TL;DR
BitVM is a proposal that will make it possible to create and run complex smart contracts that settle on the Bitcoin blockchain. A healthy dose of skepticism feels appropriate here – after all, why compete with Ethereum and its Layer 1 kin on a turf that is firmly theirs? But on closer inspection, there might be something to be said for niche-type smart contracts that rely on the most secure chain of them all.
BitVM is short for Bitcoin Virtual Machine. Released in early October 2023, BitVM’s white paper details the technological implementation of this promising idea. Ethereum was the first blockchain to make such a virtual machine possible: a platform for potential decentralized applications (dapps), an operating system if you will, on a blockchain.
To run dapps, you need smart contracts. A smart contract is like an automated agreement or a set of programmed rules. Imagine you and a friend making a bet on the outcome of a sports game. With a smart contract, you can program these rules into a computer system, which watches the game’s outcome and when the result is clear, it automatically sends the money to the winner.
Basic smart contracts already exist in Bitcoin. But, for simplicity’s sake and security reasons, they have been limited to fundamental operations like multi-signature transactions, timelocks and payment channels such as those used in the Lightning Network. Very handy, but not comparable to what for example Ethereum smart contracts can pull off (think: complex automated market makers of decentralized exchanges).
What are the Characteristics of BitVM?
BitVM introduces an innovative framework for developing more complex and expressive smart contracts on Bitcoin.
As an introduction, some key points of BitVM:
- Most of the processing in BitVM happens off-chain, making operations more efficient and unbothered by overcrowded and expensive Bitcoin blockspace. In this sense, BitVM differs from the Ethereum Virtual Machine, which runs on-chain.
- Unlike Ethereum’s virtual machine (EVM), BitVM is designed to favor two-party transactional exchanges. This is a limiting factor.
- Still, BitVM is Turing complete. Without going into the details of Turing completeness, it means you can deploy very complex smart contracts on it.
How does BitVM Work?
Like so many recent Bitcoin innovations (Ordinals, for example) BitVM leverages the functionality of Bitcoin’s Taproot upgrade, which went live in November 2021. BitVM uses a system that blends fraud proofs and the so-called challenge-response protocol to handle and authenticate transactions between two entities: the prover and the verifier.
- The prover starts a computational process and transmits it through the channel they share with the verifier.
- The verifier then assesses and confirms the accuracy of this computation.
- After this verification, the transaction gets included in a collective batch that is posted on the Bitcoin main chain.
A quote from the introduction of the BitVM whitepaper:
‘Rather than executing computations on Bitcoin, they are merely verified, similarly to optimistic rollups. A prover makes a claim that a given function evaluates for some particular inputs to some specific output. If that claim is false, then the verifier can perform a succinct fraud proof and punish the prover. Using this mechanism,…
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
