How can BTC users access capital markets through Ethereum?
Editor's Note: This article comes fromCrypto Valley Live (ID: cryptovalley)Editor's Note: This article comes from
Crypto Valley Live (ID: cryptovalley)
Crypto Valley Live (ID: cryptovalley)
BTC users can use reliable BTC tokens on Ethereum to enter capital markets (such as MakerDAO and Compound), gaming markets (such as Augur), decentralized exchanges (such as Uniswap), and applications that may become popular in the future. Examples include private transfers, innovative custody solutions, and DAOs. At the same time, these applications will be able to obtain the superior liquidity and currency attributes of BTC.
Design space for cross-chain anchor tokens
This article takes TBTC as an example to discuss the design of cross-chain in general. Desired characteristics of such an anchor token may include:
Design space for cross-chain anchor tokens
Confiscation-proof: neither custodians nor other third parties can seize stored tokens.
Censorship-resistant: Tokens can be created, redeemed and used by anyone, regardless of identity or jurisdiction.
acceptable operating costs. The system can provide services at an attractive price for both users and hosts.
Stable price relative to BTC: The token anchors the price of BTC, thus inheriting its currency attributes.
acceptable operating costs. The system can provide services at an attractive price for both users and hosts.
If someone could replicate all of the above properties on another chain, the trust model would be close to (though not equal to) the properties of using BTC on the main chain. In fact, all cross-chain anchor tokens need to actively compromise with BTC, giving priority to certain functions while sacrificing other functions. Whether these compromises are desirable in some cases, or even preferable, depends on the purpose for which the user needs the token in the first place.
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Callable vs. Non-callable
The goal of each BTC-anchored token is to introduce tokens with real BTC attributes, but on another chain (such as WBTC and LBTC). In order to maintain the currency attributes of BTC, token transactions should be as close as possible to original currency transactions. This can be achieved in two ways:
Packaging Act
synthetic method
Dai is created when users deposit collateral into Collateralized Debt Positions (CDPs). While anyone can own Dai and trade it, only CDP holders can redeem it with the corresponding collateral. Because this arbitrage cycle is much longer, synthetic assets require additional mechanisms to maintain parity. To this end, MakerDAO introduced a stability fee (which regulates the cost of CDPs) and a Dai Savings Rate (which regulates the cost of Dai). Combined, the two can help stabilize market supply and demand to reach an equilibrium price of one dollar.
Rather than wrapping BTC collateral, depositors can also create synthetic BTC (“sBTC”) with non-BTC collateral. To understand how the system works, let's use MakerDAO as an example. Although their token, Dai, is a synthetic token against the U.S. dollar, the system can equally easily issue synthetic tokens of any other asset, including BTC.
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For the system to last, these custodians must be incentivized not to abuse their power. Either we trust that theft won't happen (eg because it would discredit the custodian), or we ask them to make sure there is a remedy if something goes wrong. In any case, if the system is to survive in the long run, there must be an incentive for custodians to make "not stealing deposits" more attractive than "stealing deposits".
Secured vs. Trusted
As stated above, someone needs to control an equal amount of collateral for each token on the other chain to ensure continued parity. When using non-native collateral on another chain, such as BTC collateral parasitic in Ethereum's system, this creates an additional problem: someone must control the BTC private key. Before smart contracts could be used to control private keys (and it's not clear if this is possible), those who controlled the private keys also controlled the system.
The disadvantage of this method is that it costs more capital to produce. Undoubtedly, these additional costs are passed on to users, driving up the overall price of the service. Therefore, this compromise is best suited for services that require a lot of trust, and users don't mind paying a higher price. In some cases, stolen assets are difficult to realize. But this is not the case with BTC, because if a custodian seizes user funds, the funds belong to that custodian. In other words, the BTC market is highly liquid.
TBTC's Approach: Secured and Callable
Looking back above, we mentioned that MakerDAO’s synthetic method is secured and redeemable, while the methods of WBTC and Liquid systems are secured and redeemable for compliant users, but not for non-compliant users. is secured and non-redeemable. tBTC chose the design method of redeemable and guaranteed, which has yet to be explored.
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TBTC's Approach: Secured and Callable
Looking back above, we mentioned that MakerDAO’s synthetic method is secured and redeemable, while the methods of WBTC and Liquid systems are secured and redeemable for compliant users, but not for non-compliant users. is secured and non-redeemable. tBTC chose the design method of redeemable and guaranteed, which has yet to be explored.
As another line of defense, each BTC is held not by a single signer, but by a consortium of randomly selected signers using n-of-n threshold signatures.
Every system that requires participants to post collateral faces two major challenges: first, locking up funds is expensive, adding to the overall cost of the system; second, bonds must be regulated, which requires the system to be aware of factors external to the blockchain: The price of the collateral for the assets being managed.
Unlike WBTC, the process of creating and redeeming TBTC for BTC is not subject to KYC/AML or jurisdictional regulations. Anyone can deposit BTC and receive TBTC, and redeem TBTC and receive BTC on the BTC main chain.
The main job of the tBTC system is to ensure that all TBTCs in circulation have a corresponding escrowed BTC. Maintaining this balance is the main task of the signers, who are obliged to monitor their bonds and increase the price of TBTC accordingly when the price of BTC rises. Signers will initially be required to deposit collateral equal to 150% of the savings value. They are notified when their bond value falls below 140%, and liquidation is initiated when the bond value falls below 110%. Note that while liquidation should never happen, the possibility needs to be preserved as a severe penalty for signer misbehavior.
Every system that requires participants to post collateral faces two major challenges: first, locking up funds is expensive, adding to the overall cost of the system; second, bonds must be regulated, which requires the system to be aware of factors external to the blockchain: The price of the collateral for the assets being managed.
Challenge 1: Anchoring the price of BTC
In both cases above, it does not matter if the actual collateral is worth more than the reported value relative to BTC. Only when the actual collateral value is lower than the reported value, and there is a lack of timely automatic liquidation settings, will it pose a risk to the system. If the value of the collateral is never allowed to be lower than the value of the escrowed BTC, then we can only hope that the signer walks away with the BTC.
If the market does not have sufficient liquidity, the system can still use secured oracles as a backup.
Instead of using oracle quote tables, tBTC is looking to use a new market-based approach, according to which the floor of the BTC price is imported from actual cross-chain order books. If the ETH/BTC market is sufficiently liquid, market participants are not expected to let BTC clear at a discount to the global spot price. By looking at the highest bids outstanding over a period of time (eg 24 hours), we can confidently say that the reported value is indeed the floor of the global spot price.
If an attacker tries to manipulate the system to register the value of the collateral as higher than it actually is, he must bid higher than the global spot price. At the same time, rational market participants will keep an eye on this "buying wall" and start selling BTC into it, effectively pre-empting it. This mechanism uses the sales power of the entire market to counter the manipulator's purchasing power to ensure that the system is not damaged by manipulation.
The second biggest challenge of any secured system is to reduce the operating costs to a level where both rational custodians and users can participate. At the time of issuance, each TBTC in existence has a 250% value guarantee: 100% is guaranteed by escrowed BTC, and the other 150% is guaranteed in Ethereum, which is set up by the signer to protect the original BTC savings.
Even if we ignore the redundancy cost (signers must be online at all times or risk being made redundant), given the low yield, the number of people who would like to be signers is likely to be very limited. If the rate of return is much higher, there may be more people who want to be signers, but fewer people who want to be users. Whether the system can afford high custody fees and attract users depends mainly on the loan interest rate of TBTC on Ethereum. The loan interest rate determines how much utility TBTC users can get from accessing applications such as Compound or MakerDAO.
To reduce costs for signers, the tBTC system automatically lends bonds on Compound or other fully collateralized capital markets. If someone is going to lend ETH (or TBTC) on Compound, they might as well be a tBTC signer or earn a signer fee without paying any additional cost (besides the redundancy cost). On the other hand, the risk of adding another layer of smart contracts may further weaken the "hard money" attributes of TBTC tokens.
Since there is no known way for the market to understand these costs, the responsibility for setting the fees falls to the TBTC team. At launch, signers will receive an escrow fee of 50 bps (or 0.5%) every six months for a total of 1% of turnover per year. Given that savings must be 150% value collateral, signers will break even when the cost of capital on their claims is less than 0.66% pa.
Instead of using non-native collateral such as Ethereum, tBTC can also introduce a work token that generates cash flow from custody fees. In this way, the system can primarily use its own future cash flow as collateral for collateral. If this work token is less volatile relative to BTC in escrow than Ethereum, the overall collateral requirement can be further reduced.
in conclusion
Whether these changes will reduce the cost of TBTC to a level where both users and custodians are comfortable with the system remains to be seen. At present, we can see the advantages and disadvantages of TBTC compared to other cross-chain anchors.
