The Future of Interoperability

Interlay’s Vision: Trustless and Decentralized Cross-Chain DeFi.

Alexei Zamyatin
Oct 25, 2021 · 9 min read

tl;dr

  • $17 billion worth of BTC is at risk — and could crash the entire DeFi market.
  • interBTC revolutionizes how BTC is used in DeFi — trustless and decentralized. It’s like DAI, but better (you can redeem for physical BTC!).
  • interBTC is just the start. More assets on more chains. Cross-chain DEX and OG NFTs. Smart contracts and moonshot projects.
  • 1st moonshot project WIP: non-custodial BTC DeFi. Keep BTC in your wallet, earn yield with 1 click. Soon(TM)

Mission: Any Asset on Any Chain. Trustless.

No more centralized custodians.

No more censorship.

No more Mt. Gox-like events.

The wise, old “not your keys, not your coins” dogma brought to blockchain interoperability.

Our path began with Bitcoin — the king of all crypto assets. Others tried to engineer DeFi onto Bitcoin. We decided to do the opposite: bring Bitcoin to the exponentially growing DeFi ecosystem.

We built interBTC, Bitcoin on any blockchain. A 1:1 Bitcoin-backed asset, fully collateralized, interoperable, and censorship-resistant. interBTC will bring trustless Bitcoin to any blockchain, starting with Kusama and Polkadot — it’s home-base — and will spread to all other major DeFi networks.

The Past: A Custodial & Centralized Reality

Take a moment to look around and you will find the old, centralized ways sneaking their way into DeFi. And interoperability is leading in this category.

Nearly all cross-chain bridges in use today are centralized and custodial. Users give up control over their assets and trust a 3rd party to maintain the bridge — without any repercussions in case of theft or failure, be it as part of a technical security issue or a regulatory event.

Two Types of Bridges

  • Smart contract <> Smart contract bridges connect two chains that both support smart contracts. This includes the bridges between Ethereum and Solana, Avalanche, Near, and Polkadot. To this date, most apply a centralized approach, rather than using advanced verification techniques or cross-chain light clients. Few exceptions are Near’s Rainbow bridge and the upcoming SnowFork bridge between Ethereum and Polkadot, which have overcome the technical challenges and made use of the available smart contract functionality to come up with trustless solutions.
“No smart contract >> smart contract” (left) vs. “smart contract <> smart contract” bridges

Interlay’s interBTC falls into the latter category.

interBTC: Decentralized and Insured BTC DeFi

Interlay’s interBTC brings decentralization and economic security to custodial bridges. It is based on the XCLAIM protocol, published back in 2018 as a peer-reviewed security paper by Interlay co-founders — with significant practical improvements conceived in the years since then.

The interBTC lifecycle: from BTC to DeFi and back in a few simple steps.

To mint interBTC, users lock BTC with custodians — so called Vaults. Yet Vaults are not trusted. They must lock collateral in various assets, such as DAI, DOT, USDC, with the interBTC bridge (more precisely, the Interlay parachain on Polkadot). If a Vault steals or loses BTC, their collateral is slashed — and users reimbursed.

This simple, but effective principle, together with sophisticated collateral balancing, cross-chain verification and governance mechanisms, earns interBTC three key properties:

  • Radically open. Anyone can become a custodian of BTC (= Vault), anytime. Anyone can keep their own BTC in custody. Vaults can implement additional security measures like threshold signatures, trusted execution environments, MPC protocols and the like. But they don’t have to. If one Vault goes down, it will not affect the other Vaults in the network. No-one can stop anyone from running a Vault.
  • Secured by Insurance. Every custodian of BTC (= Vault) must provide more collateral than the value of BTC they are keeping in custody. Vaults lock collateral on the bridge in various digital assets. If Vaults misbehave, their collateral is slashed and users reimbursed. Users only trust that Bitcoin and the DeFi platform they use are secure.
  • Community-owned. Any user and custodian providing liquidity to the bridge (BTC, KSM, DOT,…), KSM/DOT crowdloan contributors, early backers, and builders will steer the success of the network via their governance tokens. They control the collateral assets, economic parameters of the system, and future innovations.
Trusted and centralized bridges (left) vs. interBTC’s decentralized and economically trustless design (right).

“Why should we care?”

The reason is simple.

Because there are more than USD 17 billion worth of BTC locked in centralized, custodial bridges. USD 17 billion that are backed by nothing but trust in a few centralized providers. USD 17 billion that will be instantly worth 0 if the centralized custodians are hacked, subpoenaed, lose their keys, or decide to steal. USD 17 billion that would turn into USD 0 — and cause a cascade of liquidations and failures across the entire DeFi ecosystem, hitting both small and major players (e.g. MakerDAO) alike.

USD 17 billion worth of BTC that stands in contrast to what Bitcoin set out to achieve.

The top 3 wrapped BTC providers are all centralized and account for $17.5 billion worth of locked BTC (99% of all wrapped BTC). Source: https://defipulse.com/btc

USD 17 billion that could be secured by a decentralized set of collateralized interBTC Vaults. A system, where the worst case scenario, if all Vaults collude and run away with BTC, is that interBTC would be backed “only” by a sophisticated multi-collateral system — and users could get their money back, should they want to.

Indeed: the “worst case” scenario for interBTC, if all BTC is simultaneously stolen, is becoming the equivalent of Maker’s DAI for Bitcoin: a BTC stablecoin backed by multi-asset collateral and price oracles. That doesn’t sound too bad, does it?

The Grand Coup: Non-Custodial Cross-Chain DeFi

Attentive readers by now spotted that interBTC is decentralized and economically trustless — but still custodial. Yet, our vision was driven by the “not your keys, not your coins” dogma?

Unfortunately, we have realized and proven that it is impossible to build a fully fungible wrapped BTC asset while keeping the bridge non-custodial. Once again we are forced to choose between usability and security.

But, do we really need fungibility?

If we take a look at DeFi today, asset fungibility is achieved by following standards such as ERC20. Often, however, assets in DeFi actually do not need to move freely: supplying collateral for stablecoins like Maker’s DAI or Acala’s aUSD does not require the collateral asset to be transferable between users. Rather, the collateral asset is locked with a smart contract in a non-custodial manner by the user taking out the stablecoin position.

Codename: LayBTC

Imagine: BTC in your wallet while you earn DeFi yield on Polkadot, Ethereum etc. with only 1 click. BTC DeFi not only for the DeFi degens — but for the mainstream user.

We don’t want to tease too much at this point. We’re making good progress and are on track to a release in 2022. Keep an eye on our channels — a few hints, maybe even a technical paper might drop soon.

Outlook: Beyond Bridges and interBTC

Expansion dimensions of the Interlay Network, beyond interBTC.

From interBTC to Multi-Chain DeFi Network

  • Assets. More underlying assets, such as DOGE, LTC, ZEC and any chain where cross-chain light clients are not feasible, can be bridged using Interlay’s technology. We will be encouraging and supporting the community expanding the bridge — it will not only be Interlay who can and will extend the system. Interestingly, the framework works not only for crypto, but also real world assets
  • Networks. From Kusama and Polkadot, interBTC and all other bridged assets will be made available to all major networks. The work on Ethereum and Cosmos has already commenced. Others will follow soon.
  • Collateral. As a multi-collateral system, a diverse set of backing assets with different risk profiles is critical for security, but also economic efficiency. Interlay will support the community in identifying and analyzing suitable collateral candidates, varying from stablecoins, LP tokens, liquid staking assets, perhaps even NFTs.
  • Trust. Finally, the bridge can be extended to support other, less decentralized trust models. While not the ultimate goal, smaller communities struggling to attract sufficient backing collateral may e.g. opt for hybrid models, where a some level of trust is required but a partial insurance is provided. Communities will be free to use the Interlay Network to bridge other assets in whatever way they feel is best suited. In some cases, e.g. real world assets, a fully trustless setup might not be possible by design.

Bridged Based Products

Integrations

Moonshot Projects

Moonshot projects like layBTC will

About Interlay

Our flagship product is interBTC — Bitcoin on any blockchain. A 1:1 Bitcoin-backed asset, fully collateralized, interoperable, and censorship-resistant, realizing the true free nature of BTC and decentralized finance. Kintsugi is our canary network on Kusama — the innovation hub of the Interlay network.

Follow our Twitter, Telegram and Discord to keep up to date with daily updates from the team, or visit our website.

Interlay

Use You Bitcoin. Anywhere

Interlay

Invest, earn and pay with BTC on any Blockchain. Radically open and secured by insurance.

Alexei Zamyatin

Written by

Co-Founder & CEO @ Interlay. PhD @ Imperial College London

Interlay

Invest, earn and pay with BTC on any Blockchain. Radically open and secured by insurance.