In this article you will learn all about tBTC, what it is, why would you use it and different applications of a synthetic bitcoin.
- What is tBTC?
- How is tBTC Made?
- Don’t we already have Pegged or Wrapped BTC?
- DAI and tBTC
- What is the Use of TBTC?
What is tBTC?
Simply put, tBTC is a decentralized, trustless ERC20 token representation of Bitcoin, on the Ethereum network – Ethereum Tethered BTC. It allows Bitcoin to easily be integrated into the Ethereum ecosystem for smart contracts. tBTC is being hailed as a critical infrastructure piece for the success of not only DeFi, but also the Bitcoin and cryptocurrency industry altogether.
tBTC refers to the project/protocol itself, whereas TBTC refers to the fungible Bitcoin-backed token, and will likely be an eventual ticker.
tBTC is not live yet. It exists right now on the Ethereum Ropsten testnet.
In order to be robust and maintain the bitcoin hard money status, tBTC must remain:
- Censorship and seizure resistant
- Inflation resistant (no fractional reserves, require proof of BTC backing)
- Leverage resistant – no cross-chain printing of synthetic bitcoin.
- No middlemen
A noticeable difference between a Bitcoin peg vs. a stablecoin fiat peg is that a bitcoin peg does not require and artificial price peg, since 1 TBTC = 1 BTC. There is no fiat dollar fluctuation.
How is tBTC Made?
tBTC is minted by sending a deposit request to the tBTC smart contract on Ethereum. The depositor must also stake some ETH – the deposit bond – an anti-spam mechanism, which is returned once the deposit process is complete. Additionally, there is a system of signers in tBTC ecosystem that are randomly selected as a signing group to generate a multi-sig public BTC wallet address, and these signers must also bond ETH as collateral – this incentivizes aligned interest in the signers and is used to penalize bad actors. Once the public multi-sig wallet is created and all deposits are confirmed on-chain, the Ethereum smart contract mints new tBTC. The mechanism for minting TBTC is very similar to MakerDAO minting of DAI stablecoin. (Source – DeFi Rate).
Don’t We Already Have Pegged or Wrapped Bitcoin?
Yes, there are two centralized versions of a pegged/wrapped bitcoin:
- WBTC (Wrapped Bitcoin)
- Liquid sidechain
WBTC is an ERC20 “wrapped bitcoin” token, created and managed centrally by the “Wrapped Bitcoin Consortium”.
The Wrapped Bitcoin Consortium consists of: BitGo, Kyber Network and Ren (Republic protocol). The consortium votes in and out custodian members and manage the bitcoin reserves. They hold multisig wallets containing the bitcoin and are responsible for minting WBTC tokens on Ethereum and sending them to the depositor of the BTC. The consortium is in control of all keys, and they are able to move the custodied bitcoin as they wish.
WTBC has actually been quite successful so far, holding roughly 890 BTC (at the time of writing this article).
The bitcoin reserves can be audited on-chain at any time. It is a relatively simple mechanism. The multisig allows any one user to withdraw the reserve bitcoin at any time – likely intended for the depositor, but what is to stop a consortium member from doing so?
The Liquid Sidechain was developed by Blockstream and consists of an inter-exchange settlement network based on a “federated peg sidechain”. This means that bitcoin is locked in a 15-signer multi-sig wallet comprised of exchanges and Liquid participants (hand-picked by Blockstream).
A sidechain is created/issued from the locked up bitcoin and the Liquid federation members validate blocks on the sidechain in something called “strong federation” which simply means a majority vote to sign blocks and agree to approve exists to the main chain.
In both instances of WBTC and Liquid Sidechain, there is a multisig wallet that is used to lock up bitcoin, and then another blockchain issues tokens representing that bitcoin.
The downside to WBTC and Liquid are that they are centralized projects. The Custodians need to be trusted. The bitcoins are held by Custodian Institutions and Merchants facilitate the conversion of BTC to WBTC by performing the KYC/AML procedures, and then the smart contract issues the ERC20 token. Although, they do have on-chain proof-of-reserves visible for anyone to audit.
The major difference between WBTC, Liquid Sidechain and TBTC is that the former two are centralized and the latter is decentralized. This is also the greatest weakness of WBTC and Liquid Sidechain. Custodians need to be trusted. Despite good intentions, they can either behave maliciously, tamper with reserve supply or be compelled to comply with government subpoenas or hacker threats.
DAI and tBTC
Similarly to WBTC/Liquid and tBTC, we have centralized USD pegs as well as a decentralized USD peg – DAI.
There are multiple centralized digital USD tokens, also known as stable coins, such as USDT, TUSD, USDC, GUSD etc. These networks have custodians who hold the depositors USD in reserve and convert the fiat US dollars into ERC20 (and other) tokens that are digital representations of USD. These tend to be highly centralized as there needs to be an actual bank institution that holds the fiat USD in reserve, in order to back the digital tokens of USD. This is expensive, less transparent, requiring audits and highly centralized. Some reserves are even used for investments and/or USD tokens are being backed by fractional USD reserves. These are even less desirable than centralized wrapped bitcoin.
Conversely, the DAI ERC20 token is a decentralized version of a digital USD. There is no central authority, no KYC/AML. It only uses locked-up Ethereum in smart contracts that use interest rates to set a stable DAI price that is matched/tethered to the USD price. It is certainly one of the most successful USD stable coins in existence.
TBTC is similar to DAI in that it is also entirely decentralized, using smart contracts to tether the price of the ERC20 token to the BTC price. It also has no KYC/AML procedure.
Just as DAI is an open, trustless, verifiable, mathematically enforced USD peg, tBTC is also an open, trustless, verifiable, mathematically enforced tethered/wrapped bitcoin in the Ethereum ecosystem.
What is the Use of TBTC? Why Have/Own tBTC?
Apparently the cryptocurrency community has been interested in a tethered bitcoin for some time, and prior attempts were made with WBTC and Liquid Sidechain. Although there is no widespread adoption of these tokens.
TBTC is a bitcoin peg with numerous potential uses:
- Functionality in smart contracts
- Scalability extensions
- Liquidity on DEXs
If Ethereum truly scales with ETH 2.0 then tBTC could be the real second layer scaling solution. This would also make Ethereum more valuable and secure.
Smart contracts in Bitcoin – or a TBTC – would have a vast number of uses, as it would bring the flexibility of Ethereum to the hard-money characteristics of Bitcoin and allow people to complete contracts priced and settled in Bitcoin – or TBTC.
Final Thoughts: tBTC is a Force to Contend With
Just as Bitcoin and Ethereum themselves are fully decentralized cryptocurrencies that can be used by anyone in the world without the oversight of a government or financial authority, tBTC preserves that functionality and adds scalability and flexibility in smart contract integration.
While tBTC is not live yet, it has huge potential implications. I think that this development is definitely one of the top developments of the next couple of years. As Bitcoin approaches its halving, and Ethereum 2.0 is being deployed the value of bitcoin will rise and the wide range of uses (and value) of Ethereum will grow exponentially.
I am personally looking forward to the next 3-4 years and the applications that TBTC will have.
Please feel free to drop a comment, question, or note for me. I love hearing from my readers
- Bitcoin.com News – Ethereum’s Wrapped Bitcoin Set to Eclipse Lightning Network Capacity.
- Crypto Potato – What is Bitcoin backed ERC20 (WBTC)? How could it change the Bitcoin – Ethereum interaction?
- Blockonomi – Trustless Bitcoin in Ethereum DeFi: Examining the Possibilities of tBTC
- Toshi Times – What is tBTC and why it matters for Ethereum developers
- DeFi Pulse – What is tBTC?
- DeFi Rate – WBTC vs. TBTC
- Crypto Briefing – Bitcoin Set to Join in on DeFi Hype with tBTC Launch
- tBTC – tBTC White Paper
- WBTC Network – https://www.wbtc.network/
- WBTC – WBTC White Paper