space, the difference between a sidechain and a rollup relies on how they manage transactions to increase throughput:

• Sidechains are independent blockchain networks with their own set of block producers and smart contract environments.

• On the other hand, rollups take transactions off the main chain (Layer 1) and process them in batches on a separate chain, submitting them back to Layer 1 for verification and security.

So, while both are scaling solutions for blockchains, they operate differently and in sidechains, either security or decentralization are normally sacrificed at the cost of scalability. 

Hence why the BitVM system is so important and why it is being passed around at a growing rate in the crypto community. It could be the technology that helps Bitcoin have a scaling solution that doesn’t need to sacrifice security or decentralization in order to achieve throughput.

Bitcoin’s very limitations have been the ones that ironically started a movement to increase its functionalities. The concept of integrating Turing-complete smart contracts on Bitcoin would be revolutionary, and it poses great potential to increase Bitcoin’s features. This is important because this might be the technological breakthrough that finally helps Bitcoin achieve Satoshi’s initial vision: to be a decentralized electronic peer-to-peer system.

Nevertheless, while the potential of this innovative system is massive, it also comes with an amount of uncertainty. BitVM could be considered a highly experimental system that is yet to be battle tested in real-world conditions. As mentioned above, the system is currently a 2-person model only, meaning that scaling it into a larger network that supports large DeFi applications is a work in progress.