Trustless Bitcoin Vault Bitcoin Charged Ethereum Defi I Jenks Guo

Jensen from Papon Labs. I'm a devo. Uh we're building Bitcoin native applications that intend to make a Bitcoin more productive than an idol asset. Uh today at East Global Boon's errors, I would like to introduce you trustless Bitcoin votes that are built specifically for uh Ethereum developers um and for DeFi purposes. We call it Bitcoin charge ethereum defy.

What we are trying to do is to unlock BTC for D5 participation. Um BTC trustless vault is our solution. will give you an overview and differences between the existing uh Bitcoin solutions and trustless vault. This product is being developed actively and is in audit phase. So therefore I cannot show you any code or ask you to build on it but we would like you to contribute your idea uh by following some proof of concept that we did in the Ethereum mainet and uh Bitcoin mainet recently.

It's quite exciting. Now the size of the market I have to justify the business here for you. BTC 5 market is big. However, it is not as big as the Ethereum DeFi market. It is currently sitting at around $ 36 billion assuming 2% of the Bitcoin is used in DeFi.

This is underrepresented because the entire uh BTC market could be as big as $1.82 82 trillion and a large majority of it is sitting idle. This is because of few reasons and one of them is the trust assumptions in the existing bridges and custodian solutions. There is also technical limitation why it didn't happen because there is no smart contract uh capabilities on Bitcoin and various uh development to make it happen is going very slowly. So, Bitcoin holders are afraid of losing their token when they are involved in these projects.

Therefore, no DeFi uh participation. Uh yield on DeFi is very very low. Yield on Bitcoin is very very low. Uh we intend to change that. So, Bitcoin is trustless.

Uh Ethereum is trustless mostly. The uh however what is connecting uh bitcoin and ethereum right now uh is not not such a case uh the existing wrap solution and bridge BTC uh will need to go through centralized entities or use a project to make it happen. So our challenge statement to ourself is how can we make bitcoins participate trustlessly in Ethereum smart contract and we know that in Ethereum world developers will only want to deal with Ethereum smart contracts and not peripheral challenges such as running nodes or offchain networks. So we have ex researched on this extensively earlier this year and we've decided to settle on trustless bitcoin vault product. This white paper um explained how Bitcoin can be used on Ethereum DeFi by trusting only the underlying trust assumptions of Bitcoin blockchain uh the Ethereum blockchain and a lot of cryptographic uh math methods.

On a very high level, put it in one sentence, the trustless Bitcoin vault is a programmable Bitcoin UTXO with conditional spending enforced by cryptographic proofs. How does it work? uh when Bitcoin is locked on Bitcoin chain using UTXO and Tapru script, we can make the other chain u Ethereum chain in this case aware of this event and create BTC vault object which are metadatas connected to certain application. The application could be a lending app. The application could be a insurance app or prediction market.

This is then utilized and assets can be created on the target application on Ethereum and use the locked position uh on Bitcoin. Users don't immediately get an asset to trade but uh we're making Ethereum DAPs aware of this situation so they can provide a DeFi uh product to the users. How it looks like is it has a three parts um of uh architecture. We have the bitcoin layer which allows user to register and create vaults. It also allows user to redeem the vaults which means getting your bitcoin back in full or partially um by just using uh tapu script.

And there is another layer between ethereum and bitcoin. Uh we call them off offchain actors. uh they are mainly composed of uh vault providers who helps Ethereum DAPs to establish vaults on Bitcoin and being used and also challengers whose jobs are validating all the events that happens on Ethereum and Bitcoin to see if the vault providers and other participants in this off-chain actor ecosystem are doing honest work. And on the Ethereum side, we have a BTC vault manager centralized uh smart contract or a single smart contract to to keep a registry of all the vaults and also applications. So when a user like Alice would like to lock their lock her BTC and use it on Ethereum to get perhaps a loan out for USDC for her to trade.

Um she can do this uh with uh minimum amount uh of u uh of hassle. uh she just need to approve a bunch of transactions on Bitcoin and also uh use her Ethereum wallet to approve bunch of transactions and the offchain actors will use their infrastructure to make it happen. This also means that you as a Ethereum developer using uh creating your DAP only needs to integrate with the BTC vault manager layer. uh all the front end and stuff can be done by either uh the application you work with um like the platform you rely on or you directly use Babylon built uh front end to interact with the wallets. A corre point to get here is that you need to switch from the wrapped uh token mindset or bridge token mindset to a different one.

We're creating a completely new primitive for it. Uh traditionally in BTC bridging or wrapping you have BTC locked on Bitcoin. You get a wrap token immediately to be used anywhere in the DeFi application and all you have to do is just to burn the token before getting the BTC back. On the other end, the correct mental model should be changed a little bit. Instead of direct asset that you get, user selects app and lock BTC.

uh what they get is only a registration of this thing happened. So we call a BTC vault object which is a metadata that lives on Ethereum that is being validated. The application can use this information to do whatever they want. For example, a lending app could create some token assets um no matter the standards is uh and use it for their own purposes. lending product will need to have repayment or liquidation occurring.

Uh insurance have uh expire or been claimed. Uh so this status can be defined by the uh D5 application themselves. The critical thing here is each BTC vault must be used uh in full amount only. Uh there is no partial amount of uh vault at least it's not developed right now. uh one vault equals to one atomic unit and the vault can only be used in one application at a time.

So if you create it for morpho you can't use the same vault for a key points here is don't split the vault amount and BTC vault is an object and it's not tradable token like a ERC20 and you should not treat it uh the same way either. So what can you build with this? Um, we're hoping to see lending protocol um, taking advantage of this. So, if I have $1 million worth of Bitcoin, I can lock it and get um, 500,000 USDC out to do some trading or some more productive use of my Bitcoin. Um, stable coin um, projects can rely on this and issue more stable coin.

insurance can use this to think of some very uh interesting DeFi um applications to ensure that people are trading and uh doing DeFi safely. Perpetual, escrow, derivatives are all possibilities. What we want in this hackathon is for you to think of innovative ways to use this uh vault uh without building to it. uh you can uh demonstrate using uh dummy um smart contracts and also front ends to demonstrate your idea. You can also think of ways to integrate the BTC vault hypothetically to popular D5 protocols.

So we can run kind of an idea on this and I will explain the price structure later. The proof of concept uh Bitcoin u u to prove the concept we have done a bitcoin lending and insurance architecture. Um if you think about bitcoin backed lending uh the borrower uh just need to lock a BTC up and then the borrower will get a loan uh back in uh in Ethereum side. When everything goes all right the loan gets repaid uh the borrower will get the BTC back uh in unhappy pass. If the BTC price dropped to a lower point uh then it will trigger liquidation or if the user failed to repay loan.

Uh the vault is designed to uh help with this process. Uh for insurance you have policy holders who lock Bitcoin to ensure something doesn't happen. the insurance either claim or expire naturally which returns to BTC fully or uh if it if some incident does occur a payout will be uh issued to a underwriter. This is all done natively in BTC. So recently we have done the exciting experiment on Bitcoin mainet and Ethereum mainet.

On October 15th we have successfully uh created a um uh it should be 2025 here. Um we have successfully created a deposit flow uh from uh Ethereum mainet using uh Babalon developed um scripts and also um uh also test uh vault providers and liquidators uh to uh make different flows happen. So the deposit flow uh we tested with 9,000 Satoshi's which is roughly about $8. Um and on Moro side because Morpho is a great platform and open sourced and u great education program etc. We love Moro so much uh we decided to use it uh for our test.

Uh the user is able to get one USDC from uh MO morul contract. Uh the vault status under goes certain changes. Um when um when the user submits the request on Ethereum, the offchain actors will uh detect the event uh create transaction graphs and create a different kind of a bitcoin transactions in different scenarios and the liquidators will also create their transactions as well uh pre-esign uh their portions and on ethereum uh the vault providers on all liquidators um acknowledge this and uh together they will update the vault status from pending to verified and eventually the application gets to define their active state back on the Ethereum side. Um and in this case Moro decided to use active in use. So this means the BTC is locked and able to be used and the application can issue a loan if they want to.

In a repayment flow, um the the user uh repays the debt on the Ethereum side. Uh the application will detect if it is being uh done full and application can uh destroy the asset uh that shows that the um for example in this case morpho used ERC20 uh a vault BTC token. uh the morph decided to burn the vault BTC token before uh calling the system to update the vault status to redeemed. Uh this way way will allow uh the BTC um the BTC side to release uh the um BTC. However, uh user is not able to get it right away.

there will be a challenge uh period um for roughly around two two to three days. We're still optimizing the protocol for it. Um and uh when all when when the challenge are all passed uh so the challengers will in this system will be able to challenge the transactions and the the the emitted event. Uh once everything is passed the user can safely withdraw or redeem their BTC. The liquidation flow is very similar uh to withdrawal flow except in this case um on a successful challenge um the liquidators will instead get um uh get the BTC uh liquidators will have to repay the debt for the user.

So let's say the user is not able to repay or the um price has dropped to a uh to below margin call level. Liquidators will spot this opportunity and start to uh request for a liquidation. Uh the system will check um whether indeed is meeting the liquidation uh condition. Uh proofs will be generated and uh different actors in the offchain uh system will be uh will be confirming uh this event and uh it will enter into a liquidation challenge period for two to three days. If there is no challenge then the liquidators will get the BTC and uh um instead of the borrower.

So in any case someone has to initiate it on the Ethereum side and it gets challenged and proved on the Bitcoin side um or using uh uh zero knowledge proofs. So in the challenge phase specifically any challenger liquidators or vault provider can challenge if they think the proof is not valid. Um if there is no cha challenge then the process will continue. If challenge if there is any challenge the BVM3 dispute resolution kicks in uh on Bitcoin to validate the Ethereum state. So uh the BVM resolution state is specifically designed to stop the actor uh from getting this uh so uh different kind of proofs will be uh will be will be created and we're using something called a garble circuit to evaluate uh who is able to uh create a valid proof.

So if challenge uh if if challenged um if challenge was successful uh then uh the there is a there's initial bond that's being created uh at the vault creation stage to be issued to the challenger as reward. Uh this is done by revealing secrets uh cryptographically. Um if a valid proof is detected uh challenger is at loss uh liquidation or borrowing uh occurs or this in this case it's a redeem process. So borrowers is trying to redeem uh the thing. Um if the uh if the invalid proof is uh detected um or or proven um the challenger wins and the liquidation or the redemption does not occur.

instead the challenger will get uh paid a small amount of u uh bond. So this process does not happen successfully. So I hope that gives you an idea of one example of how uh this vault product can be used. Uh the conclusion here is crypto economy today between Bitcoin and Ethereum highly rellyant on centralized trust assumptions. uh what we're trying to change is by connecting uh smart contracts and applications directly uh from Ethereum to trustless vaults.

Um so uh we want to have the crypto economy to be supercharged and more importantly Ethereum DeFi to be supercharged by Bitcoin and native Bitcoin. uh by having a trustless Bitcoin vault uh we believe that we can attract billions of assets to be injected into Ethereum. So the challenge here uh we want you to think of new DeFi use cases um practical plans of integration uh existing D5 uh must have examples mockup contracts and build a front end to demonstrate these use cases. uh we will select a pool of 10 projects to award uh these USDCs to. Thank you so much.