There is no doubt that Bitcoin is the king of cryptocurrencies. However, despite Bitcoin’s success as ‘digital gold’, in its current state, its use cases are largely limited to ‘holding’.
Fortunately, users can now use Bitcoin for a growing number of things, such as allowing Bitcoin to be used in DeFi protocols on other blockchains. These DeFi protocols provide a way for cryptocurrency users to use BTC for lending, providing liquidity, and more.
Ether has been the primary blockchain network used by BTC in DeFi due to its relatively high transaction speeds, smart contract capabilities, and large developer community. For example, DeFi users can lock their BTC in an Ether smart contract and receive the equivalent in the form of bitcoin tokenization (e.g. WBTC), which can then be used to earn revenue by participating in various Ether-based DeFi protocols. Without these ‘synthetic bitcoins’ running on different blockchains, Bitcoin would not be able to generate the passive income for its holders that it does today.
Bitcoin in CeFi
Centralized financial (CeFi) companies such as BlockFi allow users to deposit BTC as collateral for borrowing or as a simple savings vehicle. Due to customer service needs and general familiarity, most new users tend to use older centralized institutions to access financial services rather than using decentralized protocols.
However, more and more people are now abandoning these centralized options in favor of the unregulated, license-free, and more transparent DeFi protocols. Lending protocols such as Compound and Aave allow users to use “synthetic bitcoins” as collateral for borrowing or as deposits for lending; DEX protocols such as Uniswap allow users to pair their “synthetic bitcoins” with other assets to provide liquidity to decentralized exchanges.
Until less than a year ago, BTC was not available in most DeFi protocols due to a lack of interoperability with other blockchains. However, as the need to use BTC in DeFi became clear, solutions emerged and there are now many ways to use BTC on other blockchains.
Above: Trend of growth of total value of BTC in locked positions in DeFi. Source: Messari
Wrapped Bitcoin (WBTC)
Wrapped Bitcoin (WBTC) is a centralized “wrapped” solution that allows users to use BTC on the ethereum blockchain. WBTC is by far the most used Bitcoin interoperability solution, controlling 78% of the market for BTC usage in DeFi. The current market has a circulating supply of approximately 189,000 WBTC, or approximately $7.63 billion.
WBTC is an ERC-20 token whose issuance is backed by BitGo-hosted BTC on a 1:1 basis. WBTC operates through a “mint” and “destroy” process. In the minting process, the user provides an ethereum address to a smart contract, then the user sends the BTC to the custodian, who mint WBTC and sends it to the smart contract. Eventually that contract sends WBTC to the user, who is then free to use their bitcoin on the Ether blockchain. The redemption process is also simple, starting with that user submitting a withdrawal request, then the user sends WBTC to that smart contract, which will destroy the WBTC. After confirming this destruction, the custodian will send the BTC back to the user.
One of the problems with WBTC is its centralized custodian. This centralization makes WBTC more vulnerable to attack, which in turn has driven the development of various other solutions to bring BTC into Ether. Traditionally, cryptocurrency users also dislike centralized offerings because of their lack of trust in these centralized entities: there is always a fear that centralized organizations may censor or steal users’ assets. WBTC attempts to curb this sentiment by being completely transparent about the escrow address, a transparency that allows users to compare the escrow address to the amount of WBTC being minted to ensure a 1:1 support ratio.
On Ether, RenBTC is a direct competitor to WBTC, with a current supply in circulation of 9,993 renBTC, or approximately $403 million. Like WBTC, RenBTC is backed by BTC on a 1:1 basis, is also an ERC-20 token, and has a very similar “mint” and “destroy” process.
RenBTC is a product of RenVM, an open protocol designed to act as a “bridge” between assets and the ethereum blockchain. The key difference is that RenVM aims to host users’ bitcoins in a more decentralized way, with RenVM aiming to be powered by a network of 10,000 virtual machines known as “dark nodes” that are rewarded for providing arithmetic and storage space to the network. Dark nodes allow users to convert their BTC value into renBTC, thus allowing their BTC to be hosted in a decentralized manner. These dark nodes must pledge (stake) at least 100,000 REN coins to participate in and protect the network, which helps prevent them from committing mischief or stealing stored BTC.
Ren’s plan is to release its master network in three phases, which will make the protocol increasingly decentralized. Ren is currently in the second phase of the planned Mainnet SubZero, which is currently largely centralized: Greycore is the only set of nodes (run by Ren’s team) responsible for the network’s execution and consensus mechanism. As the SubZero mainnet progresses and the team becomes more confident in its implementation, new node members will be added. They are progressing through these phases so that they can quickly fix potential bugs that may arise in the early stages.
tBTC is another direct competitor to renBTC and WBTC. tBTC tokens are ECR-20 tokens designed by KEEP Network with the goal of maintaining Bitcoin’s “hard currency” status. Like renBTC and WBTC, tBTC is always convertible to the same amount of BTC.
The “minting” and “destruction” process of tBTC is decentralized, as is its escrow process. If a user wants to mint tBTC, they need to send a request to a smart contract for a wallet address to deposit their BTC. The KEEP network ensures decentralized BTC custody by randomly selecting a group of signers: this group of signers is randomly selected to create and manage the BTC wallet address. Currently, these signers (nodes) are required to pledge ETH worth twice the value of the BTC deposited by the user to ensure that they do not flee with the money or in any other way commit malicious acts. These signers are compensated for their work by a small fee paid by the depositor. A randomly selected group of signers can then mint tBTC by providing proof that BTC has been deposited. tBTC v2, an upcoming update to the protocol, will allow nodes to pledge only KEEP tokens, rather than using ETH as collateral, to reduce financial constraints and drive network growth.
Compared to most “synthetic bitcoins,” tBTC requires more technical proficiency and mistakes can cost users money. tBTC can only be minted based on a network-specified lot size – currently only accepting lot sizes of 0.002, 0.01, 0.1, 0.2, 0.5, and 1.0 BTC. The KEEP whitepaper shows a way for example of an overpayment error that cost the depositor a significant amount of money.
Example above: A user who provides a 1.6 BTC proof of funds for a 1 BTC lot size deposit will only mint 1.0 BTC. any user who destroys 1.0 BTC can claim the 1.6 BTC deposit and redeem the UTXO it contains (for spend transaction output), earning a profit of approximately 0.6 BTC. Source : KEEP White Paper
BTCB is a BTC-linked asset on the Coin Security Smartchain (BSC) that allows its holder to use BTC in the DeFi protocol on the BSC chain. BTCB is a BEP2 (Token Standard for Coin Security Chain) or BEP20 (Token Standard for Coin Security Smartchain) token that can be converted to BTC at low cost. BTCB is similar to WBTC on Ether because of the centralized nature of Cryptocurrency’s hosting and trust requirements for users’ BTC. Cryptocurrency provides transparency into its BTC holdings to let users know that its issuance of bitcoin synthetic assets is backed by 1:1 BTC. There are currently approximately 73,119 BTCB in circulation, or approximately $2.9 billion.
Above: The BTCB minting process for the Coin Smartchain. Source : Binance
BTCB users can use their BTC value in the DeFi protocol on the BSC chain without missing out on potential BTC price appreciation. the BSC chain offers many of the same license-free DeFi services as ethereum, but with much lower transaction fees, which are a growing problem for ethereum users.
While Cryptocurrency has the same centralized nature as WBTC, this does mean that users benefit from Cryptocurrency’s security measures: all funds locked up (escrowed) on Cryptocurrency are protected by its Secure Asset Fund for Users (SAFU), which is used as a contingency reserve to repay users in the event of a black swan event such as a hack.
Top: DeFi app on the Coin Smartchain, image source : Binance
xBTC was released by Haven Protocol on May 4. xBTC’s release marks the first synthetic crypto asset for the protocol. chainlink is the prophecy machine used to maintain the anchoring of xBTC to BTC. Currently xBTC is not available on the public market, so its true anchoring is yet to be determined, but this will change soon with the protocol’s upcoming integration with THORChain. Currently, users can exchange between xUSD and xBTC in the protocol’s Haven Vault with no counterparties and no slippage, with unlimited liquidity, low fees and Monero (Monocoin) levels of privacy. For example, in early May, a user exchanged 1.2 million xUSD for 20.3 xBTC in complete privacy for a fee of only 3,600 xUSD. See the chart below.
Users do not need to hold any BTC in order to mint xBTC, which means that there is no need for an entity to hold users’ BTC in trust to allow them to benefit from the use of xBTC. Instead, xBTC is backed by XHV coins as collateral. This is the key difference between xBTC and other synthetic bitcoins. Other synthetic bitcoins are backed by BTC on a 1:1 basis, meaning that the other synthetic bitcoins mentioned above adhere to BTC’s hard currency policy and do not create more bitcoins in circulation. In contrast, xBTC does create more bitcoins in circulation and adds a privacy component that makes it a competitor to Bitcoin.
Privacy was once a core component of Satoshi Nakamoto’s original Bitcoinby white paper, but it seems to have been lost in our very transparent blockchain today. xBTC allows its holders to capture BTC’s price movements in complete privacy, and soon after integration with THORChain, xBTC will be able to trade other crypto assets throughout the crypto world.
sBTC is a synthetic bitcoin on Synthetix, DeFi’s derivatives trading platform. Like xBTC, sBTC is issued without the user holding the underlying asset BTC. sBTC is only a derivative issued through SNX (Synthetix platform local token) as collateral. The current supply of sBTC is approximately 1700 sBTC, or approximately $69.5 million.
Synthetix allows its users to mint synthetic assets such as sBTC through a debt pool. Users pledge SNX tokens and can then mint the synthetic assets they want. Currently, the Synthetix system as a whole is highly overcollateralized to make the system more secure against sharp drops in the price of the local token SNX. sBTC is fed from Chainlink and can be traded without slippage with other local synthetic assets on Synthetix. other synthetic assets on Synthetix include anchor fiat, other synthetic assets, and other synthetic assets. Other synthetic assets on Synthetix include synthetic assets anchored to fiat currencies, other cryptocurrencies, and commodities.
sBTC is similar to xBTC in that it creates more BTC in circulation and runs counter to the hard currency properties of Bitcoin. The difference is that sBTC only allows its holders to capture the price fluctuations of BTC and can only be traded within its own network, while xBTC plans to be able to trade with all cryptocurrencies through its integration with THORChain.
There are many forms of ‘synthetic bitcoin’ out there, each with their own unique use case, minting method, or escrow process. Most synthetic bitcoins focus on bringing native bitcoin into other blockchains to unlock the value of bitcoin and use it for the DeFi protocol, while some other synthetic bitcoins offer additional components or price exposure. Which synthetic bitcoin is used to transfer the value of BTC depends on the individual or institution, and the intended use of each varies. Fortunately, there are a growing number of ways to transfer and unlock the value of bitcoin on different blockchains, and this trend is imperative as the value of BTC increases with the value the DeFi protocol brings to cryptocurrencies.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/escape-from-the-bitcoin-network-unlocking-btcs-defi-potential/
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