Making Bitcoin Productive for Ethereum using Trustless Vaults I David Tse

[Music] We are ready for our next talk. And for this one, I'd like to bring on our next speaker, David from Avalon, to tell you all about how do we make Bitcoin a more productive asset on Ethereum. So, please give David a big round of applause.

Hey, that's amazing. Thank you very much for having me here. This is the first time I've given a talk in a church. I feel very religious at this moment. All right.

So, uh I'm a co-founder of this project called Babylon. And um so what is Babylon? So Babylon launched about a year ago. We launched a protocol called Bitcoin Sticking Protocol. Uh right now there is 56,000 Bitcoin on this protocol.

It's the largest protocol built on a bitcoin in terms of tail by far and uh one of the key property of this protocol is trustless. So metallic talks about the trustless manifesto. Uh so our protocol is really a good demonstration of how powerful trustlessness is because you can bring a lot of bitcoin onto your protocol trustless. So building on that momentum, we're building a new product called Trustless Bitcoin Vault, which is sort of much more general than Bitcoin stick because it allows Bitcoiners to participate in any smart contract protocol basically or say this area and I want to explain a little bit about this technology today and the demonstration that we've done already uh connecting the Fitcoin mainet and the mainet. Okay.

All right. So, here's the problem. Okay. We want to make Bitcoin productive. Bitcoin is about what?

$2 trillion. It was a bit higher few days ago. Okay. Now, it's 2 trillion. It's still pretty good.

Uh nothing to do. Okay. This bitcoin is just sitting there. Nothing to do. All right.

It was supposed to be a payment system, but uh you know, not that many bitcoin is a payment system. So, all right. What's the activity? What's the active? The exit is on this area.

You have all these smart contracts of Ethereum, landing protocols, DS, etc. And they're all there. Um, and um, but disconnected. Okay, we're disconnected today. The Bitcoin sitting here is quite confusing today.

Okay. All right. Now, let's keep this problem. Okay. All right.

Okay. So, what's the problem? Why is there this two world split? Well, here's the issue. And it's really a trust issue.

If you look at Bitcoin, it's designed in such a way that it's trustless. And to run a stuff of Bitcoin, you don't have to trust anybody other than the fact that the Bitcoin chain works. Okay. Ethereum also trustless. Smart contracts are designed in a trustless way.

That's how DeFi is powered by trustless smart contract. Okay. The problem is that in between these two worlds today, if you want to take the Bitcoin and participate in the trusted smart contract, there's a trusted bottleneck. Trusted bottleneck. Okay, trusted bottleneck, which is basically uh WBC and CBD roughly speaking, they add up to about 1% of all the Bitcoin supply.

So they're trusted because you have to trust Bitcoin stone uh Coinbase. So they are all intermediary and that kind of defeats the purpose of trustless on both sides on the Bitcoin side and the Ethereum side because a protocol is as good as the weakest link right so there's a weakest link here and actually this weakest link is demonstrated by this very small percentage of Bitcoin. So this shows that most of the bitcoiners do not want to go through these trusted this trusted water and in fact our earlier protocol existing proto protocol bitcoin sticking demonstrated that if you can do trust this protocol then indeed bitcoiners will come. We have 60 55,000 bitcoin right now on our protocol. Okay.

So our problem that we want to solve, our problem we want to solve is to allow bitcoiners to participate trustlessly in ether blockchain. Okay. So there is no protocol that can do that right now and we are building one that can. Okay. All right.

So um when we announced this on Twitter, people start attacking me and say what do you mean trust this? It's a very loaded word. You can't you can't use this uh freely. Okay. And I got a lot of likes on Twitter.

I love Twitter. Every time you send something, people just bark at you. All right. Okay. So now today I will define more clearly what I mean by Bitcoin's participating trusty or contract which means that the goal is to build a system okay in which you only need to trust Bitcoin okay in other words you trust the Bitcoin miners honestly mining blocks and you have to trust Ethereum meaning specifically the particular smart contract Ethereum smart contract that you run your application volume.

Okay. And gas. All right. We got to bring some math to that. Okay.

So, what do you mean? Hey, even Nakamoto uses math. Okay. Nakamoto uses keys. Proof of work has fun.

All these are math. Okay. So, who are we to say that we should not use math? So, the math, okay, is our contribution. All right.

to our technology is the math that glues these two chains together to form a trustless course. Okay. All right. So today I'm not going to focus too much on the math. I love math but not everybody share my taste of math.

So I'm going to just use one slide to explain what is the math that goes underneath the hood and I'll return with one slide later after I finish the experiment discussion. Okay. All right. the math. Okay, here's the math.

All right, in three points. One is that you basically need the problem is you basically need to prove okay the smart contract state to Bitcoin, right? So basically that's what that's essentially the problem is how do you prove Ethereum smart contract state to Bitcoin and well ZK technology can do that. ZK technology can generate proofs not a problem. However, the problem is that in order for Bitcoin to verify the proof, it's not enough to just generate proof.

Someone needs to verify it. And in this case, because you want to convince Bitcoin of a particular Ethereum smart contract thing, okay, you need to run a verifier. And to do that, this will take, guys, listen, 250 Bitcoin block per every time you verify something. Okay? 250 Bitcoin block.

Okay? I'm not kidding. And this is because Bitcoin has a very dumb language called the scripting language which is very elementary and so to write a verifier takes like 50 blocks. Okay, it's a very easy thing to do say on a smart contract chain like Ethereum very easy very difficult on Bitcoin and that's the biggest challenge. uh and we invented a new technology.

Okay. Uh which can essentially do this verification off and then you just have to send a little bit information to Bitcoin to tell Bitcoin that hey verification is done. Okay. So I'll explain a little bit more how that work. Okay.

All right. So the math is done. All right. And uh so after we done the math uh in August we published this white paper which introduces this concept of trustless bitcoin vault. Bitcoin vault which enables this math.

Okay. Enables this math. All right. And um so this trustless bitcoin vault is a very general concept. It allows bitcoins to participate in almost any smart contract.

more specifically his smart concept that uses Bitcoin as a collateral collateral. Okay. Uh and so however to prove this concept we decide to build something very specific very specific application. Okay. And the application all right we built is called Bitcoin back.

Okay. All right. What is Bitcoin back?

All right. So you have lots of Bitcoin. All right, you're sitting there, the bitcoin is sitting there waiting for the value to grow. In the meantime, the bitcoins are sitting there, no use. Okay, a natural way to use the bitcoin is to use it as a collateral to borrow some stable.

Okay, so that you can generate some yield for the stable or you can use the stable to buy some real world stuff. Okay, for example, miners would like to use the stable to buy mining equipment so they can continue mining. Okay. All right. So this is a very natural use case.

Okay. You have like trillion of two trillion bitcoins in debt. Why not use it as a collateral? Okay. All right.

So that's what that's why we focus on this application which I believe is kind of a killer application for this kind of technology or trustless bitcoin vault. Okay. So let's see how it works. And um so here's how it works in terms of this vault. Okay.

So the idea is that you create a vault on the bitcoin chain. This is on the bitcoin chain of vault. All right. So the big da big d is bitcoin. Okay.

Now a depositor a borrower ball has lots of bitcoin and he wants to deposit some of them into this vault so that he can use to do borrowing on a lending protocol on ethereum. Okay. Or ethereum. This is not this is not doable today. Okay.

So today he would have to go and get some CBBDC and then use the CBBC to participate in RA or something like that. Okay. But he doesn't want to do that. He said I do not want to trust some third party. So he doesn't want to this and this is completely controlled by M by M.

Okay. So that he doesn't have to worry about someone grabbing custodium of his Bitcoin. All right. So the man basically controls two ways only two ways of withdrawing funds from this lo. Okay.

The first way is that Bob has returned his loan return his loan on say moro a okay some lending protocol and the bitcoin prices above the soal ltv in this example 86k. All right. 86K. All right. Okay.

When this when I had this example, 86K was pretty far away from the actual big clock price because 10K today. It's a little bit close. Looks a bit risky here. Maybe we should set the LTB to go lower. Okay.

But anyway, because this is the experiment that we did a month ago. Okay. Bitcoin price is better at that time. Okay. All right.

The problem with crypto guys is that every time you give a talk, you know the price becomes outdated.

Sad. All right. Okay. But that's experiment. So I just stick to the parameter.

Okay. All right. Now this one. Okay. And if the loan is repaid with the LTV not the threshold not net then the bitcoiner the b should be able to get the money from the vault to withdraw the collateral loans repaid.

Okay. So this red trust is spread okay no cost. Now on the other hand if the bitcoin price drop below 86k then a liquid data can come in liquid data can come in and liquid data from the vault. So therefore this vault has two exit conditions both of which are determined by the landing protocol smart contract section. Okay, the two different states.

Okay, and so we want to build a system that can achieve this high level goal. And so we did we did and uh we built this proof of concept. Okay. In about 6 weeks, 6 weeks from in the middle of October. Okay.

And we did a demonstration actually live on Twitter guys. Live on Twitter on Ethereum and Bitcoin main. Okay. So this protocol is a crosschain protocol. It connects the two biggest chain in the world, Bitcoin and Ethereum.

Okay.

All right. Okay. So I'll just go through a few flows. So the experiment is basically going through a few lending protocol flows to see how this thing works end to end. Okay.

All right. So the first flow is a deposit. So uh you know we don't have budget for this experiment. So we keep it small. So roughly 9,000 satoshi is roughly what US very very small number very very small don't want to waste too much money here.

So all right Bob deposites 9,000 satoshi into the vault and this experiment is with the war but you can do a similar experiment with say a as well. In fact, Ave just launched V4 yesterday. So, we're going to repeat this experiment with Arve, but this experiment was done months ago with Moro. Okay, the Moro is open source crypto. So, we create a market.

We created a market on Moro and the market basically has a collateral asset which is Bitcoin, native Bitcoin, okay, and a borrowing asset which is USDC. So, everybody can anybody can create a market on Waro. Okay. And we really experimental mark there. And so now morpho okay through the spot through um uh we add some intelligence on top morpho.

So very important experiment very important point of this experiment is that we don't change anything to the lending protocol. So no changing from off is exactly the same. But we interpret the fact that we deposit $92 in terms of the event of depositing a loan collateral into Morocco letting Bob borrow one USDC. Okay. Ling one USD.

Okay. So this is the deposit. And now if the LTP 86% uh is the loan is still healthy then the borrow can come and pay back the loan. Pay back the loan to muscle and this is the part which requires math. Okay, this part requires math.

What's the math here? The math is that now Bob has to send a zk proof. Okay, a zero knowledge proof of the fact that he has already repaid the loan guys and the LLTV is um not back. Okay, so the LTV is below LMT. Okay.

And now Bitcoin will allow the redemption of Bitcoin from the vault. Okay. So it's through ZK proof. All right. Similarly, if the liquidation events happen, the liquid data in general is decay proof to Bitcoin.

All right? And allows to liquidate withdraw. Okay? At this point, you may say, "Hey guy, this guy is like cheating." Remember I told you that Bitcoin cannot understand ZK proof.

Okay? So, what am I talking about here? You submit some ticket proof to Bitcoin and Bitcoin automatically allows you to release your funds into the appropriate pocket. You should now call me out like you want every day you call me out. Okay.

All right. So the the interesting protocol is that in some sense Bitcoin doesn't need to understand the Hebrew at all. Okay? Because actually under the hood we have a so-cal optimistic protocol. Okay.

So this protocol entirely relies on someone to observe the system in this case the counterpart. Okay. So if the borrower tries to withdraw money the labor data will say hey your ZK proof doesn't look good. Okay. Because they can offchain very very proof.

Okay. And so the flow that we did experiment was a challenge flow. So Larry is challenging Bob. So Bob actually never pay back the loan. Okay.

Bob never pay back the love. Imagine another flow. And Bob is still trying to withdraw money from his vault. If he does that, that's bad for the market. That's really bad for the market because now there's no coll.

Okay. So we cannot allow that. And the way to do it is that Larry will somehow be able to stop Bob from withdraw. Okay. So Larry is his entire body because Larry is the liquidator.

He wants to liquidate. He doesn't want the collateral to be removed. Okay. All right. So the key task here is really how to make this diagram work.

How can somehow block? Okay. And here's the cool thing. Okay, sorry guys. I'm a tech tax tech tax tech tax tech guy, so I really need to get to the text here.

And here, Lamb Tealer actually runs a ZK verifier. Okay, offchain offchain. And but this ZK verifier is a very special ZK verifier because it's built using this cryptographic construction called Gobler. And the reason why you use garbage trick is to make sure that the challenge landing is running the CK verify correctly. Otherwise you just run some random DK verify and say oh you're wrong that's no good.

So this CK verify is kind of authenticated through this technology called G. Okay, such that if the proof is invalid then a secret will be revealed and the secret okay will open a construction on Bitcoin called HLC hash time hash time lock contract okay and actually there's a very standard construction Bitcoin for example lightning uses this construction okay which basically says that Bitcoin doesn't really understand much. So at the end of the day, Bitcoin still needs to understand something. If you listen to nothing, then there's no way you can make it work. So here we reduce it to the only thing that Bitcoin can understand, which is secret.

Because why? Because when you sign a transaction, you have a secret, which is the secret. So Bitcoin can understand secret. So we basically just basically understand Bitcoin that if they if they understand secret then you can allow Bitcoin to block to block this withdrawal. Okay.

And uh the innovation here is to use this goggle circuit to generate the secret as the function of a valid proof of this interesting. That's how both work. Okay. All right. So based on this technology we are quite bullish.

Okay. that this process ball will become a way to connect Bitcoin and Ethereum. Okay. And I think landing proto will be our first demonstration. All right.

Anyone interested, please come and talk to us. We have a boo booth downstairs uh and have a chat and um we're looking for people interested in building many many interesting applications. you know this process board we're trying to create an API so that anybody can build uh and please chat with us and this is the white paper thank you very much [Music]