‘Next Generation’ Atomic Swaps for better DeFi apps

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Next-Generation Atomic Swaps could “redefine NFT tokens on Bitcoin” and enable many DeFi-related use cases, says nChain Research Director Wei Zhang. In a blog post published this week, Zhang detailed a process that uses linked chains of transactions with Zero-Knowledge Proofs (ZKPs) to record an asset’s ownership history.

Zhang and his nChain colleague Federico Barbacovi have already demonstrated the technique on the BSV TestNet. They are inviting any potential collaborators or partners to examine its findings once they publish the code. Zhang sees non-fungible tokens (NFTs) and NFT trading as the primary use case, with atomic swaps that are “lightning fast and entirely trustless” thanks to the efficient use of Recursive Groth16 ZKPs.

DeFi for Bitcoin works best on BSV

DeFi, or “decentralized finance,” has become one of the most heavily used application cases for blockchain in recent years. This is due to the popularity of speculative trading—DeFi is a way to swap and trade digital assets from users’ own non-custodial wallets without a centralized exchange platform. To an extent, this protects users from the security shortcomings that have plagued online exchanges, as well as their stringent ID requirements. DeFi isn’t completely fail-safe, though, and users can still lose assets if there’s a problem with the swapping mechanism at some stage.

Zhang noted that nChain’s new technique will work on any UTXO-based blockchain, even BTC. However, he added that processing the verification transactions is only economically feasible on the BSV blockchain.

It’s based on an academic research paper titled “NFT Trades in Bitcoin with Off-chain Receipts” and authored by Mehmet Sabir Kiraz, Enrique Larraia, and Dr. Owen Vaughan.

The technique introduces the concept of transaction chains that start with an issuance (or “genesis”) transaction, i.e. the one where a token is created. Other transactions that follow are trade transactions, each being a final settlement but maintaining unique links to the ones preceding it.

The paper’s abstract says:

“Marketplaces typically require some degree of token ownership delegation, e.g., escrow accounts, to execute the trade between sellers and buyers that are not online concurrently, and to alleviate transaction fees they resort to off-chain trades. This raises concerns on the transparency and purportedly honest behaviour of marketplaces.”

Groth16 Recursive zkSNARKs are used to create a type of Proof-Carrying Data (PCD) that can prove a computation is correct across multiple transactions. The zero-knowledge proofs function as “off-chain receipts” of ownership and can be transferred even on an insecure channel. Importantly, these receipts are small in size and can be updated by anyone at any time without growing in (data) size as an asset is traded multiple times.

nChain makes ZKPs more efficient

“Despite recent industry voices such as Vitalik’s recent post urging a move away from Groth16, we believe its unparalleled proof compactness and efficiency in verification makes it indispensable for blockchain use cases,” Zhang wrote.

DeFi trading tends to happen mostly on blockchains built with smart contracts in mind, such as Ethereum. Ethereum works with an account-based model rather than a UTXO-based one like Bitcoin, so it’s often seen as more appropriate for the task—though, like every other application on Ethereum, it’s hampered by that network’s poor scalability and high fees.

Chaining/linking transactions on UTXO-based blockchains makes it possible to maintain a state as long as there’s a way to identify the previous transactions and prove the computation performed at each step was valid.

“Bitcoin, as originally designed, has all the capabilities to implement token logic and other smart contract capabilities that we thought were only possible on Ethereum. We just had to think a bit harder and implement recursive ZKP verification in Script.”

A sender transferring a token creates a ZKP, which can trace the asset back to the original issuing (Genesis) transaction. This proof can be embedded in an unlocking script based on the receiver’s output. The first transfer “spends” the output from the genesis transaction, and after that, it requires three Bitcoin transactions to transfer ownership (zk-verifier; proof; token-swap).

The token-swap transaction is under 330 bytes, while the zk-verifier is 414KB, and the proof is 291KB. Though relatively small, multiple-transaction transfers at those sizes would get expensive on a severely limited blockchain network like BTC. Therefore, only a cheap and scalable UTXO blockchain like BSV would be useful in the real world.

nChain is still testing the technique and invites developers to look at their work and work with them on possible improvements. NFTs and DeFi, in general, have been hot topics in the blockchain world for years now, but as with most other blockchain-based apps, everyone needs a solid, scalable, and affordable foundation to build on. BSV is that blockchain, and nChain is proving once again that it is possible to have speed and efficiency without sacrificing security.

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