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Bitcoin Smart Accounts: Trust-Minimized Native Bitcoin DeFi Infrastructure

Cian Lalor, Matthew Marshall, Antonio Russo

Abstract

Bitcoin's limited programmability and transaction throughput have historically prevented native Bitcoin from participating in decentralized finance (DeFi) applications. Existing solutions depend on honest-majority thresholds, or centralized custodial entities that introduce significant trust requirements. This paper introduces Bitcoin Smart Accounts (BSA), a novel protocol that enables native Bitcoin to access DeFi through trust-minimized infrastructure while maintaining self-custody of funds. BSA achieves this through a combination of emulated Bitcoin covenants using Partially Signed Bitcoin Transactions (PSBTs) and Taproot scripts, a Trusted Execution Environment (TEE)-based arbitration system, and destination chain smart contracts that enable DeFi platforms to accept self-custodial Bitcoin as collateral without necessitating protocol-level modifications. The setup leverages liquidity secured by the Lombard Security Consortium which provides a twofold advantage: for a DeFi protocol, liquidators rely on fungible assets with deep liquidity to quickly exit positions, while for a depositor, the general trust assumptions of honest majority (m-of-n) are reduced to existential honesty (1-of-k). We present the complete protocol design, including the Bitcoin architecture, the TEE-based arbitration mechanism, and the Smart Account Registry for protocol management. We provide a security analysis that demonstrates the correctness, safety, and availability properties under our trust model. Our design enables native Bitcoin to serve as collateral in lending markets and other DeFi protocols without requiring users to relinquish custody of funds.

Bitcoin Smart Accounts: Trust-Minimized Native Bitcoin DeFi Infrastructure

Abstract

Bitcoin's limited programmability and transaction throughput have historically prevented native Bitcoin from participating in decentralized finance (DeFi) applications. Existing solutions depend on honest-majority thresholds, or centralized custodial entities that introduce significant trust requirements. This paper introduces Bitcoin Smart Accounts (BSA), a novel protocol that enables native Bitcoin to access DeFi through trust-minimized infrastructure while maintaining self-custody of funds. BSA achieves this through a combination of emulated Bitcoin covenants using Partially Signed Bitcoin Transactions (PSBTs) and Taproot scripts, a Trusted Execution Environment (TEE)-based arbitration system, and destination chain smart contracts that enable DeFi platforms to accept self-custodial Bitcoin as collateral without necessitating protocol-level modifications. The setup leverages liquidity secured by the Lombard Security Consortium which provides a twofold advantage: for a DeFi protocol, liquidators rely on fungible assets with deep liquidity to quickly exit positions, while for a depositor, the general trust assumptions of honest majority (m-of-n) are reduced to existential honesty (1-of-k). We present the complete protocol design, including the Bitcoin architecture, the TEE-based arbitration mechanism, and the Smart Account Registry for protocol management. We provide a security analysis that demonstrates the correctness, safety, and availability properties under our trust model. Our design enables native Bitcoin to serve as collateral in lending markets and other DeFi protocols without requiring users to relinquish custody of funds.

Paper Structure

This paper contains 75 sections, 10 equations, 3 figures, 3 tables, 2 algorithms.

Table of Contents

  1. Introduction
  2. The Problem
  3. Our Contribution
  4. BSA Comparison to Existing Bridging Solutions
  5. Paper Organization
  6. System Model and Security Goals
  7. Network Model
  8. Participants
  9. Failure Model
  10. Security Goals
  11. Bitcoin Architecture
  12. Overview
  13. Protocol Parameters
  14. Bitcoin Script Architecture
  15. Script Addresses
  16. ...and 60 more sections

Figures (3)

  • Figure 1: State transition diagram showing the vault unbond paths. We use boxes to represent addresses with spending paths by two or more members, and circles to represent addresses controlled by an individual actor. Terms in diagram reference state transitions as enumerated in section \ref{['subsec:state-transitions']}. Executors of state transitions can be seen in section \ref{['subsubsec:setup-cermony']}. Dotted lines reference 2-of-2 spending paths, solid lines reference 1-of-1 spending paths.
  • Figure 2: Protocol User Setup Ceremony. PSBTs are exchanged and signed, posted to the SAR (Sec. \ref{['sec:onchain']}), and independently verified before the depositor funds the Vault Address and the TO mints BTC.b at the corresponding destination address.
  • Figure 3: Protocol lifecycle timeline: onboarding through to offboarding with an illegitimate challenge.

Theorems & Definitions (6)

  • Definition 2.1: AO Correctness
  • Definition 2.2: Protocol Liveness
  • Definition 2.3: Depositor Safety
  • Definition 2.4: Token Operator Safety
  • Definition 2.5: Protocol Safety
  • Example 4.1: Liquidation on a Lending Protocol