2022 was a rough year for DeFi and cross-chain bridges. The world witnessed over $2.7 billion lost in hacks and exploits, nine of which resulted in more than $100 million in lost funds from top blockchains, including Ethereum, Solana and Binance Smart Chain. Case in point, Solana lost about $4.5 million worth of tokens to hackers in the space of three days, while the Nomad Bridge was drained of $200 million — and the list goes on. Cross-chain bridges are a gold mine for hackers as they often have one centralized storage point for user funds. And as a new technology in the early stages of development, bridges lack robust security models, which makes them highly vulnerable. What it boils down to is that until the industry steps away from centralized intermediaries, hacks of this nature and volume will continue to stump DeFi growth.

This week, the Internet Computer (ICP) completed the release of Chain-Key Bitcoin (ckBTC) by opening up ckBTC issuing to anyone. ckBTC, a bitcoin ‘twin’ on ICP, is a more cryptographically secure alternative to existing cross-chain solutions such as bridges and wrapped bitcoin, all of which go through centralized custodians and have been exploited by malicious actors.

A Bridge Too Far

As the blockchain space is developing and expanding, one main blocker continues to be the lack of seamless interoperability between different blockchains. Simply put — blockchains cannot communicate or share data with one another in a secure, decentralized manner. This deters people from transferring large amounts of crypto assets between different blockchains. Each chain has its own rules, tokens, protocols, and smart contracts that are not compatible with other blockchain networks, making it difficult for people to enjoy the full benefits that blockchain technology has to offer.

Today, an end user must always have additional trust assumptions when relying on technology that communicates between two distinct layer-1 blockchains. This imposes extra risks, as this additional trust often involves centralized entities, individuals and other trusted intermediaries that act as custodians for crypto assets. While these existing cross-chain solutions can offer lower costs and greater efficiency of the connected chains, it’s perhaps a bridge too far to trust third-party intermediaries. Native integration between two blockchains would mean that end users would only need to trust the Bitcoin network and the Internet Computer blockchain, for example.

No Middle Person

For DeFi to be truly decentralized and secure, layer-1 blockchains must directly communicate with each other on the protocol level and allow for transactions to be initiated from one chain and executed on another without going through centralized entities. The Internet Computer is one of the first blockchains to achieve this. With the launch of the native integration with the Bitcoin network in November 2022, and the release of ckBTC, the Internet Computer blockchain seamlessly interacts with the Bitcoin network as if they were one blockchain — no bridges, custodians, or intermediaries required.

To do this, the Internet Computer makes use of existing cryptographic protocols such as threshold ECDSA and paves the way for advancements in the field with protocols like non-interactive distributed key generation and key resharing. This set of cryptographic protocols that allow the Internet Computer to sign native transactions on other blockchains is called chain-key signing. Years of extensive research and engineering have led to secure cross-chain communication on ICP. Taking the middle person out of the equation allows smart contracts on ICP to have their own bitcoin addresses which can receive, hold and send native bitcoin that is mined by Bitcoin nodes and stored on the Bitcoin ledger. In fact, the whole Bitcoin state is stored in a single canister smart contract that has tens of gigabytes of state!

Bitcoin Twin

While the Bitcoin integration on the Internet Computer is extremely powerful in terms of security and interoperability, every native bitcoin transaction is subject to long transaction times that roughly take an hour, and transaction fees that at their peak have reached $60. Chain-Key Bitcoin, or ckBTC, is an Internet Computer native token that represents real bitcoin and builds on the protocol-level integration with the Bitcoin network. The beauty of ckBTC is that it is cryptographically secured 1:1 by real bitcoin, and is issued and redeemed via canister smart contracts that are verifiable by anyone at any time. Every step of converting BTC to ckBTC and back is decentralized, meaning there are no centralized custodians, no bridges and no traditional cloud providers that could act as attack vectors. Issuing and redeeming ckBTC goes through Know Your Transaction (KYT) checks to ensure no bitcoin enters the Internet Computer that is associated with criminal activity.

Securing ckBTC 1:1 with BTC is crucial as it eliminates the risk of depegging. The recent incident where the FTX exchange acted as the custodian, and Sollet as the bridge for wrapping and unwrapping BTC and ETH on Solana, demonstrated how bridges and intermediaries are highly vulnerable to hacks or other forms of compromise. At the time of writing, SOBTC sits at less than 1/30th, a small fraction of BTC’s price. In other words, when FTX — the custodian for SOBTC holding real BTC — became insolvent, users could no longer redeem their SOBTC for BTC 1:1.

In 2021, DeFi grew from $15 billion in TVL to $165 billion, but fell to $39 billion by the end of 2022 on the back of $2.7 billion in lost funds due to hacks and exploits. As ckBTC is truly decentralized, it has the potential to reverse this negative DeFi trend we saw in 2022, caused by large scale hacks and rug pulls. Chain-Key Bitcoin extends Layer-2 functionality to Bitcoin boosted by Internet Computer properties such as speed, scalability and low transaction fees. More specifically, ckBTC acts as a local ledger facilitating fast transactions with low fees (10 satoshis), and only settles transactions on the Bitcoin network when necessary.

Compatible with the ICRC-1 token standard (and soon also ICRC-2), ckBTC is also easy to integrate into dapps running on the Internet Computer, which could lead to more widespread adoption and increased bitcoin liquidity.

Blockchain Interoperability: the Key to Mass Adoption

The Bitcoin integration and the introduction of ckBTC on the Internet Computer is a significant breakthrough in blockchain interoperability. Combining innovations such as chain-key signing and network integration, ICP nodes directly transmit transactions to nodes on the Bitcoin network, while secret key material is securely generated, distributed and periodically re-shared among ICP nodes for maximum security.

Moreover, the secret key that controls BTC is never reconstructed, rather transactions are signed using a novel threshold ECDSA protocol, where nodes use their share of the secret key to construct a part of a signature, and a full signature can be reconstructed by combining sufficiently many signature parts. This allows ICP to sign Bitcoin transactions without ever storing the original secret key in one place, and it can tolerate up to n/3 malicious nodes. ICP nodes also directly pull blocks from the Bitcoin network to maintain Bitcoin’s current UTXO set. Due to this native integration, canister smart contracts can query the balance for each Bitcoin address. Essentially, any canister can submit Bitcoin transactions to the Bitcoin network through ICP nodes, thanks to the direct protocol-level integration.

When Satoshi Nakamoto minted the world’s first cryptocurrency in 2009, the idea was to create a decentralized payments platform that would revolutionize how we buy and sell everything. Interconnecting blockchains like the Internet Computer and the Bitcoin network through native cross-chain technology brings us closer to Satoshi’s vision. It has the potential to enable new cross-chain capabilities and unleash a plethora of 100% on-chain services such as multi-token transactions or multi-token wallet systems, which would greatly streamline the crypto user experience.

Imagine DEXs offering BTC trading pairs, decentralized fundraisers accepting bitcoin, or Web3 SocialFi services allowing satoshis to be sent via chat messages. It’s now possible on the Internet Computer.

(By Angela Harp)

Read more: https://medium.com/dfinity/chain-key-bitcoin-a-decentralized-bitcoin-twin-ceb8f4ddf95e