Opinion by: Bob Bodily, co-founder and CEO of Bioniq
The Problem with Liquidity Fragmentation in Web3
One of the biggest problems holding back broader adoption of the Web3 world is liquidity fragmentation. So much space is locked on certain networks. There is perhaps no more significant example than Bitcoin (BTC). Despite all the good done in the broader decentralized finance (DeFi) space, there’s no good way to connect the single largest asset by market capitalization to most of these services.
The Challenges with Existing Solutions
Until now, existing solutions have struggled with Bitcoin’s lack of native smart contract support, security concerns with wrapped tokens, and the trade-offs of integrating with Bitcoin’s unique architecture. For instance:
- Wrapped Tokens: Wrapped tokens are a solution that wraps an asset in another token to make it compatible with other blockchains. However, this comes with security risks as users can lose their assets if they’re not careful.
- Layer 2 Solutions: Layer 2 solutions are built on top of existing layer 1 blockchains to increase scalability and reduce costs. However, these solutions often require significant resources to implement and maintain.
The Solution: A New ‘Layer 0’ Network
Implementing a new "layer 0" network designed to leverage smart contracts to sign Bitcoin transactions is the key to finally solving this problem. This layer 0 would consist of two main components:
- Node Network: A node network that offers Bitcoin threshold signing subnets that can leverage the Elliptic Curve Digital Signature Algorithm (ECDSA), Schnorr signatures, and Edwards-curve Digital Signature Algorithm (EdDSA) to enable true cross-chain signatures.
- Smart Contracts Integration: These subnets can be natively integrated into smart contracts directly on other blockchains, creating working "Bitcoin EVMs" that integrate Bitcoin with Ethereum-compatible protocols without the need for external or third-party bridges.
Benefits of a Layer-0 Protocol
A layer-0 protocol like this can open up new use cases for Bitcoin that weren’t possible before. For instance:
- Omnichain Applications: Developers can build omnichain applications that work with all Bitcoin-native assets regardless of the metaprotocols, sidechains, or L2s on which they are deployed.
- True ‘BTCFi’ in Web3: A protocol like this can unlock true "BTCFi" in Web3 by allowing developers to create more complex financial products than were previously feasible.
The Importance of Interoperability
Interoperability is key to the success of DeFi. Without it, users and developers are locked into specific ecosystems, limiting their potential for growth and innovation. A layer-0 protocol like this can help bridge the gap between different blockchains and unlock new possibilities for Bitcoin and other assets.
The Future of Mining with Interoperability
Interoperability can also bring a new model to mining, allowing miners to sell their future hashrate now to get the cash to expand their infrastructure. This can be done through smart contracts that allow for non-custodial escrow and a fully decentralized mining pool.
Conclusion
Until now, interoperability has been a significant challenge to the entire Web3 ecosystem, especially Bitcoin. Introducing a Bitcoin-native layer-0 protocol is the solution that changes this. Leveraging the power of using smart contracts to sign Bitcoin transactions, this network can rewrite the book on cross-chain interoperability and bring Bitcoin into the broader market.
About the Author
Bob Bodily is the co-founder and CEO of Bioniq. His desire is to help users do more with their Bitcoin assets, with a focus on education, interoperability, trading, and games.
