Summary
TLDR: BitVM has liquidity requirements for operators of two-way pegs, leading to potential liquidity issues and risks of fund loss. Solutions include throttling withdrawals, multiple operators, linear operators, and backstop options. Ultimately, the risk of fund loss can be mitigated by putting funds under the control of a verifier in case of operator failure. Despite challenges, using BitVM for peg security is not fundamentally flawed, and discussions should focus on understanding and addressing issues effectively.
Key Points
1. BitVM pegs require operators to front their own liquidity in order to process user withdrawal requests, as the funds held in the BitVM contract are not accessible for withdrawals.
2. The liquidity crunch issue arises when an operator runs into a situation where they do not have enough liquidity to process all pending withdrawals in a single rollup epoch, leading to potential loss of funds.
3. Potential solutions to the liquidity crunch issue include throttling withdrawals, having multiple operators or linear operators, and implementing a backstop where funds are controlled by a verifier in case of total operator failure.