ckBTC Sparks a New Era on the Internet Computer
Over the last few years, blockchain developers have explored new ways to smoothly integrate BTC (and the Bitcoin network at large) with decentralized finance (DeFi) applications. Most dev teams have focused their efforts on wrapped Bitcoin (WBTC) solutions, but while WBTC does offer some benefits, these tokens (and similar knockoffs) have proven themselves to be deeply flawed — fraught with persistent security and counterparty risks.
But take heart, engineers working on the Internet Computer Protocol (ICP) have found a way forward with chain key Bitcoin. Popularly referred to as ckBTC and powered by chain key cryptography, chain key Bitcoin may forever transform DeFi for the greater good.
ckBTC is an ICP-native token backed 1:1 with real BTC, governed on chain by Internet Computer smart contracts. Think of ckBTC as a (highly fungible) twin token of Bitcoin — a 100% mirrored asset that uses chain key cryptography to own and control all underlying Bitcoin. ckBTC extends the ICP protocol stack so the blockchain behaves like a virtual layer 2 solution that is faster, less expensive, and more environmentally sustainable than the Bitcoin network.
Note that ckBTC is not a bridged or wrapped token; these are important distinctions and point to the core of what makes chain key Bitcoin so valuable.
The Issue with Bridges
In February 2021, FTX, the now-defunct cryptocurrency exchange, launched a new token called Solana Wrapped Bitcoin (SOBTC), a BTC clone designed to run on the Solana blockchain. The token gained significant praise at the time, going on to trade on several exchanges including FTX and Serum DEX, the largest cryptocurrency exchange on the Solana Blockchain. However, on the week of November 6th, 2022, SOBTC’s price fell off a cliff, losing almost all its value in a matter of minutes.
As of writing, the market price of SOBTC stands at $1,191.89, approximately one-fifteenth the value of BTC.
Allegedly pegged one-to-one with BTC, SOBTC was created to provide faster and cheaper BTC transactions compared to the Bitcoin network. On paper the tokenomics of Solana Wrapped Bitcoin looked sound; after all, FTX was the primary issuer of SOBTC tokens. But once FTX, the leading liquidity provider for SOBTC, crashed and burned, so did the value of its ironically celebrated BTC derivative token.
Like so many wrapped tokens, SOBTC was intended to enhance blockchain interoperability, increase interchain liquidity, and create new use cases for decentralized finance (DeFi), but in the throes of its quick demise, it only caused significant losses for investors who held the currency.
Traditional wrapped BTC tokens are doomed to fail because they require “bridges”, i.e. a user moves their Bitcoin to a bridge, and a third-party custodian on the bridge says, “OK, I will hold this for you. Please take this equivalent wrapped token and don’t worry about your BTC; it’s completely safe with me on this bridge. Go transact your business on blockchain x with all this Bitcoin I have wrapped.”
However, this type of bridge model is problematic for several key reasons:
Centralization: WBTC relies on a centralized system to hold and manage the underlying BTC reserves backing the tokens. Therefore, users must place trust in the custodian who holds the reserves (which goes against the decentralized ethos of Web3).
Counterparty Risk: As we’ve seen several times in recent years, trusting a third party with your coins is rarely a good idea. There is always a risk the custodian could mismanage the reserves or be subject to hacking, theft, or other types of security breaches.
- In the case of SOBTC, it appears FTX may have been surreptitiously siphoning off their customer’s bridged funds through a “backdoor” on a regular basis.
- Many bridge custodians have engaged in the hypothecation of bridged assets, lending out customer tokens to questionable third parties, thereby introducing “fractional reserve” risk to the wrapped assets in their purview.
Complexity: The process of converting BTC to WBTC and back can be complex and time-consuming for users and developers alike. WBTC requires a higher level of technical expertise and knowledge, as the handling of Bitcoin UXTOs is tedious and error-prone..
Bridge Hacks. Cybercriminals stole over 3.6 billion dollars in cross-chain bridge hacks last year alone through code exploitation, fake token issuance, and transaction manipulation. Attacks on bridges accounted for over 70% of total funds stolen in 2022.
Fortunately, the days of bridges and wrapping of tokens, with their endless issues of liquidity, latency, security, and complexity, are drawing to a close. A superior approach for executing native Bitcoin transactions has emerged, thanks to the Internet Computer Protocol and ckBTC.
There is a Better Way
With ckBTC, Bitcoin-based commerce is trustless, running natively on ICP smart contracts, where code is the law; there is no need for BTC transactions to be processed through a traditional bridge or anonymous fiduciary.
The Internet Computer has expanded its underlying protocol and technical architecture to virtually “attach” to the Bitcoin network, managing the holding, redemption, and transacting of BTC without the need for an intermediary. The same technology stack used to power the ICP is directly managing all on-chain BTC and executing the smart contracts on its behalf. The keys for managing the BTC are controlled by a subnet underwritten by ICP’s breakthrough chain key technology — the same handshake threshold solution that underwrites the entire ICP network. ckBTC does not require users to trust a third party or bridge-centered vaults (although they do have to have confidence in the Internet Computer Protocol and the Bitcoin Network).
It is important to note that ICP native BTC integration differs greatly from the Lightning Network in that Lightning is only a payment channel, with no smart contracts and no decentralized finance apps or exchanges (and thus little liquidity) in its ecosystem.
ICP Canisters: Where the Magic Happens
Canisters on the Internet Computer can receive, hold, and send Bitcoin, integrating directly with the Bitcoin ledger and signing BTC transactions in real-time at the protocol level. All BTC still lives on its native chain; the tokens never leave the Bitcoin network. However, control over the asset originates from an Internet Computer subnet, similar to how a DAO controls a dApp.
ICP canisters are essentially BTC users. Technically speaking, the BTC network does not know the difference between an IC canister or a Ledger hardware wallet. The end controllers of the asset are more or less “artifacts” using chain-key ECDSA signatures — an advanced variant of threshold ECDSA tailored to the Internet Computer — to sign transactions.
Internet Computer subnets connect to the Bitcoin network, using their numerous nodes to pull in its complete ledger (approximately 30 gigs) of transactions. Meanwhile, through ICP Threshold ECDSA signatures, canisters have Bitcoin addresses, allowing them to securely hold BTC while they submit BTC transactions via smart contracts.
A New Dawn of Possibilities for BTC
Because ckBTC is such a new paradigm in blockchain technology, it is somewhat difficult to break down its value proposition in an easy-to-understand way. As with all innovations in blockchain tech, a whole new vocabulary is required to characterize the mechanics and merits of ckBTC accurately.
ckBTC offers the first bonafide use case for bringing smart contracts to BTC. All of DeFi will soon begin building on ICP, where processing is more secure, faster, environmentally friendly, and cost-effective.
About the Internet Computer
The Internet Computer, developed by the DFINITY Foundation, is the world’s first truly decentralized and infinitely scalable public blockchain. Operating at web speed, the Internet Computer (IC) blockchain runs end-to-end on a sovereign network of dedicated machines, hosted by independent node providers around the globe, making IC the only blockchain that does not rely on centralized cloud nodes. The Internet Computer blockchain is governed by the Network Nervous System, a protocol-integrated DAO where token holders have the power to vote on the future of the network.
Hundreds of dApps are now hosting Web2-style applications (websites, mobile apps, etc.) entirely on chain at web speed, as ICP increasingly becomes a decentralized alternative to the current public internet. Presently, the Internet Computer processes upwards of a half billion transactions per day — with significantly reduced energy consumption and costs — making ICP the world’s most productive blockchain.
With the Internet Computer, the promise of a truly decentralized internet — a trustless “World Computer” upon which the broadest possible range of internet services can exist amongst massively distributed computers — has come to fruition.
About the DFINITY Foundation
The Switzerland-based DFINITY Foundation, a not-for-profit organization dedicated to developing the Internet Computer blockchain, was founded in 2016 by its Chief Scientist Dominic Williams. DFINITY’s Zurich headquarters contains the largest blockchain R&D center in the region and boasts one of the most extensive R&D teams in the industry, with many world-renowned cryptographers, researchers, and engineers. Including its research center in San Francisco, California, DFINITY employs over 200 people globally.
