Author: Vishal Kankani, Head of Multicoin Capital Investment Team; Translation: Jinse Finance xiaozou
On May 9, 2024, Multicoin announced that it led the $7 million seed round of financing for Arch, a Bitcoin native application platform. Arch unlocks the potential of bridgeless decentralized finance (DeFi) on Bitcoin, the world's largest blockchain. Other investors participating in this round of financing include OKX Ventures, Big Brain Holdings, Portal Ventures, CMS Holdings, Tangent, etc.
For nearly a decade, Bitcoin has been running like digital gold. Although there have been discussions about enhancing smart contract capabilities more than a decade ago, related efforts have fallen into oblivion, partly because a large part of the Bitcoin community believes that the corresponding trade-offs may jeopardize Bitcoin's ultimate mission of becoming the largest non-sovereign currency.
At the time, the mainstream view of the Bitcoin community was to abandon all programmability and related innovations of other chain expansion, and maximize its potential without sacrificing the ultimate vision of non-sovereign currency. The emergence of Ethereum and other smart contract platforms is optimistic about this opportunity.
Smart contract platforms have been around for a decade. Some smart contract primitives, such as decentralized exchanges, lending markets, and stablecoins, have achieved product-market fit. They are seen as fundamental building blocks of a well-functioning blockchain ecosystem.
Before the Taproot upgrade in November 2021, Bitcoin's smart contract functionality was very limited. The Taproot upgrade made it easier for developers to write complex script functions by increasing the witness field space to about 4MB. This allowed developers to script:
Atomic swap transactions
Multi-signature wallets
Conditional payments
Later, in July 2022, Casey Rodarmor released "Ordinal Theory", a satosh numbering scheme that allows individual satoshs to be tracked and transferred, unlocking the ability for users to "inscribe" arbitrary data directly into Bitcoin transactions, including images, text, games, etc., thereby unlocking full-chain NFTs on Bitcoin. These NFTs don't have to be jpegs or songs, they can also be state proofs of other chains.
The impact of the Taproot upgrade and Ordinal theory is huge, and today, developers are experimenting with Bitcoin on a large scale for the first time in a long time.
1, Current Status of Bitcoin Development
At the time of writing, more than 50 teams are conducting various research-rollups, drive chains, side chains, etc. to expand Bitcoin and make it more programmable. Most of these projects call themselves "Bitcoin Layer 2", which is a broader name in some cases. Some of these projects are available today, while others are yet to achieve breakthroughs in the future, such as BitVM, OP_CAT, etc.
In this area, each team has a clear set of design trade-offs. Several important design-related variables are:
Hosting model
Programmability
Scaling
We believe that in the short term, the first two points are the right trade-offs:
Building natively on Bitcoin - can support interactions with DeFi, without the constraints of additional trust assumptions outside of Bitcoin.
Focus on making Bitcoin more programmable in a self-custodial model.
The typical bitcoiner is a security nut. When it comes to Not your keys, not your coins, Bitcoin users are the most paranoid users on the planet. Bitcoin holders should not be expected to move their BTC to a new multi-signature, give up even a little self-custody, or worse, take on bridging risk. We believe this because WBTC and tBTC have been around for years, but cumulatively account for less than 1% of the total Bitcoin supply. There is simply not enough market demand to take on bridging/centralization risk to achieve programmability benefits.
Also, we see that most of the TVL on Ethereum resides on L1, not L2 like Base, Arbitrum, or Optimism.
To truly unlock DeFi on Bitcoin, developers need to come to the user base - Bitcoin L1.
Why focus on BTC programmability over scalability?
As a developer, if all you want is to create a fast blockchain, there are alternatives like Solana that have thriving developer ecosystems and more mature market infrastructure. Even with the most tolerant view of the current state of Bitcoin technology, we are not ready to achieve a high throughput chain without sacrificing custody, which, as mentioned above, is impossible for most bitcoiners. In this regard, most developers building on Bitcoin are "aligned with Bitcoin" and want to build the most secure blockchain in the world, not multi-signature disguised as L2. Within the current technical capabilities of Bitcoin, we believe the right order of operations is to prioritize programmability and further along the roadmap to push speed and scale.
2, Bitcoin native applications on Arch
Arch is building the first Bitcoin native application platform. The Arch network is currently in beta and is expected to be launched on the mainnet in a few weeks.
Arch is a decentralized execution layer focused on enhancing Bitcoin’s programmability, which makes several interesting trade-offs in Bitcoin’s expressive design:
It recognizes that most Bitcoin holders will not give up custody to move to multi-signature (almost all Bitcoin L2s are trusted multi-signatures).
The core architecture allows takers of spot transactions to interact with applications without assuming new trust assumptions; however, makers will face additional trust assumptions (makers are typically professional profit-seekers who explicitly take risks, rather than principled users who hold Bitcoin for self-sovereign reasons).
Technically, Arch introduces smart contract-like functionality to Bitcoin Layer 1 through a complex architecture that leverages a decentralized network of validator nodes and a purpose-built zero-knowledge virtual machine (zkVM) called ArchVM. Here is the general lifecycle of a transaction on the Arch network (technically relevant):
ZKVM: At the heart of the Arch network are zero-knowledge proofs (ZK proofs) that verify transactions and ensure provably secure application execution. ZKVM is a dedicated virtual machine that executes applications and generates cryptographic proofs that prove the correctness of the execution. It is powered by Risc0.
Decentralized Validator Network: The generated ZK proofs are then verified by Arch's decentralized network of validator nodes. The network plays a critical role in maintaining the integrity and security of the platform. By relying on a decentralized architecture, Arch is committed to ensuring that the validation process is not only secure, but also resistant to censorship and central points of failure.
Integration with Bitcoin Layer 1:Once the ZK proof is verified, the validator network can sign unsigned transactions. These transactions, including state updates and asset transfers determined by the application logic, are ultimately transmitted back to Bitcoin. This final step completes the execution process, and all transactions and state updates are finalized directly on the Bitcoin blockchain.
While other projects position themselves as Layer 2, we believe Arch is clearly Bitcoin-native. Arch uniquely positions itself as a Bitcoin-native application platform, running directly on Bitcoin Layer 1. Arch's direct operation on the Bitcoin main layer eliminates the complexity and inefficiencies that L2 solutions typically face, allowing users to directly benefit from Bitcoin's security and liquidity while exploring the scaling capabilities brought by Arch.
3 Build on Arch
In the short term, DeFi applications such as lending, decentralized exchanges, and Ordinals markets are obvious candidates for building on Arch. It would be great to be able to exchange assets, lend collateral, and earn BTC without trust.
Also, it would be great if high-end collectibles could reside entirely on the most valuable blockchain known to mankind (Bitcoin). We expect that the world's largest digital collections will reside on Bitcoin, which is a huge technological breakthrough in itself and will usher in the era of Internet-native finance. Many Ordinals collectors clearly value this.
Several projects in the Bitcoin ecosystem have already begun migrating to Arch. Recently, Bitcoin lending market Liquidum began integrating liquidity pools, using Arch to support instant liquidity loans and homogenous token pools - something that Bitcoin, or even Discrete Log Contracts (DLCs), cannot natively support. As of this writing, over 20 projects are being developed on Arch’s devnet, ranging from stablecoins to decentralized exchanges to lending markets. As excitement about Bitcoin grows, the Arch Foundation plans to support the growth of the ecosystem and fund a range of projects through upcoming hackathons.
4 The Next Chapter of Bitcoin
With the Taproot upgrade and Ordinal Theory behind it, we are witnessing unprecedented interest in the Bitcoin ecosystem. For the first time in 15 years, there is an active and tangible effort to make Bitcoin more programmable without compromising its vision of non-sovereign currency.
Arch is the first Bitcoin-native application platform to unlock bridgeless DeFi on the world’s most valuable blockchain, Bitcoin. Arch was born as a direct response to the Bitcoin community’s desire to leverage Bitcoin’s underlying security and liquidity to enable more sophisticated applications, as seen on other programmable chains such as Ethereum and Solana. By providing a Bitcoin programmability platform, Arch aligns with the Bitcoin community’s vision and principles and offers an innovative approach to enhancing Bitcoin’s utility while maintaining its integrity.
Arch invites people to re-examine the world's largest and most secure blockchain and bring progress and innovation from other blockchains back to Bitcoin.
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