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Hype of the Week: Bitcoin Interoperability

Blockchains are singular entities with unique characteristics. Hence, many blockchain ecosystems lack interoperability, resulting in cross-industry fragmentation. This week, we will be looking into some of the projects responsible for facilitating greater interoperability between differing blockchains.

DeFi

At present, 204 out of a total of 250 listed DeFi projects call Ethereum’s blockchain home. The reason for this is due to the ease at which DeFi projects can utilize essential DeFi tools (smart contracts and ERC-20 token). Conversely, Bitcoin is by far the most held crypto, with a market capitalization 5 times greater than that of Ethereum’s. However, due to blockchain interoperability, the Bitcoin blockchain functions independently from the Ethereum blockchain. Thus, over $1billion worth of Bitcoin have been moved to Ethereum as Bitcoin-holders hope to join in the DeFi boom.

Existing Solutions

Due to the lack of the interoperable nature of blockchains, several projects have emerged that aim to help Bitcoin-holders access the DeFi markets and projects housed on Ethereum.

Wrapped Bitcoin (WBTC)

WBTC is an ERC-20 token that functions as a representation of Bitcoin for use on the Ethereum blockchain and is backed 1:1 with Bitcoin. WBTC was launched in January 2019, by a collection of projects within the DeFi space (BitGo, Ren, Compound, MakerDao etc.). The aim was to bring the vast Bitcoin market to the Ethereum network and the DeFi projects located there. Key features of WBTC consist of an entry and exit point for Bitcoin-Ethereum conversions and a centralized custodianship, which insured that such conversions would not be lost.

Trustless Bitcoin (tBTC)

tBTC, was created by the Cross-Chain Group (CCG) and allows users to deposit their Bitcoin and receive a 1:1 ERC-20 token equivalent. CCG focused their efforts on making tBTC more decentralized and resistant to censorship, seizure inflation and leverage. The “trustless” element of tBTC stems from their custodian set-up, which uses a SPV proof (deposit and fraud proofs). Thus, a “trustless custodian” is responsible for the discrete and secure conversion of assets between the Bitcoin and Ethereum blockchains.

Ren Bitcoin (renBTC)

renBTC is a product of the Ren project, which aims to provide users with access to inter-blockchain liquidity. The project revolves around RenVM, established in May 2020, which operates as a trustless custodian. This means users send their Bitcoin to RenVM, which stores the Bitcoin on their network, where each node running the RenVM holds a small piece of the Bitcoin address’ private key in secret — with the Bitcoin only accessible if consensus is reached. Then a renBTC is minted which has a 1:1 backing on Ethereum and can be used like any ERC-20. RenVM also converts BCH and ZEC.

Opportunities with Bitcoin on Ethereum

With the help of the three projects mentioned above, Bitcoin-holders can now access a multitude of exciting and potentially profitable DeFi projects. Some of these projects include MakerDAO, a decentralized Reserve Bank, Compound, which enables the borrowing and lending of cryptos for interest or partake in the liquidity pools offered on the decentralized exchange Uniswap. Thus, through interoperability projects, the industry is becoming less and less fragmented and more convenient for users.

If you wish to know more about the interoperability projects, follow the links below:

https://wbtc.network/

https://tbtc.network/

https://renproject.io/

Author: Stephan Eduard Pàl Roth

Contact: stephan@accointing.com

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