Why Bitcoin Alone Shouldn't Power Smart Contracts
"Do we really need another cryptocurrency?"
It's a fair question. There are already many, many thousands of them, and the vast majority of them are total shitcoins. And each time a new one is created, that means more value that is not being held in Bitcoin. For those of us that think Bitcoin is awesome—that it's nothing less than magic steampunk transparent Internet gold—we have to look at every cryptocurrency extremely skeptically.
But we also have to be honest. One of the properties that makes Bitcoin incredible digital gold is that it's scarce: there will never be more than 21 million BTC ever created, and almost 20 million BTC have already been mined. That makes Bitcoin really terrible as a gas token for smart contracts.
You don't run your car on money; you run it on gasoline, and you buy that gasoline with money. The production of gasoline, and the burning of that gasoline to like, do stuff, doesn't dilute the value of the money you bought it with... it makes that money more useful.
Once you accept that blockchains in general are incredible tools not just for digital gold and fast, permissionless payments, but also for smart contracts and trustless, permissionless digital financial transactions more complex than anything Bitcoin Script supports natively, the limitations of BTC become clear. Some Bitcoin metaprotocols, such as Alkanes and BRC-2.0, attempt to use BTC itself as the metering unit, often by tying execution costs to UTXO size or witness data weight. This is ideologically appealing, but it creates some real crypto-economic problems:
- It forces a denomination mismatch. Smart contract platforms consume real resources—CPU cycles, storage I/O, memory—that must be metered to prevent spam, and infrastructure costs float independent of the price of Bitcoin (electricity, hardware, etc.) The cost of computation has no inherent relationship to the market price of Bitcoin. Tying them together creates an arbitrary linkage that leads to market inefficiencies. The price of gas should reflect the supply and demand for computation on a specific network, not the supply and demand for a global monetary asset.
- It creates perverse incentives. Hodlers of BTC benefit when the price of Bitcoin goes up; but users of smart contracts want the cost of contract execution to go down. Everyone wants cheap gasoline (except for oil refineries!) Bitcoin transaction fees can float because of the market for blockspace is mediated by miners; but in a metaprotocol, where you're reusing Bitcoin's consensus system and mining infrastructure, your fees aren't going to float based on computation but simply based on transaction size, which is extremely weakly correlated with the costs associated with running an indexer.
A dual-token model solves both of these problems by creating a separate, dedicated asset for metering computation. This new asset—the gas token—can have its own market, with a price that floats based on the supply and demand for the network's computational resources. This breaks the arbitrary linkage to Bitcoin's price, aligning the incentives of the whole network.
Importantly, with a metaprotocol (but not with Layer-2s in general), you can elegantly solve the user experience problem of "How do I buy the gas token?" with atomic swaps. A user can construct a single chain of Bitcoin transactions that performs multiple operations in a single confirmation. You can seamlessly swap your BTC for the necessary amount of a gas token and trigger a subsequent smart contract call that consumes that gas. From the user's perspective, they perform one signing operation with their good old Bitcoin wallet; they start with BTC and end with the result of the contract call. The gas token is an intermediate, abstracted-away step, with Bitcoin retaining its monetary primacy.
The properties that make Bitcoin the best money ever created are precisely what make it pretty lame for metering smart contract execution. This isn't a flaw; it's a feature. And forcing one asset to serve contradictory objectives—to be both a pristine store of value and a high-velocity operational token—results in a system that servers neither use case very well.
A dual-token architecture creates a symbiotic relationship between the metaprotocol and the underlying Bitcoin blockchain: increased adoption of the metaprotocol and gas token increases demand for Bitcoin (and potentially pushes its price higher), while also allowing contract execution fees to float based on supply and demand for the resource in question, which isn't blockspace but rather contract computation and storage.
The dual-token metaprotocol model is not a compromise. It is the ideal architecture, offering the best of both worlds:
- Bitcoin remains the pristine, hard monetary asset—digital gold, preserved for its core function as a store of value.
- The application layer gets a functional, responsive metering token—digital gasoline, with economics tailored to the task of sustaining indexer operation.
- Bitcoin's long-term security is strengthened through a new, sustainable source of fee revenue and indirect demand.
- Seamless integration through atomic swaps, which allows users to interact with smart contracts using only the Bitcoin they already hold, abstracting away the need to acquire a separate gas token off-chain.
