While Bitcoin is the most secure and robust blockchain in the world, it also suffers from limitations, such as low scalability, high fees, and limited functionality. These challenges have hindered the development and adoption of DApps and DeFi on Bitcoin.
To overcome these challenges, different developers have come up with various solutions such as sidechains, federated chains, and layer 2 protocols to provide faster, cheaper transactions and smart contracts on top of Bitcoin.
This article covers one of the most promising solutions in this niche, Nakachain, a layer 2 project that claims to bring DeFi to Bitcoin. Let’s dive in.
???? What is Nakachain?
Nakachain is a layer 2 protocol that enables the creation and execution of smart contracts and DApps on Bitcoin. The network is EVM-compatible, which means that any DApp or smart contract that runs on Ethereum can also run on Nakachain.
Nakachain also supports cross-chain interoperability, and hence, users can transfer and use assets from other blockchains on this network.
The network is built on top of the Bitcoin blockchain and uses proof-of-stake (PoS) as its consensus mechanism. It does not require any changes to the Bitcoin protocol but instead, it leverages the security and immutability of the Bitcoin blockchain to provide benefits that most blockchains have sacrificed.
Nakachain’s native token, NAKA, is used for governance, staking, and paying fees on the network. It boasts a 2-second block time with as low as $0.001 per transaction.
⚙️ How Does Nakachain Work?
Nakachain works by creating a parallel blockchain that is anchored to the Bitcoin blockchain. It uses a technique called peg-in and peg-out, which allows users to lock their bitcoins on the main chain and receive an equivalent amount of pegged bitcoins (pBTC) on the Nakachain.
This mechanism is enabled by the Bitcoin Virtual Machine (BVM), the first modular Bitcoin L2 metaprotocol on Bitcoin. With BVM, a few clicks can allow anyone to plug and play the best-of-breed blockchain modules to launch their own Bitcoin L2 blockchain, and this is what Nakachain did.
After minting pBTC, users can then use it to interact with smart contracts and DApps on Nakachain or swap them for other tokens or assets on the network. pBTC is also redeemable for BTC on the main chain, by burning the previously minted pBTC.
Nakachain also uses atomic swaps, which allow users to directly exchange tokens across different blockchains. Atomic swaps use cryptographic proofs and smart contracts to ensure either both parties receive their desired assets, or none of them do.
Atomic swaps enable users to tap into the liquidity and diversity of other blockchains besides the native one.
???? What are the Benefits of Nakachain?
Nakachain brings to the table several benefits that Bitcoiners have been wanting for some time now – to use Bitcoin for DeFi and DApps.
Here is a breakdown of some of those benefits:
1. Scalability
Since Nakachain can process thousands of transactions per second, it can offer faster and more efficient transactions and smart contracts on Bitcoin. Hence Nakachain automatically becomes the preferable network for DeFi functions such as lending, and borrowing.
2. Cheap and Versatile Fee Structure
Nakachain’s $0.004 per transaction beats Bitcoin’s $10+ by far. Besides this, the network also allows users to pay fees with any tokens in their wallets, instead of using NAKA. This means that users can save on gas costs and avoid volatility risks on Nakachain.
3. Functionality
Being contract-capable and ready for interoperability, Nakachain inherently offers more functionality than Bitcoin. Users can trade BRC-20 tokens, bridge tokens from other chains, stake, and even engage in futures trading.
4. Security
Since Nakachain is built on Bitcoin, it offers the same level of security. The proof of stake consensus mechanism that Nakachain uses adds an extra layer of security by incentivizing node validators.
Nakachain’s atomic swaps eliminate the need for CEXs, thereby reducing the risk of hacks, frauds, or censorship.
???? Nakachain Statistics
Nakachain went live on January 7, 2024, and has processed over 740,000 transactions as of the time of writing. There are currently 131 wallets on the blockchains accounting for an average of 43,000 transactions per day.
Information about Nakachain can be accessed on BVM-powered explorer Blockscout.
Conclusion
Nakachain is one of the most awaited protocols that may just return vibrancy to Bitcoin and bring it above being just a P2P payment network. The rise of Bitcoin inscriptions caused gas fees on the Bitcoin blockchain to soar, while TPS dropped drastically. However, with the success of Nakachain, Ordinals can function on the Bitcoin blockchain without sacrificing fees and speed.