Please describe your proposed solution

Our proposed solution leverages Perun Channels to create a secure, efficient cross-chain communication protocol between Bitcoin’s Lightning Network and the Cardano blockchain. The solution introduces a new cross-chain protocol that utilizes adaptor signatures as the cryptographic primitive. Adaptor signatures enable atomic, trustless transactions between the two networks, ensuring that assets can be transferred securely without relying on third-party intermediaries. Depending on the off-chain transaction type, a simpler solution without the need for complex adaptor signatures could also be utilized.

This protocol builds on a foundation of previously developed Perun State Channels on Cardano, which will be extended to support cross-chain functionality. The integration of the Lightning Network into this framework will enable cross-chain transactions between Cardano and Bitcoin while retaining the flexibility and scalability of Cardano’s smart contracts.

The project is structured into five milestones, including formal research and specification of the protocol, implementation, adaptation of existing smart contracts, integration with the Lightning Network, and development of a proof of concept (PoC) for the cross-chain channel. By connecting Bitcoin and Cardano, this solution addresses the key challenge of interoperability between leading blockchain networks, offering secure, seamless asset transfer mechanisms for both ecosystems.

Please define the positive impact your project will have on the wider Cardano community

Interoperability

By enabling seamless cross-chain transactions between Cardano and Bitcoin’s Lightning Network, the project will foster broader integration with other blockchain ecosystems. This positions Cardano as a hub for cross-chain DeFi solutions, expanding its use cases and appeal to a wider audience of developers and users.

Increased Utility

The project enhances the utility of the Cardano blockchain by allowing Cardano users to interact with Bitcoin’s Lightning Network. This creates new opportunities for users to engage in low-cost, fast transactions, unlocking new DeFi and payment solutions.

Technological Leadership

Adaptor signatures and Perun State Channels represent cutting-edge cryptographic primitives and layer-2 scaling solutions. By implementing these on Cardano, the project showcases the platform's capacity for advanced blockchain innovation, attracting developers interested in building next-generation solutions.

Boost in Ecosystem Growth

With the proof of concept demonstrating the potential for cross-chain channels, more projects will be incentivized to build on Cardano, driving developer activity and user adoption within the network.

Strengthened Decentralization

By connecting with decentralized networks like Bitcoin’s Lightning, Cardano strengthens its position as a decentralized financial ecosystem, contributing to its long-term sustainability and resilience.

What is your capability to deliver your project with high levels of trust and accountability? How do you intend to validate if your approach is feasible?

Capability

Our team has a proven track record of delivering innovative blockchain solutions, with expertise in cryptographic protocols, smart contract development, and cross-chain technologies. We have previously developed Perun State Channels on Cardano, demonstrating our deep understanding of both the Cardano platform and state-channel frameworks. This prior experience positions us well to deliver the proposed solution with high levels of trust and accountability.

To ensure transparency and accountability, we will implement the following measures:

Experienced Team: Our team consists of blockchain engineers and cryptography experts who have successfully implemented similar projects. We will continue to apply rigorous development practices, peer reviews, and open-source contributions to maintain quality and transparency throughout the project lifecycle.

Open-Source Development: Our code will be developed in a public repository, ensuring that the community can monitor our progress in real-time. This transparency builds trust with the broader Cardano community, as they can review and audit the code throughout the development process.

Collaboration with Academic and Industry Experts: We will collaborate with academic researchers and industry experts in cryptography to validate the formal specification of the cross-chain protocol. This collaboration ensures that our approach is grounded in proven cryptographic principles and remains cutting-edge.

Community Feedback: We will engage with the Cardano community through forums, GitHub, and other communication channels to gather feedback and refine the solution based on community input.

Feasibility Validation

Formal Specification and Analysis:

We will begin by creating a formal specification of the cross-chain protocol using adaptor signatures. This includes defining the cryptographic assumptions, security guarantees, and the interaction between the Cardano and Bitcoin networks.

The formal specification will be peer-reviewed by cryptographic experts to ensure that the design is sound and adheres to the required security and performance standards.

Prototyping:

A basic prototype of the protocol will be developed to test the fundamental interactions between Perun State Channels, adaptor signatures, and the two networks (Cardano and Bitcoin’s Lightning Network).

This prototype will allow us to simulate cross-chain transactions in a controlled environment and validate key components of the protocol, such as signature exchanges, channel management, and final asset transfers.

Testing in Simulated and Live Environments:

Simulated Testing: Before full-scale implementation, we will run extensive simulations to test various cross-chain scenarios, including normal operation, edge cases, and potential failure modes. This helps identify any potential issues or bottlenecks in the protocol early on.

Testnet Deployment: We will deploy the cross-chain protocol in a testnet environment for both Cardano and Bitcoin. This will allow us to test real-time performance, latency, transaction throughput, and the overall integrity of the system under real-world conditions without affecting the main networks.

What are the key milestones you need to achieve in order to complete your project successfully?

Milestone 1: MS1: Whitepaper including a formal specification of the implemented Cross-Chain Protocol

Duration 2 Months

Milestone Outputs:

• Comprehensive research on cross-chain protocols and technologies to implemented i.e. adaptor signatures ot hashed time lock contracts
• Formal specification document for the cross-chain protocol, detailing cryptographic assumptions, security guarantees, and interaction between Cardano and Bitcoin.

Acceptance Criteria:

• Formal Specification reviewed by cryptographic experts.
• Protocol design satisfies the security and interoperability requirements for cross-chain communication.

Evidence of Milestone Completion:

• Public release of the formal specification document.

Milestone 2: MS2: Adaptation of Existing Perun Smart Contracts to Include Cross-Chain Functionality

Duration 1 Month

Milestone Outputs:

• Modified Perun State Channel smart contracts on Cardano with cross-chain capabilities.
• Full integration of off-chain communication logic between Cardano and Lightning network.

Acceptance Criteria:

• Cross-chain functionality integrated into the Perun smart contracts.
• Smart contracts pass security audits.

Evidence of Milestone Completion:

• Updated smart contract code published in a public repository.

Milestone 3: MS3: Implementation of the Cross-Chain Protocol

Duration 1 Month

Milestone Outputs:

• Development of the core cross-chain protocol based on the formal specification.
• Working code for channel creation, channel updates, and asset exchange between Cardano and Bitcoin using adaptor signatures.

Acceptance Criteria:

• Successfully implemented protocol that can perform core operations such as channel creation, update and settlement.
• Code is publicly available and functional.

Evidence of Milestone Completion:

• Codebase published in a public repository (e.g., GitHub).
• Documentation outlining the implementation of key protocol components.

Milestone 4: MS4: Integration of the Lightning Network

Duration 1 Month

Milestone Outputs:

• Add RPCs to an existing lightning node: pre-sign payment (without sending, on sender side), redeem pre-signed payment (on receiver side)
• Integration of the Bitcoin Lightning Network with the cross-chain protocol.
• Interface development for Lightning and Cardano state channel interaction.

Acceptance Criteria:

• Cross-chain transactions between Lightning and Cardano are tested and functional.
• Simulation tests show the protocol’s effectiveness under different scenarios.

Evidence of Milestone Completion:

• Test reports demonstrating successful transactions between Lightning and Cardano.
• Public release of integration results and performance data.

Final Milestone: MS Final: Proof of Concept (PoC) Cross-Chain Channel Between Lightning and Cardano

Duration 1 Months

Milestone Outputs:

• Demonstration of a fully functional cross-chain channel between Bitcoin’s Lightning Network and Cardano.
• Evaluation of transaction performance, security, and scalability in a testnet environment.

Acceptance Criteria:

• End-to-end cross-chain transactions between Lightning and Cardano are successfully executed in a testnet.

Evidence of Milestone Completion:

• PoC demonstration video or documentation showcasing a cross-chain transaction.
• Public release of PoC code and documentation.

Who is in the project team and what are their roles?

Prof. Dr. Sebastian Faust (Head of research**)**: Co-founder of PolyCrypt and co-inventor of the Perun Protocols. Head of research group for applied cryptography at TU Darmstadt, Germany. Numerous publications at renowned cryptography and computer security conferences such as CRYPTO, EUROCRYPT, S&P, CCS.

Hendrik Amler (Head of business and project management): Co-founder and CEO of PolyCrypt. Leads the business development. Will lead the project management.

Sasan Safai (Project Manager):

Co-founder of PolyCrypt. Oversees the Project Management Office.

Ilja von Hoessle (Core developer): PhD in Physics. Leads Perun development since 2023. He is also involved in layer 2 and cross-chain projects with Perun and has furthermore gathered experience extending Perun to more blockchains and advancing our asset cross-chain swap solution Perun-X.

Jan Bormet (Researcher & Core developer): PhD candidate for applied cryptography and researcher and core developer @Polycrypt. Core developer of Perun since 2022, experience in programming Perun Channels on Cardano from the F8 project and building and researching layer 2 and cross-chain solutions for UTXO chains.

**Min Huy Tran (**B.Sc. in computer science): Core developer for Perun since 2022. Has previous experience with UTXO chains and in transferring formal cryptographic specifications to working code. Has Cardano experience for ~6 months working on our F11 Atala Prism project.

Please provide a cost breakdown of the proposed work and resources

Hourly Rate per role:

Cost per Milestone:

• Perun Channels for Channel logic and security features
• Plutus Core for Schnorr Signature support to ensure compatibility with Bitcoin/Lightning
• Atlas PAB as an indirect dependency to utilize Perun Channels
• Selected Lightning Codebase (i.e. lnd) to adapt for cross-chain features

How does the cost of the project represent value for money for the Cardano ecosystem?

The project offers excellent value by integrating Bitcoin’s Lightning Network, which expands Cardano’s reach and unlocks new use cases and liquidity opportunities. Additionally, this integration enables the development and enhancement of numerous applications that can participate in the Bitcoin ecosystem, fostering greater interoperability and innovation. Through its innovative approach, the project future-proofs Cardano, keeping it at the forefront of blockchain technology and attracting developers, researchers, and users.