Abstract:
The Bitcoin blockchain has many advantages, such as decentralization, security, and scarcity. However, its volatility makes it less suitable for use as a stable store of value or medium of exchange. In this paper, we propose a layer 2 solution that can provide stablecoin-like functionality on the Bitcoin blockchain without requiring external integration. Our solution involves locking the BTC price to a USD amount, which essentially freezes the price of Bitcoin in USD, allowing users to transact with a stable value. The locked BTC cannot be transacted on the mainnet until the state is changed back, which happens at the new BTC amount based on the price oracle at the time the unlock mechanism is activated. We describe the technical details of this solution, including the smart contracts, the price oracle, and the security considerations. We also discuss the potential use cases and benefits of this solution, such as facilitating cross-border payments, reducing volatility risk, and increasing adoption of Bitcoin as a means of payment.
Introduction:
The Bitcoin blockchain has been hailed as a revolutionary technology that enables peer-to-peer transactions without the need for intermediaries. However, its price volatility has been a major obstacle for its wider adoption as a stable store of value or medium of exchange. The price of Bitcoin can fluctuate wildly within hours or even minutes, making it difficult for merchants and consumers to use it as a reliable means of payment. Moreover, the existing stablecoins, such as USDT, USDC, or DAI, rely on external integration and collateralization, which may introduce counterparty risk or regulatory challenges.
In this paper, we propose a layer 2 solution that can provide stablecoin-like functionality on the Bitcoin blockchain without requiring external integration. Our solution involves locking the BTC price to a USD amount, which essentially freezes the price of Bitcoin in USD, allowing users to transact with a stable value. The locked BTC cannot be transacted on the mainnet until the state is changed back, which happens at the new BTC amount based on the price oracle at the time the unlock mechanism is activated. This solution can provide a stablecoin-like functionality on the Bitcoin blockchain, while maintaining its decentralization, security, and scarcity.
Technical details:
Our solution consists of several components, including smart contracts, a price oracle, and a security model. The smart contracts are deployed on the Bitcoin blockchain as a layer 2 solution, using off-chain transactions to manage the locked BTC state. The smart contracts consist of a locking mechanism, an unlocking mechanism, and an oracle interface. The locking mechanism allows users to lock their BTC into a state where the BTC price is frozen at a USD amount, which is specified by the oracle. The unlocking mechanism allows users to unlock their BTC by paying a fee, which is proportional to the BTC price difference between the lock and unlock times. The oracle interface provides the BTC price in USD, which is used to determine the unlocking amount.
The price oracle is a crucial component of our solution, as it provides the external reference point for the BTC price in USD. The oracle can be implemented as a trusted third-party or as a decentralized mechanism, such as a decentralized oracle network or a decentralized exchange. The oracle must be reliable, timely, and resistant to manipulation or attack. The oracle should also have a reputation system or a penalty mechanism to incentivize accurate reporting.
The security model of our solution involves several layers of protection against attacks or exploits. The smart contracts are designed to prevent unauthorized access or modification, using cryptographic proofs or multisignature schemes. The smart contracts also have a time lock mechanism, which limits the duration of the locked state and the unlocking window. The price oracle is subject to subsequent market movements.
In order to address these challenges, we propose a new layer 2 solution on the Bitcoin blockchain that leverages a locking mechanism to freeze the price of Bitcoin in USD, allowing users to transact with a stable value.
Our solution involves locking the BTC price to a USD amount, which can be achieved through a smart contract on the Bitcoin blockchain. This smart contract would use a trusted price oracle to determine the current market value of BTC in USD and lock that value for a specified period of time. During this time, the locked BTC cannot be transacted on the mainnet until the state is changed back, which happens at the new BTC amount based on the price oracle at the time the unlock mechanism is activated.
The key advantage of our solution is that it provides a stablecoin-like functionality on the Bitcoin blockchain without requiring external integration. This is particularly important for Bitcoin enthusiasts who want to preserve the decentralization and security of the Bitcoin network while still having access to a stable value.
To ensure the security of our solution, we would implement several measures to prevent exploitation. First, the locking and unlocking mechanisms would be secured by robust cryptographic algorithms to prevent unauthorized access. Second, the smart contract would incorporate a dispute resolution mechanism to address any discrepancies that may arise due to market fluctuations or price oracle inaccuracies. Finally, the smart contract would be audited by a reputable third-party auditor to ensure its security and reliability.
In conclusion, our proposed layer 2 solution on the Bitcoin blockchain provides a novel approach to creating a stablecoin-like functionality without sacrificing the decentralization and security of the Bitcoin network. With its robust security measures and trusted price oracle, our solution can provide users with a reliable and stable value that is not subject to the same volatility as BTC. We believe that this solution has the potential to revolutionize the Bitcoin ecosystem and open up new possibilities for its use in everyday transactions.
Technical Protocol:
Create a smart contract on the Bitcoin blockchain that will serve as the bridge between Bitcoin and the locked BTC. The smart contract should contain the following functions:
Lock: Allows users to lock a certain amount of BTC at the current USD price. This function should also store the lock time and the USD price at the time of locking.
Unlock: Allows users to unlock their locked BTC at the current USD price. This function should also calculate the BTC amount based on the USD price at the time of unlocking and transfer the BTC to the user’s address.
UpdatePrice: Allows the price oracle to update the current USD price of BTC.
GetLockedBalance: Allows users to query their locked BTC balance.
Implement a price oracle that will provide the current USD price of BTC. This could be a decentralized oracle or a trusted third-party oracle.
Implement a mechanism that will ensure that the lock and unlock functions are secure and cannot be exploited. This could involve multi-factor authentication, time-lock mechanisms, and/or other security measures.
Create a user interface that will allow users to interact with the smart contract and perform lock and unlock functions. The interface should be user-friendly and secure.
Test the protocol thoroughly to ensure that it works as intended and is secure.
Deploy the protocol to the Bitcoin blockchain and make it available to users.
Overall, the technical protocol should ensure that the locked BTC remains stable in value relative to USD, and that users can easily lock and unlock their BTC as needed. The protocol should also be secure and resistant to attacks.
Proof of Concept:
The mathematical proof of concept for this project involves locking the BTC price to a USD amount, which essentially freezes the price of Bitcoin in USD, allowing users to transact with a stable value. Here is the breakdown of the proof of concept:
Locking Mechanism: We start by determining the current price of BTC in USD and locking it to a specific amount. For example, if the current BTC price is $60,000, we could lock it to $60,000.
Locked BTC Amount: Once the price is locked, we can determine the amount of BTC that is equivalent to the locked USD amount. For example, if we lock $60,000, we could determine that the equivalent BTC amount is 1 BTC.
Transacting with Locked BTC: Users can now transact with the locked BTC amount, which will remain at the equivalent USD value regardless of any changes in the market price of BTC.
Unlocking Mechanism: When the user wants to unlock the BTC and return to the market price, they can activate the unlocking mechanism. At this point, the BTC amount equivalent to the locked USD amount will be transferred back to the user at the current market price of BTC.
Calculating Differences: Any difference between the locked amount and the current market price of BTC will be added or subtracted from the user’s account balance, depending on whether the market price is higher or lower than the locked price.
This proof of concept ensures that users can transact with a stable value, while also allowing for fluctuations in the market price of BTC. The code for implementing this proof of concept can be found in the technical requirements protocol I provided earlier.
Initial Proposal:
Bitcoin is not perfect in any way, but it does a fantastic job at the core of what it was created to do, which is to eliminate third-party trust in validating transactions to prevent double spending. However, it has a significant flaw, which is its volatility and unreliability for storing value. It’s like Grant in Lincoln’s army, a perfect general with one small drinking problem. Volatility is Bitcoin’s drinking problem.
The solution is not to replace Bitcoin but to give it more functionality. This is where layer 2 solutions come in. I wanted to know how to do this, so before consulting my council, which is Google, because Google knows everything, I talked to ChatGPT, and according to Chat, there are three primary methods: “State channels, sidechains, and plasma are the most well-known and established Layer 2 solutions for Bitcoin.” Chat continued, “State channels are useful for fast and frequent transactions, while sidechains are good for larger and more complex applications. Plasma is designed for scalability and can support a large number of users, but it can be more complex to implement than other solutions.”
Before deciding on the avenue, mainly the three directions above, let’s consider what I want to build. Bitcoin must be stable, but only as an option. The main blockchain can exist as it is. What happens when a person wants to create and freeze the price of a bitcoin, preserving it in USD? In today’s market, you simply sell and buy USD equivalent stablecoins. In our approach to be a self-contained solution, bitcoin must be this stablecoin. Let’s call it bUSD for this token. Is it created as a by-product of selling and buying it? If that is the case, then the token could be a separate blockchain.
We are not going to go into that rabbit hole and address the pros and cons of creating a stablecoin. So our solution has to be on the Bitcoin blockchain, which is by definition a layer 2 solution.
The second way to achieve this, other than to sell and buy a stablecoin, is to mimic the fractional reserve system. This is ideal because it would create an inflationary system instead of the disinflationary one, which the existing power would not approve. AI could be the disinflationary effect on the economy, but that is the real economy, and the worst is the disinflationary on the financial economy.
That is also another rabbit hole we will not explore for another obvious reason; it is outside the scope of this paper. If you want to fix it to USD, you would create a transaction that shorts the amount, the difference between the BTC price and the accumulated loss on the short (in an increasing price market). The short balance is accumulated and is used to store the metadata, which can be used to offset the accumulated long balance in the system when holders move from a fixed USD state to a BTC state. The balance between the long and short is then processed by acquiring the BTC.
What is the effect if this accumulated balance is used to buy or sell bitcoin as an internal process that transfers the amount to a specific account? This special account is used for that one transaction. What happens if that is just a metadata figure with no real significance?
We are digressing with the details when we are not done with the big picture. Let’s get back to our alternative method three. The third method is to lock the BTC price to a USD amount. Then it cannot be transacted on the mainnet until the state is changed back. It changes back to the mainnet at the new BTC amount based on the price oracle at the time the unlock mechanism is activated.
Depending on the filling price of bitcoin to USD, the amount of bitcoin prior to the lock and unlock mechanism could be higher or lower, depending on the filling price of bitcoin to USD, the amount of bitcoin prior to the lock and unlock mechanism could be higher or lower, depending on whether it’s a rising or declining market. This method is similar to how stablecoins are pegged to a fiat currency, except in this case, bitcoin is pegged to the USD. This approach could be accomplished by creating a smart contract on the Bitcoin blockchain that would automatically execute the lock and unlock mechanisms.
In conclusion, Bitcoin’s lack of stability and reliability for storing value has been a significant issue for many users. Layer 2 solutions, such as state channels, sidechains, and plasma, can add functionality to Bitcoin, but they may not necessarily address the stability issue. The proposed method of locking Bitcoin’s price to USD could potentially provide a stable and reliable way of storing value on the Bitcoin blockchain. However, further research and development are needed to determine the feasibility and practicality of this approach.
Discussion:
The proposal is a way to make Bitcoin more stable as a store of value by creating a stablecoin, called bUSD, that is self-contained within the Bitcoin blockchain as a Layer 2 solution. The proposal mentioned three ways to achieve this: selling and buying bUSD, mimicking the fractional reserve system, or locking the BTC price to a USD amount. There are potential issues with each method and the author acknowledged that there may be some technical details that need to be worked out.
Overall, your proposal seems interesting and could potentially provide a solution to the volatility issues of Bitcoin as a store of value. However, there are some potential vulnerabilities and technical challenges that will need to be addressed in order to make the system secure and effective.
For example, the first method proposed, selling and buying bUSD, would require a mechanism for issuing and redeeming bUSD tokens, as well as a way to ensure that the price of bUSD remains stable relative to USD. This could be challenging, as stablecoins have faced issues with maintaining their peg in the past. Based on what was described, the first solution of creating a separate blockchain for bUSD would not be a true layer 2 solution on the Bitcoin blockchain.
The second method, mimicking the fractional reserve system, also has some potential vulnerabilities. It would require careful management of the long and short balances to ensure that they are always balanced and that the system does not become overleveraged. Additionally, fractional reserve systems are controversial and can be subject to regulatory scrutiny. This solution, which involves mimicking the fractional reserve system, could be a layer 2 solution on the Bitcoin blockchain as it involves creating a separate transaction layer that keeps track of the accumulated long and short balances.
It is not clear how this would be used as a stablecoin-like functionality?
The third method, locking the BTC price to a USD amount, also has some challenges. For example, you would need to ensure that the lock and unlock mechanisms are secure and cannot be exploited. Additionally, if the price of Bitcoin changes significantly while the BTC is locked, there could be significant discrepancies between the locked amount and the current market value of BTC.
This involves locking the BTC price to a USD amount, could be a layer 2 solution on the Bitcoin blockchain. It essentially freezes the price of Bitcoin in USD, allowing users to transact with a stable value. The locked BTC cannot be transacted on the mainnet until the state is changed back, which happens at the new BTC amount based on the price oracle at the time the unlock mechanism is activated. This solution can provide a stablecoin-like functionality on the Bitcoin blockchain without requiring external integration.