StarBTC

• BTC Locking: Users lock their Bitcoin through a bespoke transaction script, ensuring that the BTC remains accessible only under predefined conditions within an associated smart contract on the Ethereum Virtual Machine (EVM).
• Smart Contract Execution: Governed by a smart contract on the EVM, the loan’s terms are laid out, including interest rates and the conditions for collateral access or liquidation.
• Arbiter or Relayer Function: Acting as a bridge, Arbiters facilitate the communication between the Bitcoin and EVM chains, verifying transaction proofs to ensure all conditions are met for collateral release.

We have created a fully decentralized collateralized lending system on the BTC mainnet that does not rely on WBTC or any cross-chain bridges.

Suppose Alice collateralizes BTC and borrows USDC from Bob. The BTC is locked in a BTC collateral script. If Alice fails to repay the USDC by the deadline, Bob can retrieve the BTC from the script. If Alice repays on time, Bob must cooperate with Alice to jointly sign off on unlocking the collateralized BTC.

The critical question is: what happens if Bob refuses to cooperate? We utilize the arbiter network provided by BEL2 to act as an intermediary between Alice and Bob. Alice can initiate arbitration, and the arbiter can co-sign with Alice to unlock the BTC (Alice and Bob choose the arbiter when they initially create the transaction contract).

A new issue arises: what if Alice and the arbiter collude maliciously? Based on the BTC transaction proof provided by BEL2, the collateralized BTC can be monitored. If it is misappropriated, Bob can initiate a challenge by submitting proof of the arbiter’s misconduct to the arbiter contract. This will punish the arbiter, and the penalty will compensate Bob.

With this oversight mechanism, any malicious actions will result in greater losses, making cooperation the best outcome for all parties. In most cases, Alice and Bob can complete the lending transaction smoothly without the need for arbiter intervention.

This system utilizes BEL2’s arbitrator network and zero-knowledge proofs for BTC transactions. The proof circuit is implemented using StarkWare’s Cairo1.