In-depth analysis of how BTC anchor currency issuance forms a safe, efficient and easy-to-use anchor currency?

From niche to mainstream adoption, Bitcoin’s market value has surpassed that of Internet giants such as Facebook after more than a decade of development. Although it failed to become the “peer-to-peer payment system” envisioned by Satoshi Nakamoto, it has gone farther and farther on the road of value reserve. It is joining more and more companies’ balance sheets and is moving in the direction of “super-sovereign currency”. develop.

Limited by the lack of programmability of the Bitcoin network, Bitcoin, the oldest and strongest consensus cryptocurrency, has limited applications in its own network. The emergence of BTC-anchored coins has built a broader stage for Bitcoin. Through this form, it can be extended to Turing-complete blockchains such as Ethereum, and participate in the construction of a prosperous ecosystem as the most consensus underlying asset.

Bitcoin network is still the most secure blockchain network

The Bitcoin network is the earliest blockchain. Judging from the data on the chain, Bitcoin is still the most secure and consensus cryptocurrency today. According to Glassnode data, as of July 18, there are about 640,000 active Bitcoin addresses, and 9 million addresses holding more than 0.01 BTC. Every day 1.17 million BTC is transferred on the chain, which is equivalent to 36.9 billion U.S. dollars, which is equivalent to Bolivia. In one year’s GDP, there are only 94 countries whose GDP exceeds this value in 2020.

Every new round of Bitcoin’s bull market is accompanied by an influx of more users. It can also be said that more and more users have caused the price of Bitcoin to rise. This round of bull market is driven by the adoption of large institutions. of. In October 2020, the international payment giant PayPal announced its entry into the cryptocurrency market, allowing users to use PayPal’s online wallet to buy, sell and hold Bitcoin and other virtual currencies. Almost at the same time, Singapore’s DBS Bank announced the launch of a digital asset trading platform and supported the trading of cryptocurrencies such as BTC. Since then, companies such as Tesla and Meitu have begun to buy Bitcoin. Bitcoin is also gradually moving from a niche to mainstream adoption.

The huge volatility of Bitcoin makes it difficult for many investors to accept, but as more powerful institutional buyers gradually enter the market, the volatility of Bitcoin is becoming lower and lower. According to statistics from BitPremier, from 2010 to the present, Bitcoin’s 30-day volatility has shown a downward trend as a whole. Even during the 3.12 period last year, the volatility was not as good as that between 2010 and 2014. The reduced volatility also allows Bitcoin to be deployed by institutions as an alternative asset. Because there is no correlation between Bitcoin and most mainstream assets, holding a portion of Bitcoin can enhance the diversity of the institution’s basket of assets.

In-depth analysis of how BTC anchor currency issuance forms a safe, efficient and easy-to-use anchor currency?

Throughout the development of Bitcoin, after encountering countless crises, Bitcoin has become more and more well-known worldwide, and the consensus has become stronger and stronger. On August 1, 2017, some miners performed a hard fork at the Bitcoin block height of 478558, and BCH was born. After that, BCH forked out of BSV. They all called themselves “real Bitcoins”, but they were different from Bitcoin. The price ratio has continued to fall. In 2014, MtGox, the largest cryptocurrency exchange in history, closed down due to the theft of $400 million worth of virtual currency. On September 4, 2017, Chinese exchanges began to go overseas due to supervision.

“Anything that can’t kill you will make you stronger.” Various regulations, hacker attacks, etc. have not knocked down Bitcoin, but have made Bitcoin the most secure blockchain network. Altcoin (Bitcoin alternative) is more prone to security issues. For example, the double-spending attack on Bitcoin Gold BTG in 2018 caused the exchange to suffer economic losses of RMB 110 million. Now the price of BTG is only left. Less than 10% of the 2017 high.

The value of BTC’s high-quality assets deserves more applications

BTC, as the highest-quality encrypted asset, should have been widely used, but due to the lack of programmability, long block time, and limited block capacity of the Bitcoin network itself, it has restricted the daily use of BTC. It was once regarded as a lightning bolt of hope. Expansion schemes such as networks are also developing slowly. With the prosperity of the Ethereum ecosystem, BTC, as a high-quality asset, began to be widely used in DeFi applications on Ethereum. At present, the Bitcoin pegged currency issued on Ethereum has exceeded 1% of the total amount of Bitcoin, and this number is still increasing.

The introduction of BTC as a cross-chain asset into other blockchains is beneficial to other public chains, currency holders, and the Bitcoin network itself.

Benefits to other public chains

Bitcoin’s high market value, high liquidity, and low volatility are a high-quality asset for any public chain. Therefore, the anchor currency of Bitcoin is widely used in the lending protocol on Ethereum as the underlying asset. For other public chains that lack assets, the introduction of Bitcoin is even more important.

The increase in asset types also makes the stacking of DeFi Lego safer. Before 3.12 last year, the assets on Ethereum were relatively single, and a large number of assets were liquidated when the market fluctuated greatly. In MakerDAO, a large number of users need DAI to repay their borrowings, and the premium of DAI once rose to more than 20%. If DAI can be borrowed by collateralizing more types of assets, the anti-fragility of the loan agreement can be increased. With the application of cross-chain Bitcoin such as WBTC, this problem has been solved.

Benefits for currency holders

For Bitcoin holders, using Bitcoin on other chains through a cross-chain method can effectively reduce costs and increase usage scenarios. There are many advantages to using Bitcoin as an anchor currency:

  • The transfer cost is lower. When the network is not congested, the transfer cost in the general Bitcoin network is about $5; while the Gas Price in Ethereum is 10 GWEI, the transfer cost of ERC20 tokens is about $1. The transfer costs on other chains such as Solana, Polygon, Harmony, etc. are basically negligible.
  • Transaction confirmation is faster. Bitcoin’s block generation time is about ten minutes, Ethereum is about 13 seconds, and the emerging public chain can complete transaction confirmation within a few seconds.
  • As high-quality assets in agreements such as mortgage lending, transactions, derivatives, bonds, etc., for example, stablecoins and other assets can be borrowed by collateralizing bitcoin anchor currency.
  • It can help currency holders to gain income, which cannot be achieved in the Bitcoin network.

The benefits to the Bitcoin network itself

For the Bitcoin network itself, cross-chain Bitcoin can also increase Bitcoin consensus.

  • Cross-chain means that Bitcoin can be accepted by more users on the network, increasing the number of BTC holders. According to the data on the Ethereum blockchain browser, there are currently 33046 coin holding addresses for WBTC.
  • Conducive to consolidating Bitcoin’s position as a store of value. The native bitcoins are pledged in the bitcoin network, which will not affect the value storage function of bitcoin, and can obtain income through other networks and convert the income into more bitcoin assets.
  • Conducive to increase the actual utility of Bitcoin. Bitcoin’s block generation speed is slow, and it is difficult to be applied in the Bitcoin network. It may take 10 minutes for a transaction to be on the chain, and it takes about 1 hour to wait for 6 blocks to be confirmed. The form of anchoring coins is more conducive to the actual use of Bitcoin. The transaction confirmation speed of blockchains such as Ethereum is faster, and 10 block confirmations can be completed within three minutes.

The issuance method of BTC anchor coin

Bitcoin-anchored coins are a type of tokens that are issued in non-bitcoin networks and whose prices are anchored to native Bitcoin. Currently, the most commonly used bitcoin anchor coins include WBTC, HBTC, renBTC, sBTC, oBTC, and pBTC. As of July 19, the number of bitcoin anchor coins issued on Ethereum alone reached 262,642, and their issuance methods are different.

Cross-chain VS Synthesis

According to the locked underlying assets, Bitcoin anchor coins can be divided into two implementation methods: cross-chain and synthetic.

Cross-chain

The Bitcoin anchor currency realized in this way, its native Bitcoin is also locked in the Bitcoin network 1:1, and then the anchor currency is minted on other blockchains. The most widely used bitcoin anchor coins are implemented in this way, such as WBTC, HBTC, and renBTC.

synthesis

The bitcoin anchor coins generated in this way do not have real BTC as collateral, but use other tokens to “simulate” the casting of assets equivalent to the value of bitcoin, such as sBTC and xBTC.

Comparison of the two: The Bitcoin anchored currency realized by cross-chain method has real Bitcoin as collateral in the Bitcoin network. This process will not generate additional Bitcoin, but the assets are mapped to 1:1 On the other chain. The Bitcoin generated by synthesis does not have native Bitcoin as support at the bottom layer. It can only rely on a lower fund utilization rate and mortgage with Altcoin, which has lower liquidity and greater volatility, which will result in a lower fund utilization rate. It’s low, but it can’t guarantee enough safety. From this perspective, it is more reasonable to use native BTC as a mortgage.

Centralization VS Decentralization

Issuing Bitcoin in a cross-chain manner will inevitably face a problem, that is, the custody of funds. The user’s native bitcoins need to be staked 1:1 in the bitcoin network, and these bitcoins must be kept by someone, and the user must be issued a “voucher” for receiving the native bitcoins. We usually call this type of person a “custodian” square”. There are two ways for the custodian to keep assets: centralization and decentralization.

Centralization

In the Bitcoin-anchored currency issued in a centralized manner, the custody work is completed by a single entity, such as the collateral required for the issuance of WBTC is hosted by BitGo. According to Wikipedia, BitGo was founded by Mike Belshe and Ben Davenport in 2013. It is a digital asset trust and security company headquartered in California, USA.

Decentralized

Not under the control of a single entity, the hosting work is completed by a decentralized decentralized network. For example, in renBTC, the funds are managed by the Ren virtual machine (RenVM), and these virtual machines are also called dark nodes. In tBTC, the system randomly selects signers who create and manage BTC wallets to ensure decentralized custody.

Comparison of the two: a centralized custodian is more likely to have a single point of failure, such as asset theft or even actively stealing users. Decentralized custodial methods are the trend and are more in line with the spirit of the blockchain.

Minting limit & liquidation risk

In the decentralized Bitcoin anchor currency issuance, in order to maintain the security of funds and prevent the custodian from doing evil, in addition to the user’s 1:1 mortgage of the native Bitcoin, the custodian also needs to pledge assets in order to work. The custodian usually pledges not Bitcoin, but other Altcoins, so over-collateralization may be required.

In the existing scheme, renBTC chooses to use REN tokens as the collateral for the nodes, among which dark nodes need to register and pledge 100,000 REN tokens as collateral. tBTC uses ETH as collateral, and the amount of collateral is not less than 1.5 times of the assets under custody. In Synthetix, the overall pledge rate of synthetic assets is as high as 588%. This means that the number of generated BTC anchor coins is limited by the collateral, and over-collateralization will also cause a great waste of funds.

According to CoinMarketCap data on July 15, the current market value of REN is 326 million U.S. dollars, and the market value of renBTC has exceeded REN. Ren’s official documents show that the ideal mortgage rate of renBTC is above 300%, and as long as it is not less than 100%, the security of assets can be guaranteed. However, the mortgage rate of renBTC is now less than 100%. There may be a security risk.

As the demand for Bitcoin anchor coins increases, the problem of minting caps will become more serious. There are already many agreements seeking to reduce the mortgage rate and increase the efficiency of capital use. For example, Synthetix passed a proposal in August 2020 to reduce the mortgage rate from 700% to 600%, and oBTC is also seeking to reduce the mortgage rate from 125% to 115% in the near future. The vote has been held on SnapShot and received 94.17% support. Rate.

The current custody method also faces a problem. The altcoins pledged by nodes are more volatile. When the pledged material drops sharply in a short period of time, it may not be possible to rely on the pledge to maintain the security of the network. .

The ideal properties of a Bitcoin anchor coin

As mentioned above, the ideal Bitcoin anchor currency should have native Bitcoin as the collateral for minting users, and be issued in a decentralized manner. The capital utilization rate and minting limit are high enough, and the liquidation risk is low enough. PANews believes that the ideal attributes of a Bitcoin anchor currency need to include:

  • Fairness: Fully decentralized asset custody. The custodians have the same weight in the random network and can freely enter and exit at any time, preventing a single point of failure of the custodian, so that the custodian cannot steal the original BTC assets in the system.
  • Security: The collateral of minting users is native Bitcoin, and the mapping is only done 1:1 in the new network, and there will never be a risk of decoupling.
  • Anti-censorship: Without KYC, anyone can create, exchange, and use Bitcoin-anchored coins, regardless of their identity or jurisdiction.
  • High coin capacity: Do not limit the number of bitcoin anchor coins due to its own mechanism design, and ensure that the number of bitcoin anchor coins that can be minted should be as large as possible.
  • High fund utilization rate: When the network is sufficiently secure, the mortgage rate of the custodian should be as low as possible, and the price of mortgage assets should be stable enough to increase the fund utilization rate. The total pledge rate of most BTC-anchored coins in the market is above 250% (sBTC: 600%, tBTC: 250%). The higher the total pledge rate, the lower the capital efficiency.

In order to solve the above problems, DeCus proposed a new decentralized cross-chain coin minting program.

First of all, the collateral of the custodian is BTC assets, initially WBTC, and then gradually expanded to cross-chain BTC including cross-chain BTC minted by itself. In theory, it can accommodate all BTC minted into cross-chain BTC through mortgage.

According to an SCI paper by Dr. Yang Guang, the research director of Conflux, an efficient escrow model was formed and a self-adjustable escrow network was established. The custodian does not even need a full mortgage to ensure the security of the overall network.

According to DeCus’s overlapping grouping scheme, as the network matures, the more custodians, the mortgage rate will decrease.

In-depth analysis of how BTC anchor currency issuance forms a safe, efficient and easy-to-use anchor currency?

This has formed the three core advantages of DeCus, namely, complete decentralization; the pledge rate of the custodian is low (the pledge rate is about 20%), and the utilization rate of funds is high; users and custodians pledge all bitcoins, and there is no liquidation Risk of decoupling. Similarly, DeCus’s cross-chain BTC can also maintain the advantages of faster transaction confirmation, cheaper transfer fees and other blockchains.

In addition, DeCus also plans to split the cross-chain BTC for ease of use. Now that the value of 1 BTC is too large, DeCus will issue the split currency SATS of Bitcoin. 1 BTC = 100 million SATS. SATS and BTC can be swapped at any time in a fixed proportion. Because there are native BTC pledged by minting users and cross-chain BTC pledged by the custodian, SATS will be sufficiently safe.

Text | Jiang Haibo 

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