For a couple of years now, the Portal team has been working on “DeFi on Bitcoin layer 3”. The project, which was featured in S10 E1 of the Bitcoin Takeover podcast back in December 2021, makes use of atomic swaps on top of Bitcoin’s Lightning network in order to build a decentralized exchange protocol for various assets. Essentially, Portal aims to be a faster, more scalable, and actually immutable version of Ethereum by integrating all the smart contract and computation features into a Bitcoin layer 3 protocol.
When the Lightning network was first introduced, a big selling point for this layer 2 was the atomic swap: a way to build bridges across blockchains in order to enable instant swaps between currencies and assets without trustless third parties in the middle. Basically, Lightning’s atomic swaps have the power to make centralized exchanges obsolete – a use case that the creators of Portal found very valuable.
What’s particularly interesting about Portal is that the project raised money from two of the biggest centralized exchanges in the world: Coinbase and OKEx. So it’s clear that these companies invested in a backup plan so their customers can still trade their assets in the event of destructive government regulations. Portal may not get too much traction for now, but it’s the escape from an otherwise constrained, excessively surveilled, and politically limited system. As co-founder and former CEO Eric Martindale mentioned during S10 E1 of the Bitcoin Takeover podcast, he’s building Portal because he wants it to exist and doesn’t worry too much about short-term market dynamics.
In the meantime, Portal released their demo for their first cross-chain atomic swap between Bitcoin and Ethereum. To pull of this feat, the team developed Thunder – a custom-made layer 2 for Ethereum, which serves the purpose of providing Lightning network interoperability. It’s a significant breakthrough because it removes the need for wrapped BTC on ETH and also bring more liquidity to Lightning and Bitcoin. Most importantly, the swaps are trustless and don’t require an entity in the middle. Everything is conducted through an open source protocol, which is the ideal design for decentralized internet money.
As of June 2023, Portal also expanded its scope to cover asset trades on the Bitcoin base layer. With the popularization of ordinal inscriptions and BRC-20 tokens, there’s a lot of demand for infrastructure to make BTC asset trading more seamless and better integrated with existing infrastructure. Up to this point, most trades happen on-chain via PSBT: the seller signs a transaction from the wallet which holds the ordinal inscriptions, and then the buyer pays for the broadcasting of the transaction (miner fee + asset price). It’s a pretty smart workaround which Casey Rodarmor described in S13 E3 of the Bitcoin Takeover podcast, but the user experience is far from perfect.
The team behind Portal, given their experience with cross-chain atomic swaps, decided to make payments easier through HTLC (Hashed Timelock Contract, basically a 2 of 2 multisig) locking scripts on the base layer and Lightning payments. Essentially, instead of using PSBT, the seller will lock the asset in a Bitcoin contract and the buyer will be able to redeem it through an instant Lightning network payment. Naturally, both of them will have to wait for on-chain confirmations to be sure the locking and the unlocking have taken place as expected. If one of the parties involved tries to cheat, then they get back their initial assets and the trade fails.
Why try to replace PSBT with HTLCs and Lightning/atomic swaps? Portal’s design is more user-friendly and can be easily integrated in exchange platforms and wallets. Currently, there’s a certain technical barrier that limits the popularity of inscription and BRC-20 markets. On the other hand, Bitcoin’s version of OpenSea would be much easier to build with Portal’s protocols. Unfortunately, there currently aren’t any scalability or cost-efficiency benefits as compared to PSBT – as the number of on-chain transactions is the same.
Another major selling point for trading ordinal inscriptions and other Bitcoin base layer assets using HTLCs and Lightning is the ability to make use of atomic swaps to make payments from other blockchains. For example, users who hold ETH, USDT, or WBTC on the Ethereum network will be able to basically buy bitcoin seamlessly and trustlessly in order to participate in the Bitcoin digital collectibles market. This is good news for Bitcoin because most of the liquidity for “DeFi” is on Ethereum and this community has a greater tendency to spend. However, there are only so many bitcoins that they will be able to buy and the block space also has a hard limit – which means that buying ordinal inscriptions on Bitcoin and trading them will always be very expensive hobbies.
In the demo that Portal CEO Chandra Duggirala and his engineers Manoj Duggirala and Casey Bowman presented to Jason Rosenstein of LFG Market (an ordinal inscriptions marketplace), the user interface looks clean and friendly. The only difficult part was the one in which Sparrow wallet was required to lock the ordinal inscription in a HTLC. So it would certainly be interesting to see if Portal can build and integrate their own Bitcoin on-chain wallet that can manage and potentially issue inscriptions and BRC-20 tokens. This might be the step that completes the experience and makes every step along the process easy.
As a personal note, now that Portal is dipping their toes into the Bitcoin base layer territory, I’d be happy to see them also provide support for Counterparty assets. It’s the realm where you can find Spells of Genesis, Rare Pepes, Bitcoin Heads, and all sorts of historic gems and collections.
But for now, it’s great to see more action taking place in Bitcoin and it’s also endearing to observe how Ethereum enthusiasts are coming back home to Bitcoin. Portal certainly provides useful infrastructure to make this transition happen and I very much look forward to testing their public release whenever it comes out. Around the time, I’ll also make sure to invite them on the Bitcoin Takeover podcast to do a live demo and discuss technical specifics. Until then, stay tuned to the Portal website and Twitter account to learn more about the project’s development.