By Karim Halabi at Messari
With the release of Harmony’s new trustless BTC bridge comes another opportunity for BTC hodlers to put their BTC to work and participate in DeFi without liquidating any precious sats.
Smart contracts are extremely difficult to build with Bitcoin Script as it is intentionally more limited - helping make Bitcoin a more secure and resilient network. Ethereum, on the other hand, came along and made tradeoffs to achieve greater smart contract functionality and Turing completeness, which is why application development and DeFi originally blossomed there, but also why contract exploits are prevalent. ‘Turing completeness’ means that creating anything within that system is theoretically possible, as long as you can break it down into logical steps. Smart contracts and the sprawling world of Web3 are an example of this: where we are limited only by our imaginations (and making these bits of code gas efficient). Since Bitcoin does not have smart contracts, it is more challenging to create conditioned and complex transactions. This makes programmatic custody of bitcoin and bridging it to other blockchains trustlessly quite a tall task. Today, the vast majority of BTC used on other chains is via centralized custodians.
This report will examine a trustless BTC bridge, the Harmony BTC bridge to be exact; a new product within the Harmony ecosystem. It is designed to be secure and completely trustless. The bridge operation, economics, and risks will be evaluated as well as the implications of BTC functioning on an Ethereum Virtual Machine (EVM) compatible network.
Harmony is a sharded, fully Ethereum Virtual Machine (EVM) compatible blockchain that utilizes an innovative consensus mechanism called Effective Proof-of-Stake (EPoS). Unlike ‘traditional’ PoS, in which the right to validate the next block is awarded via lottery or bidding, EPoS encourages decentralization by introducing a non-linear relationship between the amount of tokens staked and the chances of mining the next block. In other words, more tokens staked does not equal more rewards. Thus, stakers cannot harness economies of scale.
For a more in-depth explanation of the mechanism, check out the full EPoS explanation by the Harmony team and previous Messari research.
Harmony is also home to a burgeoning DeFi ecosystem, with TVL increasing more than four-fold in the past two months to reach over $1 billion. The majority of the TVL (60%) comes from game/DEX/NFT marketplace DeFi Kingdoms. The next biggest application by TVL is Tranquil Finance, commanding nearly $500 million.
Throughout 2021, the rise of L2s and many alternate L1s with liquidity incentives has meant that mercenary capital has moved from and across chains. Over $25B of value bridged across Ethereum is a testament to this.
Bridges are the vital piece of the puzzle that facilitate the movement of capital. Different chains are better suited for different uses, and bridges help them become interoperable. Different protocols have different rules and standards, which means tokens you can use on one chain are not usable on another. Bridges allow the use of tokens on new chains. This is achieved via ‘wrapping’, where a token is burned or locked in escrow on one chain, and an equivalent, ‘wrapped’ token is issued on the new chain.