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Tokenized Bitcoin — Comparison of different approaches

Toxonaut
Toxonaut
Nov 20, 2019 · 9 min read

(Updated 1/28/20) Recently several approaches have been made to tokenize Bitcoin and move it to other blockchains with different properties. The individual projects have various degrees of decentralization and trustlessness depending on how the 1:1 peg to the original Bitcoin blockchain is achieved and how decentralized the host blockchain is. The reason why there is an interest in tokenizing Bitcoin is to enable functionality which is not natively supported by the Bitcoin blockchain such as compatibility with the Ethereum DeFi ecosystem, increasing the transaction speed, privacy and fungibility. Of all crypto-currencies Bitcoin is considered the hardest money, so it would only make sense to make it compatible with the growing number of DeFi services and be able to use it e.g. as collateral for loans, etc.

In the following, I will describe both already existing solutions as well as projects that are still in development.

Existing Bitcoin tokens

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Wrapped Bitcoin (WBTC) went live on Ethereum at the beginning of 2019. It is an ERC-20 token and backed 1:1 with real Bitcoin. WBTC is a custodial solution where a federation of custodians keep real Bitcoins locked up and issue corresponding WBTC tokens. The governance model is via a DAO (Decentralized Autonomous Organization) in which the community has a say in the direction of the project. Custodianship is secured by multi-sig contracts that require multiple parties within the DAO to sign transactions.

WBTC is currently the only significant player in the DeFi space with listings on lending platforms such as Compound, Nuo and Fulcrum. Lending rates are between 0.13% and 3.57%.

WBTC can be obtained in two ways: By contacting one of the WBTC partner merchants and sending them BTC in exchange for newly minted WBTC tokens. This approach requires a KYC/AML check. WBTC can also be exchanged for fiat or other cryptocurrencies on centralized or decentralized exchanges such as Bitfinex or DDEX. DEXes allows users to keep complete custody of their funds at all times by e.g. directly trading from hardware wallets etc.

Use case: Use BTC for (more or less) trustless lending or use as collateral for borrowing other assets on platforms such as Compound.

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Bitcoin BEP2 (BTCB) is a tokenized Bitcoin on the Binance chain that is backed 100% by native Bitcoin. Binance acts as the custodian and lets people audit the total amount of funds held via their published Bitcoin reserve address. The main raison d’être for BTCB is to be able to trade other assets on Binance’s decentralized exchange (DEX) Binance DEX against Bitcoin.

Binance chain on which Binance DEX runs uses a consortium of validators for its consensus algorithm (PBFT) which allows faster block times than Ethereum. Additionally, fees are also lower than on Ethereum adding to enhanced user experience while using the DEX. There are however less trading pairs for Binance chain based tokens than within the Ethereum ecosystem where most of the token activity currently happens. There are also no DeFi products running on BEP2 tokens yet. Furthermore, the enhanced user experience/speed comes with sacrifices in decentralization as the user has to trust both Binance with the custody of the underlying BTCs as well as the consortium of validators with running the blockchain.

BTCB can be traded against real Bitcoin on Binance (the normal, centralized version) or against BNB or a BEP2 version of the USDS stablecoin.

Use case: Decentralized trading on Binance DEX using BTC pegged token. Selling BTC (held as BTCB) quickly for USD directly from a hardware wallet.

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SBTC and IBTC are synthetic assets (or synths) built on the Synthetix platform atop of Ethereum. Synths are considered to be more trustless than e.g. WBTC because they do not require the underlying asset to be held. They are implemented as ERC-20 tokens and pegged against any crypto, real-world asset, index etc. Synths are backed by the Synthetix Network Token (SNX), which is staked at a ratio of 750% thus providing enough collateral to absorb large price shocks. Assets on Synthetix are assigned an exchange rate through price feeds supplied by an oracle and can be exchanged on the Synthetix exchange app. There are trading pairs for SBTC against other synths such as SETH, SUSD, SEUR and even precious metal pegged tokens such as SXAU (gold) and SXAG (silver). Synthetix also allows the creation of synths that are inversely correlated to the asset they are tracking. IBTC, for example, tracks the inverse Bitcoin price and can be used to take a short position in Bitcoin by simply buying into it.

Getting into the Synthetix ecosystem is currently achieved by exchanging Ethereum for SUSD or by buying SNX on an exchange and minting SUSD with it on Mintr. SBTC or any other synth can also be minted with SNX using the smart contract directly but this involves the understanding of the contract. The most straight forward way is to get SUSD as described above and then exchange it for SBTC on the Synthetix exchange.

Use case: Decentralized trading of BTC on Ethereum for other assets. IBTC for shorting BTC.

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LBTC is Bitcoin that has been locked up on the Bitcoin blockchain and unlocked on the liquid sidechain via a two-way peg mechanism. The liquid blockchain is operated by a federation of functionaries which removes the need for Proof of Work. Liquid produces blocks every two minutes by the block signers in the federation. This comes with a range of features such as a fast settlement time of two minutes, confidential transactions (amount sent hidden) and the possibility to issue other assets on top of liquid.

The main functionality of Liquid is to enable fast settlements of funds across different cryptocurrency exchanges. Though Liquid transfers are not as safe and decentralized as native Bitcoin, trusting the liquid functionaries who are crypto exchanges themselves should be acceptable for traders as they keep their funds on centralized exchanges anyway. Currently, a range of exchanges offer conversion of Bitcoin to L-BTC and back, as well as withdrawals and deposits of L-BTC such as Bitfinex, The Rock Trading, and Coinut.

Use case: Quickly transfer BTC from one exchange to another to profit from arbitrage opportunities.

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As in the example above with liquid, RBTC is Bitcoin which has been “moved” from the BTC blockchain to a sidechain, in this case, the Rootstock (RSK) sidechain. The two-way peg between BTC and RBTC is achieved by a federation of trusted members. Transactions, on the other hand, are not signed off by the federation as with liquid, but secured through merged mining with Bitcoin. As a big percentage of Bitcoin miners also mine on RSK a considerable amount of hash power is accumulated providing high security to the RSK network. Block times are 33 seconds, making the network also faster than Bitcoin.

RSK was developed to enable smart contracts on Bitcoin. It is compatible with Ethereum and allows to port solidity code over to the Rootstock ecosystem and thus running Ethereum applications with Bitcoin’s security. There are only a few projects built on RSK so far. One interesting example is Money on Chain, a Bitcoin collateralized stable coin and DEX platform running on RSK.

RBTC can be exchanged for BTC on a couple of exchanges such as Bitfinex, KuCoin or Huobi Global.

Use case: Enabling functionality of Ethereum on Bitcoin.

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imBTC is an ERC-20 token backed 1:1 with Bitcoin . It can be generated by locking up Bitcoin using the imToken wallet from Tokenlon. Locking up Bitcoin sends BTC to a multi-signature account and simulatneously mints an equal amount of imBTC tokens. These tokens can then be used on Ethereum DeFi apps and later reimbursed again for BTC. While not trustless, the locking/unlocking process is fully automatic and easy to execute. An interesting feature of imBTC is that it bears interest by simply holding it. This interest comes from Fees incurred by other users transforming BTC to and from imBTC and amount to about 1% annually. imBTC can also be lent out on lendf.me for additional profit.

Projects in development

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Ren is a platform with the goal of making tokens of different blockchains interoperable, allowing DEXes and DeFi apps to leverage the liquidity available on various crypto ecosystems. At the core of Ren is RenVM virtual machine which runs on a decentralized network of thousands of so-called dark nodes. RenVM allows the generation of gateways e.g. a special address on the Bitcoin blockchain. When BTC is transferred to this address RenVM takes custody of the coins and mints a representation of it on the host blockchain (e.g. an ERC-20 token representation of BTC on Ethereum). The Ren documentation describes an example ZBTC ERC-20 token which could be issued that way. Possible applications are DEXes with trading pairs outside of their native blockchains (e.g. BTC on Ethereum). Other applications could be lending or providing collateral for DeFi applications using tokens of other blockchains.

Currently, ZBTC can be issued on https://roundabout.exchange/ (unaudited, so be careful) and exchanged for other currencies on Uniswap.

Use case: Interaction of smart contracts with tokens of other platforms. Issuance of tokens pegged to tokens on other platforms.

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pTokens aims to solve liquidity and interoperability between blockchains by providing ERC-20 token versions of non-Ethereum blockchain currencies. The project is currently implementing pEOS, an ERC-20 version of EOS, but will later add more coins such as pBTC. The way pTokens couple the original asset with the ERC-20 representation is by running each involved blockchain simultaneously in a Trusted Execution Enclave (TEE)— a physical piece of hardware. The Enclave has access to both sets of keys and can execute transactions on both blockchains effectively linking the two assets together. Decentralization will be achieved in a later stage by spreading the operation out to a federation of operators with multiple TEEs each.

pBTC can be issued here on Ropsten testnet using testnet BTC. The company said that it is in contact with various DeFi projects to later enable it there.

Use case: Issuance of tokens pegged to tokens on other platforms to enable DeFi applications on them.

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tBTC is a system that allows users to mint TBTC by depositing Bitcoin into an address trustlessly created and controlled by a group of signers. Users don’t have to trust the signers because they have to deposit a bond (in Ether) higher in value than the BTC in custody (150% collateral). TBTC can be redeemed again for BTC via the signers. For this, the user has to submit a redemption request to the tBTC smart contract which will generate and publish a transaction signature that can be published to the BTC network. The advantage of this system to custodial solutions like WBTC is that anyone can convert BTC to TBTC or redeem BTC for TBTC without having to go through any KYC/AML.

Use case: Usage of BTC in DeFi applications.

It is clear from the examples shown in this article that there is a big interest in increasing Bitcoin’s functionality by enabling representations of it on other blockchain systems. Which of these projects will succeed in the end has to be shown, but the fact that there is so much activity in this space underscores the importance of Bitcoin as hard base money in the crypto sector.

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Toxonaut

Written by

Toxonaut

Hobby researcher of upcoming tech in Bitcoin and DeFi. Follow me on Twitter @cryptobasel

Coinmonks

Coinmonks

Coinmonks is a non-profit Crypto educational publication. Follow us on Twitter @coinmonks Our other project — https://coincodecap.com

Toxonaut

Written by

Toxonaut

Hobby researcher of upcoming tech in Bitcoin and DeFi. Follow me on Twitter @cryptobasel

Coinmonks

Coinmonks

Coinmonks is a non-profit Crypto educational publication. Follow us on Twitter @coinmonks Our other project — https://coincodecap.com

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