In the records of financial history, few events have shaped the global economic landscape as profoundly as the establishment of the Bretton Woods system. In 1944, amidst the ruins of World War II, representatives from 44 Allied nations convened in Bretton Woods, New Hampshire, to create a new framework for international economic cooperation. The primary goal was to prevent the economic instability and competitive devaluations that had contributed to the Great Depression and the war.

The Bretton Woods system pegged major currencies to the US dollar, which was convertible to gold at a fixed rate. This effectively made the US dollar the world’s reserve currency, providing much-needed stability and fostering economic growth. However, by the late 1960s, the system began to unravel. The US faced mounting balance-of-payments deficits and dwindling gold reserves. On August 15, 1971, President Richard Nixon unilaterally ended the dollar’s convertibility to gold, effectively dismantling the Bretton Woods system and ushering in the era of fiat currencies.

The transition to fiat currencies, while offering greater flexibility for monetary policy, also introduced significant challenges. Governments could now print money without restraint, leading to inflation, currency devaluations, and a series of financial crises. Today, the world faces a staggering $307 trillion in debt, excessive currency issuance, declining bank credit, and rising economic instability. This backdrop underscores the need for a new financial paradigm, one that combines stability with the technological advancements of the digital age.

 

Bitcoin: Digital Gold

Bitcoin, created in 2009 by the pseudonymous Satoshi Nakamoto, was designed as a decentralised digital currency that could operate independently of central banks and governments. Often referred to as “digital gold,” Bitcoin possesses many qualities that make it an ideal candidate for a global reserve asset: it is scarce (with a cap of 21 million coins), durable, portable, and easily divisible. Bitcoin’s blockchain technology ensures transparency, security, and resistance to censorship, making it a robust vehicle to support fiat currencies and value exchange.

Despite its adoption and over $1 trillion in value, Bitcoin’s mainstream financial use faces challenges like scalability and programmability limitations. Its high decentralisation and security make transactions slower and resource-intensive. While its simplicity ensures robust security, it limits Bitcoin’s ability to handle complex transactions like digital agreements for loans or exchanges. Innovations like Ethereum, which introduced smart contracts in 2015, offer more functionality, leading to Layer 2 solutions aimed at uniting technologies and enhancing Bitcoin’s capabilities.

 

Bitcoin Layers

Layer 2 solutions are protocols built on top of a blockchain (Layer 1) to enhance performance and enable more complex functionalities. For Bitcoin, Layer 2 technologies like the Lightning Network and sidechains address issues of transaction speed, programmability and scalability, while bridges facilitate interoperability with other blockchain ecosystems. These solutions allow Bitcoin to interact with other blockchain ecosystems and innovations like Ethereum, enabling smart contracts and decentralised applications (DApps) that were previously not possible. However, there is a problem.

 

Inherent Problems

Scalability layers involve bridging Bitcoin off its main network and into these environments, creating security concerns that undermine its decentralised ethos. Wrapped Bitcoin (WBTC), for instance, is an ERC-20 token that represents Bitcoin on Ethereum networks. While it brings Bitcoin’s liquidity to more programmable finance platforms, it has several critical issues:

• Centralisation Risk: WBTC requires users to trust centralised institutions to manage and safeguard the Bitcoin backing the WBTC. If these institutions act maliciously, users have no recourse, undermining Bitcoin’s decentralisation ethos.
• Custodian Risk: The centralised custodians holding the actual Bitcoin can potentially be hacked or face regulatory pressures, putting users’ assets at risk.
• Lack of Transparency: Users must rely on the custodians’ transparency regarding the actual reserves backing the WBTC, which may not always be reliable.

Recent cross-chain bridge hacks, such as the Nomad Bridge exploit, highlight these vulnerabilities. Chainalysis reports that $2 billion has been stolen in 13 cross-chain bridge hacks, accounting for 69% of total funds stolen in 2022, with North Korean-linked hackers stealing approximately $1 billion. Currently, there are more than 70 cross-chain bridges with over $25 billion locked and daily transaction volumes in the millions. Synapse, a popular cross-chain bridge, has surpassed $5 billion in transaction volume. Bridges are vulnerable due to their structure, combining custodians, debt issuers, and oracles, each presenting multiple attack vectors. For instance, the Poly Network and Wormhole attacks showcased vulnerabilities in cross-chain communication, resulting in significant losses.

To mitigate these risks, it is crucial for Bitcoin’s evolution to connect other innovation layers through information transmission rather than asset transfer, while decentralising staking on Bitcoin to avoid pooling assets together. This approach keeps Bitcoin native, secure, and decentralised, while enabling broader financial applications in scalable environments.

 

Native Bitcoin DeFi, Pioneering the New Bretton Woods System

Native Bitcoin refers to Bitcoin that remains on its main network while being collateralised for Layer 2 DeFi applications. Through BeL2, Bitcoin can participate in complex financial transactions without being transferred off the Bitcoin blockchain, maintaining its security and decentralisation. This allows Bitcoin to act as a versatile tool in DeFi ecosystems, leveraging its inherent strengths while expanding its functionality into smart services such as swaps, loans, and stablecoin issuance.

• Staking: BeL2 employs non-custodial native Bitcoin staking in decentralised wallets, providing security for the network.
• Zero Knowledge Proofs (ZKPs): These provide private and verifiable proofs on Bitcoin staking transactions.
• BTC Oracle: Connects BTC proof information into Layer 2 smart contracts, facilitating Bitcoin DeFi services without moving assets off the main network.
• Arbiter Network: Utilises decentralised and collateralised nodes to facilitate time-based execution and dispute resolution, enhancing trustless financial operations.

BeL2 transmits information, not assets, across chains, preserving Bitcoin’s security and integrity while enabling smart contracts and decentralised applications for complex financial transactions. This approach eliminates reliance on centralised entities and ensures secure, decentralised financial operations. By keeping Bitcoin native, BeL2 ensures that the original blockchain remains the ultimate trust anchor for all transactions, thereby maintaining the foundational principles of Bitcoin’s decentralised ethos.

 

Native Bitcoin Loan App Demo

In the context of BeL2’s transformative role in decentralised finance (DeFi), the BeL2 Loan Dapp Demo showcases its potential to enhance Bitcoin’s utility while maintaining security and decentralisation. This demo is the first native Bitcoin lending protocol built on Starkwares Cairo programming language, allowing users to lock their native Bitcoin as collateral without relying on Wrapped Bitcoin (WBTC) or cross-chain bridges. The BTC remains on the Bitcoin mainnet, ensuring non-custodial and non-liquidatable collateral.

Users lock their Bitcoin through a bespoke transaction script, and the loan terms, including interest rates and conditions for collateral release, are governed by a smart contract on the Ethereum Virtual Machine (EVM). BeL2’s arbiter network acts as an intermediary, facilitating communication between the Bitcoin and EVM chains and verifying transaction proofs. If a borrower, like Alice, fails to repay a loan, the lender, Bob, can retrieve the BTC. If Bob refuses to cooperate in unlocking the BTC after repayment, Alice can initiate arbitration, and the arbiter will co-sign to unlock the BTC.

This peer-to-peer system ensures fairness and security through zero-knowledge proofs and the arbiter network. Any malicious actions by the arbiter or parties involved are deterred by the ability to challenge and penalise misconduct, ensuring cooperation is the best outcome. This innovative approach enables Bitcoin holders to access liquidity while preserving Bitcoin’s core principles of decentralisation and security.

 

Principles for a New Native Bitcoin Bretton Woods System:

• Decentralised Global Settlement: Native Bitcoin must act as a global settlement layer where all transactions are secured on Bitcoin’s main network, ensuring it remains the ultimate trust anchor for global finance.
• Financial Innovation and Stability: By integrating native Bitcoin with smart contracts and DApps, we can support new financial products like BTC-backed loans and stablecoins, providing liquidity and stability to the global economy whilst uniting all layers.
• Trustless and Transparent Operations: The implementation of information transmission through zero knowledge proofs and a decentralised arbiter network ensures trustless and transparent financial operations for native Bitcoin applications, reducing counterparty risk and enhancing transaction integrity.

BeL2’s vision is to become the defining piece of native Bitcoin infrastructure for a new Bretton Woods system. Emerging from the Elastos SmartWeb vision, which aims to create a decentralised internet where data, applications, and identities are secure, private, and user-owned, BeL2 strives to become a pivotal component of native Bitcoin infrastructure, transforming Bitcoin from digital gold into the cornerstone of a new global financial system.

 BeL2 leverages Elastos’ secure infrastructure, using ELA as collateral for arbiters to ensure robust and trustless dispute resolution. ELA, an asset merged mined with over 50% of Bitcoin’s miner security, adds an additional layer of security and decentralisation to the BeL2 ecosystem, reinforcing both projects’ commitment to a secure and decentralised financial future. Excited to learn more? Head over to the BeL2 website and follow Infinity for the latest updates!