- DeFi services are the driving force of crypto adoption, and the majority of them are happening on Ethereum and its L2 solutions.
- Botanix Labs suggested a new L2 protocol, built on top of the Bitcoin network.
- Spiderchains are enabling smart contracts on Bitcoin, while the security of the protocol relies on Bitcoin’s PoW system.
- Orchestrators can deposit BTC into smart contracts, and validate transactions on the network.
- No hard fork needed on the main Bitcoin blockchain.
Passive income is always welcome. And in the crypto space it became quite popular through staking mechanism, where users can lock their funds for a certain timeframe and earn interest on them. It was in demand even before Ethereum network had an upgrade, with cryptocurrency staking on centralized exchanges, but with PoS launch it reached massive expansion through new protocols that allow staking.
TVL (total value locked) in contracts is far from its ATH in 2021, currently floating around 37b USD, per defiLlama. However, majority of this is happening on the Ethereum network, ~20b USD, while locked BTC accounts for ~180m USD.
If you are a Bitcoin maxi, not many options were available to you so far to increase your BTC bag. You could continue buying it on a weekly/monthly basis, or try your luck in trading. However, with the newest network upgrade proposal, all DeFi enthusiasts could get an option extra for increasing their BTC holdings.
Staking is coming on Bitcoin, through spiderchains and Botanix protocol.
Before explaining this concept, let’s briefly go through the basics of staking.
Proof of stake in short
Staking cryptocurrencies is the process of locking them in a smart contract for a certain period of time, with the benefit of earning interest on that staked amount. By locking funds users get a chance to support a specific network, decentralize it, and validate transactions that occur for what they earn rewards, mainly in the form of newly issued coins.
For a better understanding of this concept, make sure to check this article.
L2 in short
There is one more term that needs to be addressed, before explaining spiderchains, since it will be mentioned later in this article. And that is Layer 2 solutions or L2 blockchains. Another synonym for these systems is sidechains.
Essentially, a sidechain is a separate blockchain tied to the base layer upon which is built. The main purpose of this secondary layer is to scale specific networks by moving certain transactions off the base layer. Thanks to this, L2 solutions can increase the protocol’s scalability, efficiency, and functionality, without compromising the security and decentralization of the underlying blockchain.
In Bitcoin network which is a base layer, Lighting Network is one example of L2 solution.
For Ethereum network, that would be Polygon or Arbitrum. Ethereum has far more L2 sidechains than Bitcoin, with different use cases, mainly oriented towards low fees and DeFi services.
You can learn more about L2s on the Ethereum network in this article.
Spiderchains as an L2 on Bitcoin was recently proposed by Botanix Labs. As stated above, the main purpose of this protocol is to further increase Bitcoin scalability by bringing new features like smart contracts and DeFi services on Bitcoin. All this while preserving security and decentralization of the main network through history-proven Proof of Work.
Spiderchains are fully compatible with Ethereum Virtual Machine (EVM) which is one of the main things to keep in mind. What this means is that practically any dapp currently running on Ethereum could be ported to Bitcoin and its spiderchains.
But why would anyone do this next to Ethereum and already existing layer 2 solutions?
First, and foremost, Bitcoin network is the most secure and decentralized system to date. And will continue to be so, since anyone can run a full node these days and contribute to the network. In fact, I am running one myself… Although many expected that Ethereum would become more decentralized after switching to staking consensus, the reality is that most validators are big institutions and its infrastructure is stored on AWS. Spiderchains on Bitcoin would thus inherit security and node decentralization from the main network.
Second, the proposed solution is built on top of Bitcoin, which practically means no hard fork is needed, nor code change in the base layer. It is simply “blockchain on blockchain”, with improved performance, which is another reason to be used. Devs can build dapps regardless of miners, and the only thing that will decide whether their dapp is needed or not are end users and market adoption.
Third, spiderchains will use multisig wallets and escrow bonds for locking BTC. What this means is that there will be smart contracts where users can deposit their BTC as collateral and start validating transactions on spiderchains.
Fourth, miners are not involved directly in the staking system, their role is taken over by so-called orchestrators, users that stake BTC and get to validate transactions and earn rewards for it on a 2nd layer.
Going forward into its structure, deposit addresses for this layer 2 solution will be generated and added to the main Bitcoin network at each block. From there, users can add bonds to the new multisig address, lock their Bitcoin and start earning rewards through staking. Also, spiderchains will work on the Last in First Out system (LIFO), which adds an additional security level to them, speaking from the perspective of keeping funds safe. If an orchestrator decides to attack the network and steal funds, they will have access only to funds deposited from the moment they started to validate transactions. Previously added BTC will remain safe.
New orchestrators can enter multisig wallets only when older ones decide to leave. For those who want to exit multisigs, they need to wait for each wallet where they are signers to have keys replaced with the recently joined orchestrators.
Speaking of the rewarding system, since blocks are created on the base layer by miners, orchestrators earn only a small profit from transaction fees on spiderchains, and expected BTC from slashing if some other participants decide to cheat.
That raises the question why would anyone participate in this system? The answer is quite simple, to expand Bitcoin ecosystem and offer new services, new protocols built on top of the main network, where using those solutions is cheaper and faster. With low costs, more users will come, volume will increase, which leads eventually to more transactions and fees generated.
Let’s talk now about spiderchain security. This feature depends on factors like:
- Size of the multisig (number of signers).
- The stake provided by the orchestrators.
- The total number of orchestrators.
- Amount of BTC locked in the spiderchain.
By all logic, the bigger the number of each of them is, the layer more secure.
In addition, spiderchains rely on Bitcoin’s PoW features, and we all know very well by now that this is the safest blockchain of them all, with its hash rate growing and constantly reaching new ATHs.
Side note: Current hash rate of the Bitcoin network is 436,712,351.92 TH/s, and can be checked here.
The distinction is also made for orchestrators’ conduct on the network. Inactivity can be due to hardware or internet connection problems, and this is not punishable by taking away their stake. However, building incorrect blocks, signing a wrong transaction, double spend attempt, and incorrect validation are all slashable events and will cause losing staked amount.
There are two ways of securing funds in spiderchains: security by design, and security by incentives.
By design, funds are locked in multisig addresses, which means more than one user needs to confirm the outbound transaction. The attacker can’t access BTC in this type of wallet unless everyone holding the keys approves spending.
Security by incentives means that all participants need to put a certain amount at stake and lock their funds. By providing this collateral, they get a chance to participate in the network’s activity. If they decide to act hostile, they will lose their stake, which will be split among other signers in that wallet, and be kicked out of the protocol.
Since this scaling solution is proposed by Botanix Labs, they decided the best thing to kick it off is to be fully centralized in the beginning. As much as we all love decentralization, in all honesty, this move does make sense. With this solution being in its infancy and the possibility for bad actors to use it right away, decentralization would bring more harm than good. They have plans to onboard different users and entities in a few phases, with their final goal to be permissionless and decentralized with a minority of their funds held in escrows, in the final 5th phase.
Pros and Cons of spiderchains
- No hardfork needed.
- Additional network functionality by bringing smart contracts to Bitcoin.
- Spiderchains inherit Bitcoin’s PoW security.
- “2-way peg” needed, for BTC to be moved to and off spiderchain.
- Peg can be broken if the main Bitcoin blockchain experiences a reorg of longer than five blocks.
- Centralized in the beginning, until more orchestrators join the protocol.
Why are spiderchains needed?
DeFi services on Bitcoin network are needed, no doubt about that, and the simplest explanation why is to look at WBTC, a Bitcoin that exists on Ethereum network in the form of a wrapped token. At the time of writing, its market cap is 4.5b USD with over 163 000 tokens issued already.
Next, we see new chains being launched every day, from L1s to L2s, and they all promise to fix scalability issues Bitcoin network is facing. But the reality is that none of them can compete with this network in the sense of security and decentralization. Either there are limited validators in those protocols, or they get hacked and funds stolen. Additionally, bridging between different blockchains for improved speed and low costs is still not completely safe, and very often too complicated for a regular user.
In PoS systems, stakers get rewards and earn newly created coins, which can be further restaked. Restaking is quite popular since prizes directly depend on the amount of staked coins. It is clear that this system favors rich ones which leads to centralization. On the contrary, in PoW system, miners need to pay for energy used to create new blocks. Sure, mining equipment is expensive these days and there are electricity costs, however, you can support the network by running a node only, and it doesn’t cost more than 200$ to do it, while at the same time you keep the network fully decentralized.
Finally, If spiderchains were built as a layer 1 staking system, the first and the oldest orchestrators could reject new bonds since they would have a majority. Being built on top of the PoW system means orchestrators are layer 2, and they have no control over block creation since miners are doing all the work.
To read the full spiderchain whitepaper, click here.
What does the future look like?
In short, nobody knows.
Joking aside, by strictly looking at the Pro and Con list, it would appear that spiderchains are not needed.
Even so, expanding Bitcoin’s functionality and bringing new services to the network outweigh any additional cons that might occur down the road.
And let’s not forget that in the end, this solution is being developed on top of Bitcoin, miners can’t decide about it, and no hardfork is needed. And without the need for code change, everything is much easier.
I for sure look forward to see new dapps launched and how DeFi on Bitcoin will develop further.
What is your opinion on L2 and staking on Bitcoin?