Cardano-Bitcoin bridge may be first step to true Bitcoin DeFi

The upcoming Cardano-Bitcoin bridge, based on the Grail protocol, may be a first step toward providing decentralized finance (DeFi) applications that are secured by Bitcoin, documents from the bridge’s underlying protocol reveal.

On Oct. 24, Emurgo, the development team backing Cardano, announced that it was developing the bridge in partnership with Grail’s developer, BTCOS.

In an X post on the following day, Cardano founder Charles Hoskinson clarified that the network will eventually host DeFi applications secured by Bitcoin, adding that, “With babel fees, Bitcoin developers can develop Hybrid Cardano/Bitcoin applications in Aiken and pay their transaction fees in bitcoin.”

The post was deleted on Nov. 16, but similar statements from Hoskinson were recorded by X user Al’O and shared through his channel.

Some Bitcoin users were skeptical of the idea that DeFi apps could be secured by the Bitcoin network.

Critics claimed that earlier “Bitcoin layer 2s” didn’t allow users to withdraw their Bitcoin without the consent of the network’s operator and suspected that the new Cardano/Bitcoin hybrid network would be more of the same.

Still, documents for Grail show that it does allow Bitcoin users to withdraw from Cardano without the consent of its validators.

Smart contracts on Bitcoin

Grail was inspired by an earlier idea called “BitVM,” described by developer Robin Linus in a 2023 white paper.

The paper proposed that a Bitcoin “optimistic rollup,” similar to Ethereum’s Optimism, Base or Arbitrum, could be created by having a server that commits to either a “0” or “1” for each bit of data stored. It said that simple games like chess, go or poker could be run on Bitcoin using this system.

An example of a BitVM logic circuit on Bitcoin, used to create smart contracts. Source: BitVM white paper.

The Grail white paper, published in April, said that Grail “builds on the BitVM paradigm,” and the original BitVM system created billions of complex transactions that would ultimately make its bridge impractical to use.

To reduce the complexity, Grail uses zero-knowledge (ZK) proofs to shrink the amount of data that needs to be stored on Bitcoin. 

The end result is a system that allows users to deposit Bitcoin into the layer-2 network without needing to trust that network’s security. In this case, it means that users could withdraw their Bitcoin BTC$91,095 from Cardano even if Cardano’s nodes were taken over by a malicious actor.

Creating hybrid apps may take a long time

Even after the bridge is implemented, developing DeFi apps secured by Bitcoin may take a while. In his now-deleted X post, Hoskinson said developers would need to be trained in Cardano’s Aiken programming language to create these hybrid Bitcoin/Cardano apps.

Since most Ethereum DeFi developers are trained in Solidity, this implies that new apps can’t be created by just cutting and pasting ones from Ethereum. They’ll have to be written from scratch.

Aiken programming language documentation. Source: Aiken.

In the recording posted by Al’O, Hoskinson said, “It’s going to be an enormous amount of work, it’s a very heavy lift, and there’s going to be wallet integrations and all of these things that have to happen.” He went on to say that the work was worth it because “there’s $1.5 trillion in the Bitcoin space.”

Withdrawals can still be blocked

Cointelegraph spoke to Edan Yago, co-founder of Grail developer BTC OS. Yago said that withdrawals from the bridge could still be blocked if 100% of its verifiers collude maliciously.

“In order to take over the Grail system maliciously, you would need to own 100% of the nodes,” he said.

Still, he said, this is “a stronger security assumption than Bitcoin,” since Bitcoin only relies only on the assumption that the “majority of miners [or hash power]” are honest.

In Yago’s view, the bridge has better security than current Bitcoin pegging systems, and creating a more secure system is necessary because trillions of dollars worth of capital is tied up in Bitcoin. He added:

“Most BTC is latent today because holders don’t want to trust third-party centralized entities that provide bridging/wrapping to other blockchains. We believe that a vault or a bridge like Grail — secured by zero-knowledge cryptography and a network of Bitcoin miners — could be the safest crypto native vault solution that holders will more readily rely on before putting their BTC to work.”

OP_CAT as an alternative for Bitcoin DeFi

Grail is not the only solution that attempts to secure DeFi apps using the Bitcoin network. Another option, called “OP_CAT” also claims to provide this benefit. Still, it would require a soft fork of the Bitcoin node software, which some Bitcoin nodes are reluctant to do.

Even so, StarkWare CEO Eli Ben Sasson has advocated for the change and predicted that it will go live “within the next 12 months.”

When asked about OP_CAT, Yago said that its implementation “does not materially change the security assumptions of the bridge.” 

He doesn’t support adding OP_CAT to Bitcoin, since he believes that it is “quite risky.” He said:

“OP_CAT can quickly become very cumbersome in terms of transaction size, and even chains like Fractal that have created a Bitcoin fork with OP_CAT activated are finding that it brings its own complexities to solve.”

Even so, he said that if OP_CAT were implemented, it “might change the architecture of how one can do zk verification on Bitcoin, but it [wouldn’t] materially change how the bridge would work.”