This post is syndicated from rubin.io.
Now that we’ve established the four pillars of Privacy, Decentralization, Self Custody, and Scalability, let’s get into smart contracts. But first…
There is a lot of fuss around if bitcoin has or doesn’t have smart contracts, and this is usually people talking past one another. Bitcoin does have enough functionality to create certain smart contracts. But Bitcoin does not “have Smart Contracts” in the same way that, say, Ethereum “has” Smart Contracts. Sure, one can argue that because Ethereum is weaker in terms of its fulfillment of the four pillars, it doesn’t really have smart contracts either. But almost undeniably there is something happening in the Ethereum Ecosystem that isn’t happening for Bitcoin – yet.
Often, Bitcoin Boosters will say that the types of things happening on Ethereum aren’t desirable at all and are just scams. Many of these Boosters then go on to promote projects of similar dubious nature… but that’s off topic for this post! While there are many projects that frankly suck, there are also many projects on Ethereum that are relevant to the interests of Bitcoiners! Examples of projects that advance Ethereum’s realization of these 4 pillars that would be difficult to build on Bitcoin include: Gnosis Safe for Custody; Tornado Cash for Privacy; Optimistic/Zero Knowledge Rollups for scalability; SmartPool for on-chain mining pool coordination. It’s claimed that any time something of value proves out in the other ecosystems, Bitcoin can easily just incorporate the highlights.
My position is somewhat unique on this matter: Smart Contracts aren’t something you build on top of a layer with good decentralization, privacy, scalability, and self custody – Smart Contracts are a central part of what makes achieving those pillars possible! In other words, we need a Smart Contract ecosystem that enables broad innovation in order to make our four pillars robust. This is not the same as saying we need the Ethereum VM, but we do need something to be different than the status quo today to empower builders to create new tools on top of Bitcoin. This differs from a traditional Bitcoiner perspective which is more along the lines of once we improve our (insert generic property here); then we can consider figuring out how to add more smart contracts.
Another reason sometimes given for not wanting smart contracts is that they’re too expensive and won’t scale. While this is a valid concern, the story around fees is somewhat interesting. You may have seen people complain about high fees on other platforms and say therefore it sucks and should die. It’s a bit like saying a crowded bar is no good. Obviously, if people are at the bar it is good. That your enjoyment is less is solely because you’re antisocial. On other platforms, there are users paying exorbiant fees to do transactions… but would they be doing them if they weren’t getting commensurate value? Let’s have a look at some data from cryptofees1.
|Name||1 Day Fees||7 Day Avg. Fees|
|Binance Smart Chain||$7,240,187.13||$7,525,565.73|
Clearly a lot of folks are willing to pay for Ethereum and projects on top of it. Bitcoin is ultimately a business, and it relies on its customers paying fees to incentivize the production of blocks. More fees, more incentive to provide security for Bitcoin. It’s a little problematic, therefore, when users are getting more utility from (by virtue of how much they are spending) other chains than Bitcoin2.
Although we need to be careful to not hurt Bitcoin’s essential properties, it’s clear that smart contracts provide massive leverage for incentivizing users to do transactions to pay for block production, without which Bitcoin falls apart.
The last point I’ll leave you with is perhaps a bit charged / “problematic”, but I think it’s a good one. Bitcoin is a bit like America. Ethereum is a bit like China. Provisionally, America is the Free Market Capitalism country and China is the State Controlled Communist Markets country. In practice, if you visit a market in China there seems to be a lot more capitalism than in the US. Tons and tons of small businesses, operating with (seemingly) little regulation. On the other hand, in San Francisco you can spend $200k trying to get permits for an Ice Cream shop and fail. On the flip side, in the states once you’re successful and operating it’s pretty darn hard for the government to substantial interfere. In China, your CEO might vanish for a few weeks like Jack Ma.
Bitcoin is a bit like America. Building on it is incredibly hard, but if you figure it out and crack the code it’s supposed to work forever and devs bend backwards to ensure your use case won’t break.
Ethereum is a bit like China. Building on it is incredibly easy – at first – but if what you’re doing violates the “social order” your thing will get rekt by king VB with EIPscallibur. Examples of this include the removal of refunds for clearing space which bricked a popular gas fee arbitrage token.
Now, obviously this description is tinged with preference. I love America. Best country in the world (or, rather, terrible country, just better than all the other terrible countries). However, Bitcoin is not America and Ethereum is not China. There can be a middle road, and benefits from such an approach as well. Smart contracts seem to be really good at enabling permissionless innovation. Permissionless innovation is great for capitalism! Capitalism is great for improving utility of users and coordinating people. Wouldn’t it be nice if building on Bitcoin didn’t require getting proposals passed the developer “commitiburo” and more innovators picked Bitcoin as the best chain to build new ideas on top of? Obivously we don’t want to sacrifice the other parts that make Bitcoin great, but we can still entertain the types of economic benefits we would see by enabling more permissionless innovation. Because ultimately, and perhaps tautologically…
As described, Bitcoin has certain positive and negative properties. Ethereum too. At the end of the day, in aggregate, what “matters” is what participants choose to use and rely on through a free market selection process. That’s why despite not offfering the playground of Ethereum, Bitcoin has something that people value more: stability. However, stability and stagnation are two sides of the same coin. Stagnate for too long and competitors will eat your lunch. And perhaps the stability that makes Bitcoin unique will eventually be convincingly present in other ecosystems, despite Bitcoin’s head start in that endeavor.
In the coming posts we’ll review the concepts more in depth, the state of the art research for Bitcoin Smart Contracts, and get into some examples of useful Bitcoin contracts.