Is BitVM the Holy Grail of Bitcoin? It’s Complicated, Developers Say

A once-vaunted scaling innovation for Bitcoin may be much more limited in practice than its early proponents once claimed, according to developers.

Since its introduction in October, BitVM—described as a “computing paradigm” to express smart contracts on Bitcoin—has been pitched as a potential way to bridge BTC to other blockchains in a truly decentralized manner. If so, it could unlock a world of applications for BTC holders that are currently exclusive to other chains, including privacy, scalability, and dApps.

However, such bridges will introduce a key limitation that critics claim the technology’s supporters have been elusive about.

"BitVM bridges treat capital formation as trivial. But the bridge protocol is not well defined until it describes HOW this upfront capital is raised," Bitcoin developer Tyler Whittle told Decrypt. "It is this lack of clarity around the role capital allocators play that is causing issues. I do not believe that capital formation on the magnitude of billions of dollars is trivial."

He explained last week on Twitter that other bridges place user funds in an escrow account managed by the bridge operator. But "BitVM relies on what we call ‘optimistic reimbursement,’” he wrote.

Under this system, a bridge operator must first prove that they’ve paid out all withdrawal requests to users trying to withdraw their coins back to Bitcoin’s main chain before unlocking the BTC deposited to the actual bridge. In short, bridge operators must front withdrawal payments with their own liquidity.

If an operator doesn’t have the liquidity to process all pending withdrawal requests, then user funds could be in serious jeopardy, and users may only be paid back on the main chain with “pennies on the dollar.”

Taproot Wizards co-founder Eric Wall promoted BitVM bridges in January, but grew more skeptical of them upon learning of this limitation—and getting booted from a group.

“I just got banned from the BitVM builders chat for asking more questions,” he tweeted. “As far as I know, they did ask multiple people first, [who] are all in agreement that the bridge is unsafe.”

BitVM proponents, however, say that Whittle’s criticisms don’t take into account the risk mitigation strategies available to bridge operators.

“The criticism is correct, but exaggerated,” said Edan Yago, a developer working on a separate BitVM-based Bitcoin rollup system, to Decrypt.

In a Twitter Spaces hosted on Friday, Yago explained that some bridge models can simply impose limits on how much Bitcoin can be withdrawn at once, to match the liquidity limits of bridge operators.

To address bottlenecks during heavy withdrawal periods, the bridge could increase its number of operators, or more operator sets could manage the bridge. “In practice, it is not a major flaw,” he said.

Meanwhile, BitVM creator Robin Linus showed frustration with Wall and other critics, claiming their assertions about BitVM were made in bad faith.

“You better try to understand BitVM before you write sensational articles, unfairly attacking our work,” Linus wrote to Twitter. “Otherwise, you just come across like all the other shitcoin thingies trying to spam our group with ‘questions.’”

Typically, bridged versions of BTC are backed by coins controlled by a custodian or federation inside of a multi-sig wallet. Liquid (LBTC) and Rootstock (RBTC) are examples of Bitcoin sidechains that use this model.

The downside? Users of these chains must trust a majority of federation members not to collude and steal their Bitcoin. Even so, since custodians are in control of all coins at all times, they don’t suffer from the security issues that could arise if users of a poorly designed BitVM chain tried to withdraw all funds at once.

Editor's note: This story was updated to add a comment from Bitcoin developer Tyler Whittle.

Edited by Ryan Ozawa.