The Protocol: Bitcoin Might Get Ethereum-Style Smart Contracts Under ‘BitVM’ Plan

Bitcoin tech is suddenly in the spotlight after the publication by ZeroSync’s Robin Linus of his “BitVM” paper, which outlines a plan to easily add smart contracts to the original blockchain. The announcement has generated enthusiasm in Bitcoin circles, since smart contracts are the key innovation behind the second-biggest blockchain, Ethereum, not to mention its hordes of imitators.

Israeli crypto firms scramble to deal with Hamas war.
More blockchain startups cut jobs as crypto winter drags on.
Avalanche blockchain now used to track cannabis.

You’re reading The Protocol, CoinDesk’s weekly newsletter that explores the tech behind crypto, one block at a time. Subscribe here to get it every week.

Network news

Robin Linus, core contributor to ZeroSync and the author of the BitVM paper. (Robin Linus)

BITCOIN’S NEW PARADIGM? This week’s publication of a research paper outlining the design for BitVM, “a computing paradigm to express Turing-complete Bitcoin contracts,” got bitcoiners buzzing on social-media forums. The big idea is that Ethereum-style smart contracts and might be coming to Bitcoin, raising the possibility of a existential transformation of the originally payments-focused blockchain – perhaps even a bigger development than the advent of NFTs earlier this year via the Ordinals protocol. “Bitcoin is about to become a lot smarter,” according to one post on X. “Something really interesting cooking,” wrote another. The author of the BitVM paper is Robin Linus, a core contributor to ZeroSync, a Swiss non-profit that’s building tools for Bitcoin developers to use zero-knowledge proofs – a type of cryptography that has become one of the hottest trends of 2023 in the Ethereum ecosystem. “BitVM is an amazing breakthrough because while there are many gaping holes right now in the BitVM, they are mostly solvable,” Bob Bodily, CEO of Bioniq.io, a Bitcoin Ordinals marketplace, wrote in a post on X. One person went so far as to inscribe Linus’s paper onto the Bitcoin blockchain. BitVM relies on computations performed off-blockchain and then verified on-chain using a setup similar to those found in so-called optimistic rollups on Ethereum. The details are quite technical, as evidenced by an article on the topic in Bitcoin Magazine that delved into the arcana of “NAND gates.” A poster on X put up a white flag, asking “Can you explain BitVM in plain English?” and then giving only two choices, “No” and “No way.” There were memes aplenty.

HARSH WINTER: In the last edition of The Protocol, we recounted the rounds of layoffs coursing through the blockchain industry – at Chia Network, Chainalysis and Yield Protocol. Such moves come as digital-asset markets have stalled over the past several months, prolonging what many experts describe as an unusually harsh “crypto winter.” According to the analysis firm Messari, fundraising for crypto startups has hit a three-year low. Well, over the past week, there’s been more job cuts. CoinDesk broke the news this week that Blocknative, a provider of tools on the Ethereum blockchain, had reduced headcount by a third, which works out to about a dozen people. Last week, the crypto custody firm Ledger cut 12% of staff, or about 88 jobs, citing “macroeconomic headwinds” that are “limiting our ability to generate revenue.” Yuga Labs, the NFT company behind the Bored Ape Yacht Club NFT collection, eliminated an unspecified number of roles, even though it closed a $450 million funding round just 18 months ago, Unchained reported. In a statement on Yuga’s website, CEO Daniel Alegre wrote that the company had “a number of projects that, while well-intentioned, either spread the team too thin or required execution expertise beyond our core competencies.” It bears pointing out that the broader economy doesn’t seem to be suffering in the same way; the U.S. added 336,000 jobs in September, double analysts’ forecasts, a government report last week showed.

ISRAELI CRYPTO FIRMS DEAL WITH WAR: The past week’s surprise attack on Israel by Hamas fighters has upended the daily routines of crypto firms based in the Middle Eastern country, known as a haven for startups and tech companies. Several Israeli crypto executives and developers told CoinDesk they weren’t experiencing severe business disruptions, especially since many of them work remotely. But already, many employees of the firms are getting called up to reserve duties in the army. There were the personal elements such as the stress – digesting the scope of the damage, and the tragedies – as well as coping with bare supermarket shelves and repeated siren warnings. One of the largest projects so far to come out of the disaster is Crypto Aid Israel, a campaign led by Israeli crypto firms to gather crypto donations to help citizens who have been affected or displaced by the ongoing war. Separately, a local media outlet reported that Israeli police have frozen cryptocurrency accounts linked to Hamas, working with the crypto exchange Binance. According to the Wall Street Journal, Hamas along with the militant groups Palestinian Islamic Jihad and their Lebanese ally Hezbollah received more than $100 million combined in crypto funding into their digital-currency wallets over the past couple years.

Avalanche social app Stars Arena, which became a sudden sensation when it launched a week ago, generating enthusiasm in the market for the blockchain’s AVAX tokens, suffered a reversal of fortune on Oct. 7 when it got drained of nearly all locked funds, some $3 million worth. The episode was attributed to a “major security breach with the smart contract.” WAIT THIS JUST IN: On Wednesday, the smart-contract address that launched the attack encoded a message into a blockchain transaction: “I would like to cooperate.”

Thorswap, a decentralized cross-chain crypto exchange, shifted into “maintenance mode” after the infamous “FTX Exploiter” used a series of Ethereum transactions to move funds onto the platform; project says the action was taken after “consultation with advisors, legal counsel and law enforcement.”

Activist crypto investors scored a $2.5M bounty after mounting a campaign on FloorDAO.

Tokenized U.S. Treasuries arrive on Coinbase’s Base blockchain with Backed’s RWA token.

Taiwanese crypto trader’s 6-cent fee leads to $310K win in tax-receipt lottery.

Protocol Village

Highlighting blockchain tech upgrades and developments.

2. Bitcoin financial services firm Swan is introducing a “collaborative custody” service using Blockstream’s hardware wallet Jade.

3. Quant, a London-based provider of what’s described as central-bank-grade key management, has unveiled Overledger Authorise, which aims to integrate digital asset and blockchain keys with existing security systems, “ensuring top-level security and compliance,” according to a message from the team.

4. Spark Protocol, DAI-centric DeFi lending platform in MakerDAO ecosystem, announced its “deployment on Gnosis Chain, a decentralized Ethereum Virtual Machine sidechain with over 150,000 validators,” according to the team.

5. JPMorgan has carried out its first live blockchain-based collateral settlement transaction involving BlackRock and Barclays, the U.S. banking giant said on Wednesday.

Money Center

Neutral, which aims to build a regulated exchange for tokenized environmental assets including carbon and renewable-energy credits, has raised a $3.2 million in a financing round led by North Island Ventures with contributions from Redalpine, DCG, Cerulean Ventures, Factor Capital, Very Early Ventures and Rarestone, according to a message from co-founder and CEO Farouq Ghandour.
Blackbird, crypto restaurant app, raises $24M in funding led by Andreesen Horowitz (a16z).
Crypto prime broker Membrane Labs raises $20M from Brevan Howard, Point72, Jane Street, Flow Traders, QCP Capital, Two Sigma Ventures, Electric Capital, Jump Crypto, QCP Capital, GSR Markets, Belvedere Trading, and Framework Ventures.

Vechain, a layer-1 enterprise-grade blockchain based in the country of San Marino, said it awarded $46,000 in price money at a 36-hour sustainability-themed hackathon at Harvard University. Winners included Movelo, FiTag and PropelPixel.
The Web3 Foundation, the organization that supports the Polkadot Network and its DOT Token, announced on X Tuesday that it’s launching a development fund for projects looking to build on Polkadot, allocating $41 million to the endeavor.
Immutable, an operator of blockchain networks for Web3 gaming, announced it will work with Amazon Web Services on “infrastructure and go-to-market initiatives designed to accelerate the on-boarding of game studios to Web3 and drive ownership of in-game items,” according to a press release.

Bitcoin HODLers – a misspelling of “holders” that’s come to represent those cryptocurrency investors who never take profits – stash BTC worth $1.35 billion each month, onchain data shows. Separately, the money-management giant Fidelity’s digital-asset division argued in a report that the cryptocurrency’s “first technological breakthrough was not as a superior payment technology, but as a superior form of money.”
The Polygon-based stablecoin Real USD (USDR), backed by real estate holdings, saw its value plunge to nearly 51 cents within a few hours after its treasury was drained of DAI.
The JOE token sank after supermarket chain Trader Joe’s sues the decentralized crypto exchange Trader Joe. The defendants “developed a narrative around a fictionalized ‘Trader Joe’ who sells his crops in the local marketplace, further evoking Trader Joe’s business and brand,” the suit reads.

Crypto Startup Fundraising in Deep Chill

The job cuts. The stall-out in this year’s bitcoin price rally. Those are just a couple signs of the prolonged crypto winter. Here’s another: a continued decline in funds raised by blockchain startups. Crypto firms raised $2.1 billion in the third quarter, down 36% from the prior quarter to the lowest in almost three years, according to a report last week from the analysis firm Messari. As the overall pie shrinks, investors are increasingly putting their money into early-stage startups rather than later-stage deals – “indicative of strategic bear-market positioning as investors attempt to fund projects with asymmetric upside that can return greater multiples when market sentiment eventually shifts in a positive direction,” according to Messari.