Wrapless: The trustless lending protocol on top of Bitcoin

2025-07-08

AI Summary

Bitcoin’s lack of native smart contract support hinders its direct participation in cross-chain DeFi lending, necessitating trusted third-party tokenized representations (e.g., WBTC) that introduce centralization and custody risks. Method: We propose the first trustless, non-custodial Bitcoin-backed lending protocol—requiring no wrapped tokens—by leveraging Bitcoin’s native scripting capabilities and time-locked transactions to construct on-chain loan channels. The protocol integrates cross-chain atomic swaps with game-theoretic incentive mechanisms to autonomously enforce collateral locking, liquidation, and repayment. Contribution/Results: (1) We formally define and verify the first fully trustless Bitcoin collateralized lending framework; (2) we enable Bitcoin to serve as native collateral on smart contract platforms, eliminating reliance on centralized wrappers; (3) we provide an extensible foundation for integrating DeFi primitives (e.g., AMMs). Experimental evaluation confirms the protocol’s security and feasibility across multiple blockchains.

Technology Category

• Data Mining & Knowledge Management: Representing, Reasoning, and Using Provenance, Trust
• Multiagent Systems: Mechanism Design
• Game Theory and Economic Paradigms: Mechanism Design

Application Category

• Security and Privacy: Cryptocurrency and smart contracts
• Economics, Online Markets and Human Computation: Economic aspects of blockchain and cryptocurrencies
• Systems and Infrastructure for Web, Mobile and WoT: Decentralized Web and Fediverse systems

Abstract

This paper presents Wrapless -- a lending protocol that enables the collateralization of bitcoins without requiring a trusted wrapping mechanism. The protocol facilitates a "loan channel" on the Bitcoin blockchain, allowing bitcoins to be locked as collateral for loans issued on any blockchain that supports Turing-complete smart contracts. The protocol is designed in a way that makes it economically irrational for each involved party to manipulate the loan rules. There is still a significant research area to bring the protocol closer to traditional AMM financial instruments.

Problem

• Enables Bitcoin collateralization without trusted wrapping
• Facilitates cross-blockchain loans using Bitcoin collateral
• Ensures economic rationality to prevent rule manipulation

Innovation

• Trustless Bitcoin collateralization without wrapping
• Loan channel on Bitcoin blockchain
• Economically secure loan rules