Bitcoin could be one upgrade away from overtaking Ethereum DeFi

A single, long-dormant string of code, hidden deep within the original Bitcoin stack, can introduce a suite of new functionality that could potentially see the Bitcoin network rival Ethereum in terms of decentralized finance (DeFi) activity. 

The upgrade is called “OP_CAT” (short for operation code concatenate) and refers to a few simple lines of code originally introduced by Satoshi Nakamoto. This code was part of Bitcoin’s initial scripting system and effectively increased Bitcoin’s transaction utility and expanded the variety of operations users could perform with Bitcoin. 

However, Nakamoto was initially worried that OP_CAT could expose the Bitcoin network to security risks, including denial-of-service (DoS) attacks and the creation of exponential memory requirements that could potentially overwhelm the network. 

As a result, Nakamoto removed OP_CAT from the active opcodes in 2010 as part of a broader effort to make Bitcoin simpler and more robust. 

But in October 2023, cryptographer Ethan Heilman and Botanix Labs lead engineer Armin Sabouri breathed fresh life into the idea of OP_CAT, introducing a proposal to reintroduce the opcode by way of a soft fork to the Bitcoin network. 

If approved, the upgrade will bring a string of new upgrades to the network, introducing the possibility of rollups and expanding Bitcoin Tapsprict and its smart contract-like functionalities.

Since then, OP_CAT has rapidly gained traction not just among Bitcoin circles but also in the wider development community. 

On April 25, OP_CAT was granted Bitcoin Improvement Proposal number 327, marking the first real step toward introducing and accepting the software upgrade.

While the OP_CAT upgrade is certainly not short of advocates — most notably Taproot Wizard co-founders Udi Wertheimer and Eric Wall — StarkWare CEO Eli Ben-Sasson is one of the key industry heavyweights from the Ethereum side pushing for OP_CAT to be introduced.

A “simple” addition with a big upside

Speaking to Cointelegraph, Ben-Sasson said it’s his goal to help scale the Bitcoin network to be capable of handling thousands of transactions per second and make Starknet the first network that settles simultaneously on Bitcoin and Ethereum.

The approval of OP_CAT — which will enable rollups, covenants, fraud proofs and STARK scaling — holds the key to achieving genuine scalability for Bitcoin, said Ben-Sasson. 

“By simply adding OP_CAT, you can’t introduce actual smart contracts on Bitcoin itself. Bitcoin will not be able to execute something like Uniswap, but you can easily have Ekubo, which is like a version of Uniswap v4 on Starknet, running on an L2 [layer-2 network] on top of Bitcoin,” he added. 

“But even with this, you could technically have all of DeFi and more: gaming, SocialFi and DePIN.”

But not everyone is convinced of the necessity of OP_CAT for Bitcoin’s growth in the long term, saying that the current structure of sidechains is already sufficient to scale Bitcoin.

Bart van der Voort, chief strategy officer of Bitcoin liquid staking protocol pSTAKE, said OP_CAT could pose an unnecessary risk, given the relative success of Bitcoin sidechains in scaling Bitcoin thus far. 

“It’s introducing a risk — to a degree — for Bitcoin. Why mess with something that’s working?”

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“I really don’t know if it’s that necessary because you can already see all of these side chains that are coming up and building around Bitcoin itself. This should be more than enough.”

Bitcoin sidechains refer to networks like CORE, Stacks, BitLayer and bSquared, which are separate blockchain networks that run parallel to the Bitcoin network but settle to the Ethereum Virtual Machine (EVM) and use a bridge to transfer assets between them and the parent network.

CORE — much like other Bitcoin sidechains — allows Bitcoiners to bridge their idle Bitcoin ( BTC ) to its protocol CORE DAO and earn a yield on BTC that would otherwise be left sitting passively in a cold wallet. 

The largest Bitcoin sidechains, ranked by market share. Source: DefiLlama

Ben-Sasson has heard of the risks associated with introducing OP_CAT and launched a $1-million research grant fund for developers as part of a broader effort to assess the pros and cons of OP_CAT and ensure that it can be safely and securely implemented. 

Sidechains aren’t enough to move the needle

Labrys founder Lachlan Feeney takes the other side of the argument, saying that sidechains simply don’t offer enough in the way of innovation or security to make them attractive to OG Bitcoiners.

“There are no real L2s on Bitcoin right now — other than Lightning Network, which doesn’t do too much.”

Feeney said the majority of the current cohort of Bitcoin L2s are essentially no more than EVM-settling L2s and glorified bridges that are often, incorrectly, labeled as Bitcoin layer-2 networks. 

“A lot of these projects even settle to Ethereum and have a bridge to Bitcoin, and while they’re technically Bitcoin-aligned, they’re not really what anyone could call a real Bitcoin L2.”

Herein lies the problem, Feeney said. Because the current swathe of Bitcoin sidechains doesn’t settle natively to the network, they don’t fundamentally allow for the positive feedback loop of activity that would be necessary to propel Bitcoin to one day rival Ethereum in any meaningful sense.

“All of the sidechains being put forward right now are just fast, short-term solutions. The only way Bitcoin DeFi grows larger than Ethereum DeFi is when you have massive Bitcoin whales moving their capital around and plugging them into the protocols.”

“And to do that, you need to move towards having a legitimately trustless environment, and OP_CAT is absolutely going to have a very large role to play in doing this.”

Feeney said the path forward for Bitcoin DeFi and other potential applications built on the network following the introduction of OP_CAT isn’t necessarily going to be one of sudden mass adoption, saying that it may take a while for the famously cautious Bitcoin maximalists to get with the program. 

“I don’t think the Ethereum DeFi crowd is going to leave Ethereum and all of a sudden start using Bitcoin L2s and Bitcoin DeFi and whatever else.”

“You also have a massive contingent of the Bitcoin crowd that are going to look at a lot of these protocols and applications as scams and shitcoins and want no part in that as well, especially when these are sidechains that are settling to other networks.”

To Feeney, OP_CAT solves this problem by offering real utility and security on Bitcoin at the base level.

OP_CAT isn’t just an upgrade; it’s a liferaft

But Feeney doesn’t just think that OP_CAT is a cool upgrade for Bitcoin that could bring about DeFi and other capabilities; he said it’s actually a crucial ingredient to the network’s survival in the long run. 

A common concern among both critics and advocates of the Bitcoin network is that it will eventually reach a point where it will no longer be able to sustain itself under its current economic model. 

Right now, Bitcoin is almost entirely dependent on miner revenue and fees, and — barring the idealistic and unlikely scenario where the price of BTC perfectly doubles every four years — block rewards won’t be able to sustain and incentivize interest in securing the network forever. 

Source: Charles Guillemet

“Bitcoin cannot survive long term as it is today. It has to have a thriving L2 ecosystem,” said Feeney. 

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“If you take it to the extreme, roughly 90-something percent of miner revenue today comes from block rewards. Eventually, block rewards dry up and there are no more block rewards. And so, miner revenue has to come from transaction fees. So, you will eventually get to a point where Bitcoin must sustain itself based on transaction fees or it dies.”

“A lot of people think that’s 100 years away, but it’s actually only one or two halvings away when the block reward is so small that they’re not sufficient to sustain the security of the network, and so transaction fees have to rise substantially,” he added.

“Its options are: It fails to create an L2 ecosystem and it dies, or it has this thriving L2 ecosystem where the L1 becomes a settlement chain and thrives.”