Bringing Smart Contracts to the Bitcoin Network: Unhashed #27

For the 27th part of Unhashed, I reached out to Burak Keceli, the founder of Bitmatrix, a constant product market maker on Bitcoin Layer 2, to discuss the future of smart contracts on the Bitcoin network. Let’s dive in.

Q1: Welcome to Unhashed. What is your crypto story and what led you to work on Bitmatrix?

I started in the Bitcoin space about five years ago, exploring and building different aspects of the technology, including mining, payments, wallets, developer tools, and finally, Bitcoin-style smart contracts. I saw Bitcoin as a monetary base layer, as a platform for the next generation of financial applications. Further, I was also curious about exploring and playing around with AMMs, lending protocols, and other applications that thrived in the Ethereum ecosystem. This led me to bring these new use cases to Bitcoin layer two, in line with Bitcoin characteristics.

Q2. Approaching Bitcoin as a foundation for building financial applications is surprisingly overlooked. What do you think are the potential reasons for this hesitancy?

I see that historically everything humanity has accomplished is built on layers, and I believe that the stateless nature of Bitcoin and the UTXO model is superior to the stateful design of the EVM model. My thesis is that Bitcoin with its multi-layered approach is the most solid foundation for building the next generation of financial applications at a large scale.

Q3: How do you think the future of AMM-backed DEXs will shape? Please delve into the practicality of a future where such DEXs hold the lion's share of crypto trading volume, overtaking centralized exchanges.

The terms DEX and DeFi should really end with a question mark. A product or service that relies on a centralized base layer and/or a centralized service provider should not be decentralized. Decentralization is a spectrum that people can measure in metrics such as the number of full nodes. Unfortunately, most DeFi users today cannot verify their chain state by trusting third-party service providers like Infura. In my opinion, there is not very much of a difference between DEXs(?) and CEXs.

Q4: How does the setup of Bitmatrix pool involving four covenants translate into its efficiency given their recurring nature adds to the finality time?

Given deterministic one-minute blocks on the Liquid Network, a Bitmatrix interaction can take one to two minutes to finalize, depending on when the interaction is attempted. The number of covenant input-output pairs does not affect settlement time.

Q5: Major DEXs and smart contract platforms are suffering due to concurrency issues. How do you think AMMs should approach the parallel execution of smart contracts? Also, briefly delve into the security of the Bitmatrix protocol and please emphasize on how Bitmatrix mitigates the risk of flash loan attacks.

The design of the EVM model by-design allows concurrent transactions in a single block, which is challenging to tackle in the UTXO model. Cardano developers have suffered from this issue when building multiple AMM attempts. Bitmatrix team has solved this issue by utilizing Bitcoin technologies PSBT, MAST, and RBF.

The nature of the EVM model inherently allows contract-contract calls. While this brings various benefits for smart contract developers, it as a downside allows flash-loan attacks. This is fundamentally not possible when operating in a Bitcoin environment.

Q6: Out of experience, what do you think are the major backend problems one can expect to face while building DeFi protocols?

In alternative smart contract platforms, the changes are introduced through hard forks, which have historically caused many unintentional network splits. In contrast to Bitcoin, the network upgrades happen through backward-compatible soft forks resulting from years and years of research and development. Although Bitcoin and its layers are safer than alternative platforms, these new Bitcoin-style smart-contracting efforts are in the experimental phase and are yet to be battle-tested.

Q7: Please share your thoughts on the future of DeFi with special emphasis on Bitcoin as a base layer for DeFi products and dApps.

Bitcoin layer two is really in its very early days. However, day after day, month after month, and year after year, we will see an increased talent shift towards the Bitcoin development space. Whether it's Lightning, or Sidechains, Bitcoin layer two will be attracting many more builders, entrepreneurs, and hustlers. This will eventually shift the Overton Window such that people realize it's possible to build smart-contracting primitives on Bitcoin’s layers.

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Disclaimer: The sole purpose of Unhashed is to unhash (decode) information about projects innovating using blockchain and cryptocurrencies and share it with the community. The does not have any vested interest in any of the projects covered herein. Not that this article shares any, but still, taking investment advice from strangers on the internet is not a wise thing to do.