Two startups are joining forces to introduce a solution for verifying total value-locked (TVL) claims by Bitcoin decentralized finance projects (Bitcoin defi).
Why Bitcoin Defi Needs Proof-of-TVL
With a total value of over $30 billion (TVL), Bitcoin decentralized finance (Bitcoin defi) is quickly becoming a profitable trend, but exaggerated TVL figures from questionable projects could undermine the entire sector.
The reason TVL is the de facto vanity metric is because it indicates the liquidity of a token. It also helps investors gauge the popularity and reliability of a project. But Bitcoin defi is different. Assessing Bitcoin-based TVL is much more difficult than with a protocol like Ethereum.
Bitcoin’s unspent transaction output model (UTXO) tracks individual pieces of bitcoin (BTC) that – as the name suggests – have yet to be spent. A protocol like Ethereum simply provides a total balance of ether (ETH) in an account. And therein lies the problem: Bitcoin’s unconventional UTXO model allows projects to game the system and inflate TVL.
“You can make as many claims on the UTXO model as you want,” Professor Yu Feng told Bitcoin.com in an interview. “But ultimately we only calculate the transaction that takes place on Bitcoin [blockchain] because that is the number that no one can change,” Feng added.
Essentially, Bitcoin defi projects are advertising funds promised to them by liquidity providers (LPs) in the form of bitcoin UTXOs, but it is unclear whether those funds are then provided to the projects. After all, as Feng explains, only those funds that can be demonstrably proven to be controlled by the project should count towards TVL.
Feng is a professor of computer science at the University of California Santa Barbara (UCSB) and the founder of blockchain scalability startup Nubit. He works with former UCSB assistant computer science professor Shumo Chu, who founded Nebra Labs, a zero-knowledge proof (zk-proof) research company.
ZK-Proofs comes to the rescue
Instead of relying on falsifiable TVL claims, Chu and Feng told Bitcoin.com that they have designed a tool that uses zk-proofs, which use cryptography to prove the validity of information without revealing the information itself. and BitVM, a Bitcoin-based smart computer. contract framework, to reliably confirm TVL.
“The great thing about zk is that it’s programmable,” Chu said. “We can implement these protocols relatively easily using our technology so that people cannot commit fraud.”
Chu explained that his proof-of-TVL solution is very similar to the proof-of-reserves systems adopted by exchanges like Binance in the wake of FTX’s collapse.
“I was one of the original authors of the proof-of-reserves articles in the Ethereum community,” Chu explained. “It’s basically a proof-of-reserves plus some Bitcoin adjustments,” Chu added, referring to how his proof-of-TVL system has additional requirements to accommodate Bitcoin’s UTXO model.
Like proof-of-reserves, proof-of-TVL attempts to prevent catastrophic bank runs where a large number of investors with liquid staking tokens decide to withdraw the underlying bitcoin only to discover that a project had minted more tokens than bitcoin.
Proof-of-TVL also shows how much bitcoin is locked and can be cut. The bitcoin that investors entrust to a project ends up on proof-of-stake platforms where it is used for credit and defi purposes. These platforms curtail malicious activity by seizing or “cutting” some of the money a bad actor spends on a project. But in order to make cuts, the platform must have some form of control over the assets, something Chu’s solution can verify.
According to the proof-of-TVL Github repository: “The BTC that is not subject to the staking protocol and cannot be cut cannot be counted in the TVL.”
Chu and Feng said their proof-of-TVL system is still being tested, but will be included in Nubit’s upcoming product called Goldinals – a Bitcoin fungible token standard similar to Ethereum’s ERC-20 model – which will be launched as early as next year. week.
“Right now, we are starting to build the first Bitcoin native access protocol, called Goldinals, on top of BitVM,” Feng said. “One of our top missions is to bring the world’s computer back to Bitcoin.”
