Today, we are proud to announce our investment in Arch, a Bitcoin-native application platform that unlocks bridgeless decentralized finance (DeFi) on the world's most valuable blockchain. We led the investment with participation from OKX Ventures, Big Brain Holdings, Portal Ventures, CMS Holdings, Tangent and others.
For almost a decade, Bitcoin has functioned like digital gold. While there were discussions more than a decade ago to enhance smart contract functionality, those efforts hit a dead-end, in part because a material portion of the Bitcoin community perceived trade-offs that could jeopardize the ultimate mission of becoming the largest non-sovereign money.
The dominant idea (posts from Vitalik on bitcointalk forum) in the Bitcoin community back then was to let go of all the innovation related to programmability and scaling to other chains, and repatriate what is possible, if ever, without sacrificing on the main north star of non-sovereign money. Ethereum and other smart contract platforms emerged to capitalize on this opportunity.
Smart contract platforms have been around for a decade now. A few smart contract primitives, such as decentralized exchanges, lending markets, and stablecoins, have found product-market fit. They are considered the fundamental building blocks of a well functioning blockchain ecosystem.
Before the Taproot upgrade in November 2021, Bitcoin had limited smart contract-like capabilities. The Taproot upgrade made it easier for developers to write complex script functionalities by increasing the space in the witness field to roughly 4MB. This enabled developers to script:
- Atomic Swaps
- Multi-signature wallets
- Conditional payments
Later, in July 2022, Casey Rodarmor published “Ordinal Theory,” a numbering scheme for satoshis that allows tracking and transferring individual satoshis – which unlocked the ability for users to “inscribe” arbitrary data directly into Bitcoin transactions, including images, texts, games and more – unlocking fully-onchain NFTs on Bitcoin. These NFTs don't necessarily have to be JPEGs or songs; they could be state proofs of other chains as well.
The implications of the Taproot upgrade and Ordinal Theory are big enough that developers are now experimenting with Bitcoin at a scale not seen in a long, long time.
State of Bitcoin Development
As I write this article, there are more than 50 teams working on various approaches – rollups, drivechains, sidechains, and more to scale Bitcoin and make it more programmable. Most of these projects self-identify as “Bitcoin Layer 2s,” which would be a generous interpretation in some cases. Some of them are usable today, and others are dependent on future breakthroughs such as BitVM, OP_CAT and more.
Within this space there is an explicit set of design trade-offs various teams are making. A few important variables in the design space are:
- Custody model
- Programmability
- Scaling
We believe the right set of trade-offs in the short term are the first two:
- Build natively on Bitcoin – make it so that takers can interact with DeFi without being subject to additional trust assumptions other than those of Bitcoin
- Focus on making Bitcoin more programmable within the bounds of self-custody
The prototypical bitcoiner is a security freak. Bitcoiners are the most paranoid user base on the planet when it comes to “Not your keys, not your coins.” It is unreasonable to expect bitcoiners to throw their BTC into a fresh multi-sig, give up an inch of custody, or worse, take bridge risks. The reason we have conviction in this is because WBTC and tBTC have been in existence for many years now and yet cumulatively account for less than 1% of the total BTC. There is simply not enough market demand to take bridge/centralization risk for programmability gains.
Separately, we also see that the majority of TVL on Ethereum resides on L1 as opposed to L2s such as Base, Arbitrum or Optimism.
To actually unlock DeFi on Bitcoin, developers need to meet users where they are—Bitcoin’s L1.
Why focus on programmability more than scaling?
As a developer, if all you want is to build on a fast chain, then there are alternatives like Solana that have a thriving developer ecosystem and much more mature market infrastructure. Even in the most generous interpretation of the current state of Bitcoin technology, we are not ready to see high throughput chains without sacrificing custody which, as discussed above, is a non-starter to the majority of bitcoiners. Most developers worth their salt who are building on Bitcoin today are “Bitcoin aligned” in that regard; they want to build on the most secure blockchain in the world, not some multisig that is masquerading as an L2. And within the limits of the technological capabilities Bitcoin has today, we believe the right order of operations is to prioritize programmability natively – and push speed and scaling further down the roadmap.
Bitcoin-Native Applications on Arch
Arch is building the first Bitcoin-native application platform. The Arch Network is currently in beta and is slated to hit mainnet in a few weeks.
Arch is a decentralized execution layer focused on enhancing the programmability of Bitcoin, and it makes several interesting trade-offs in the Bitcoin expressivity design space:
It acknowledges that most bitcoiners will not give up custody to multi-sigs (i.e., almost all Bitcoin L2s are trusted multi-sigs, and are in no way L2s insofar as one would think of Optimism and Arbitrum in Ethereum’s ecosystem)
The core architecture allows takers in spot transactions to interact with applications without ever taking on new trust assumptions; however, makers will be subject to additional trust assumptions (makers are usually profit-seeking professionals who explicitly underwrite risk vs. principled users who hold bitcoin for self-sovereignty reasons)
Technically, Arch introduces smart contract-like functionality to Bitcoin's Layer 1 through a sophisticated architecture that utilizes a decentralized network of verifier nodes, and a purpose-built zero-knowledge virtual machine (zkVM), called the ArchVM. Here is the general lifecycle of a transaction on the Arch Network related to the enabling technology:
ZKVM: At the heart of Arch's Network are zero-knowledge proofs (ZK Proofs), which enable the verification of transactions ensuring provably-secure application execution. The ZKVM, a specialized virtual machine, executes applications and produces a cryptographic proof that attests to the correctness of the execution. It is powered by Risc0.
Decentralized Verifier Network: The generated ZK Proofs are then validated by Arch's decentralized network of verifier nodes. This network plays a crucial role in maintaining the integrity and security of the platform. By relying on a decentralized architecture, Arch seeks to ensure the validation process is not only secure but also resistant to censorship and central points of failure.
Integration with Bitcoin's Layer 1: Once the ZK Proofs are validated, the verifier network facilitates the signing of unsigned transactions. These transactions, encompassing state changes and asset transfers dictated by the applications' logic, are eventually posted back to Bitcoin. This final step completes the execution process, with all transactions and state changes being finalized directly on Bitcoin's blockchain.
While other projects are marketing themselves as Layer 2’s, we think Arch is explicitly Bitcoin-native. Arch uniquely establishes itself as a Bitcoin-native application platform, functioning directly within Bitcoin's Layer 1. Arch's direct operation on Bitcoin's primary layer eliminates the complexities and inefficiencies often encountered with Layer 2 solutions, allowing users to directly benefit from Bitcoin's security and liquidity while exploring the expanded capabilities that Arch introduces.
Build on Arch
In the short term, DeFi applications such as borrow/lend, DEXes and Ordinal marketplaces are obvious things to build on Arch. It would be great to be able to exchange assets, borrow against them and earn yield on your BTC trustlessly.
Furthermore it would be great to have high-end collectibles reside fully onchain on the most valuable blockchain known to mankind. We expect to have society’s most valuable digital collectibles reside on Bitcoin, a massive technological breakthrough in its own right, ushering in internet-native finance. Many Ordinals collectors clearly value this.
Several projects within the Bitcoin ecosystem have already started migrating to Arch. Liquidium, the borrowing and lending marketplace on Bitcoin, recently started incorporating liquidity pools leveraging Arch to support both instant-liquidity loans and fungible-token pools—something that Bitcoin, even Discrete Log Contracts (DLCs), are incapable of natively supporting. As of the time of this writing, there are more than 20 projects, across stablecoins, decentralized exchanges, borrow/lend markets and more, building on Arch’s devnet. As excitement around Bitcoin grows, the Arch Foundation plans to support the ecosystem through upcoming hackathon and grant programs.
The Next Chapter of Bitcoin
We are witnessing an unprecedented interest in the Bitcoin ecosystem on the back of Taproot upgrade and Ordinal Theory. For the first time in 15+ years, there is an active and tangible effort to make Bitcoin more programmable without sacrificing on its north star of non-sovereign money.
Arch is the first Bitcoin-native application platform that unlocks bridgeless DeFi on the world's most valuable blockchain. Arch's emergence is a direct response to the Bitcoin community's interest in harnessing Bitcoin's foundational security and liquidity for more complex applications as seen on other programmable chains such as Ethereum and Solana. By providing a platform for programmability on Bitcoin, Arch aligns with the community's vision and principles and offers a novel approach that enhances Bitcoin's utility while maintaining its integrity.
Arch is an invitation to revisit and reimagine what's possible on the world's largest and most secure blockchain, bringing the advancements and innovations from other blockchains back home to Bitcoin.
We are excited to back Matt, Amine, and the team in their journey. If you are a developer interested in building on Arch, please reach out to Matt or Amine directly or me here. If you are a developer building something interesting on Bitcoin, we would love to hear from you.
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