The excitement to bring DeFi to Bitcoin is at an all time high. BitcoinOS, Starknet, and others are competing to layer Bitcoin’s $2 trillion market cap with zero-knowledge proofs (ZK-proofs). The power? Scalability, smart contracts, and a whole new world of possibilities for that first cryptocurrency. Let’s pump the brakes for a second. I’m Catherine, and I’m here to tell you how we can stop this from happening. The race to DeFi-fy Bitcoin takes us down a perilous road. While the upside at stake here is gigantic, the unintended impact could be disastrous.
Untested Tech Equals Security Nightmares
Picture developing a world-class skyscraper atop a foundation you’ve never really stress-tested. We’re now adding ZK-proofs, a truly complicated and cutting-edge technology, on top of the bedrock foundation that Bitcoin has created. This method improves transaction security and privacy perspective.
BitcoinOS heralds its breakthrough “No Counterparty Bridge” (Grail). Meanwhile, Starknet is aiming for the scalability of thousands TPS. Let's be real. That’s because DeFi is already one of the biggest playgrounds for hacks and exploits. Adding in the completely untested wild card of ZK-proofs will only compound that peril. You’ll remember the hundreds of millions that got lost in a number of DeFi hacks over the last year. Now, increase that risk a thousandfold by adding an untested technology that even the most experienced cryptographers are still trying to fully understand.
The intricate mathematics that goes into ZK-proofs, from BitcoinOS’s BitSNARK verification to Starknet’s ZK-STARKS, obscures potential weaknesses. These mistakes are not your garden-variety coding errors. At worst, they can reveal fatal weaknesses in the fundamental cryptographic assumptions that these belief systems are built on. Identifying these deficiencies requires an extraordinary level of skill. All of these bad actors are extremely motivated given the huge economic incentive to be the first to find them.
Think of it like this: You're giving a master safecracker a brand new type of safe. He’ll spend every minute of the day, every day, figuring out ways to circumvent it. Are we that sure that these zk-proof systems are actually ready to be placed under that kind of microscope? I'm not.
"No Counterparty?" Think Again!
Bitcoin's core value proposition is decentralization. It flourishes because it is totally decentralized and doesn’t need a boss to do well. Yet the race to bring ZK-proofs to Bitcoin threatens to replace this centralization with different flavors of centralization in the name of innovation.
BitcoinOS is not first to market in providing a so-called “No Counterparty Bridge.” It’s misleading. Nobody is keeping your money hostage. You are entirely at the mercy of the BitcoinOS team, their tech, and how they choose to implement ZK-proofs. This means that if they screw up, your Bitcoin could be lost. A vulnerability in their code or a compromised system could put your investments in jeopardy.
Starknet’s ambitious goal is to scale Bitcoin to 1000s of TPS. This ambitious expansion is made possible by their groundbreaking ZK-STARK technology and their dream of the "integrity web." Eli Ben-Sasson's vision is compelling, but it means placing a significant amount of trust in Starknet's ability to execute and maintain this complex system.
This isn’t “no counterparty,” this is just moving the counterparty risk from a trusted custodian to a technical one. On one level you’re just trading one form of trust for another. Are we sure this is an upgrade? That is the key question that the Bitcoin community needs to ponder. Are we really ok with giving that kind of power over to just a handful of developers and entities? Otherwise, we run the very real danger of constructing a system that is decentralized in name only and ultimately controlled by the few.
Regulation's Unblinking Eye Watches Closely
DeFi, more broadly though, is already on the radar of regulators across the globe. The UK’s recently announced crypto regulations, perhaps the most stringent to date, are an unambiguous harbinger of what’s to come. Now, picture adding the complexity and opacity of ZK-proofs into the mix.
This added complexity of Bitcoin DeFi, made possible through ZK-proofs, opens entirely new doors for crime to flourish. Financial crimes can be covered up with cryptographic trickery. Money laundering and tax evasion become much easier when transactions are hidden. Regulators, already unable to find their asses with both hands when it comes to Bitcoin, will almost certainly overreact with a heavy hand.
This isn’t only about punishing the bad actors. And while we can’t overstate the impact of broad-based restrictions that would indiscriminately punish and stifle innovation, the whole Bitcoin ecosystem would be harmed. Regulators are undoubtedly aware of the risks associated with unmitigated financial crime. As a reaction, they might choose to preemptively ban or severely limit the use of ZK-proofs within Bitcoin DeFi. This would have the practical effect of killing the whole movement dead right out of the gate before it even has the chance to get started.
Think of it like this: Bitcoin is a nascent technology, still trying to prove its legitimacy to the world. Adding a layer of complexity that invites regulatory scrutiny is akin to painting a bullseye on its back. We must not move too quickly, or we could end up putting the whole endeavor in danger.
The promise of Bitcoin DeFi is tantalizing. We must not let our enthusiasm for these technologies lead us to ignore their potential to do harm. Centralization, regulation, and security are major concerns. They’re serious dangers that might undercut the whole Bitcoin ecosystem. There’s a real and serious conversation to be had about these risks that must be made honestly and transparently before we release the ZK-proof revolution. That’s why, if we’re not careful, this is the beginning of the end for Bitcoin as we know it.
