Can Bitcoin on Ethereum break through the ceiling of DeFi?
On February 14, Huobi Global announced that it will issue 1:1 HBTC anchored to Bitcoin on Ethereum.
Produced | Odaily (ID: o-daily)
BTC anchor currency, Bitcoin-backed token, is as easy to understand as its name, but why issue BTC anchor currency based on other public chains?
DeFi is the most watched star track in the encryption world in the past two years, but its development is deeply limited by the Ethereum market. The market value of Bitcoin is 160 billion U.S. dollars, which is 6 times that of Ethereum. If thousands of ecological applications of Ethereum leverage Bitcoin as an asset, it will undoubtedly contribute to the story of its "world computer".
In addition to Ethereum, there are also multiple public chains that are gradually trying to issue Bitcoin-anchored coins. In June last year, Binance launched BTCB on Binance Chain, ChainX issued xBTC based on Polkadot, and Kava, a lending platform on Cosmos, also supports BTC. The public chain has a certain user market.
Conversely, BTC users also have demand for public chain ecological applications. The success of Ethereum is based on smart contracts and applications. Using BTC based on it, users can experience a variety of open financial products and enjoy lower rates than centralized lending and leveraged transactions.
Just like the dollar-anchored currency, there are more than one players who want to divide this cake. So far, there have been 3 different issuers of ERC20 BTC, and a total of nearly 2,000 bitcoins (worth 20 million US dollars) have been exchanged.
The recent entry of Huobi has been favored by many people in the industry. The most important reason is that the exchange is not only the traffic entrance of the blockchain world, but also a large capital pool and a gathering place for ecological chains. It may be one of the most ideal development methods for them to inject blood into DeFi.
For exchanges, the opportunity to issue US dollar-anchored coins has been lost. It seems that they are the first to issue BTC-anchored coins and promote them to connect Bitcoin, Ethereum, and DeFi to create a network effect in which they are the core participants. It's an imaginative story.
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What is the use of BTC anchor currency?
After a month of consecutive rises, on February 7, Ethereum broke through the $200 mark again and continued to rise.
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Data from: DeFipulse
For many practitioners of open finance, this is a milestone.
Two years after its birth, DeFi has gone from a lock-up volume of less than $10 and being little known to now attracting countless gold and being highly sought after. Many practitioners believe that the next billion of DeFi will come sooner.
But where does this "faster" start? Where is the increment?
Improving the security of contracts to ensure asset security and user confidence; improving usability are two must-haves.
In addition, some innovators have also begun to find new ways to "go global". The 1:1 ERC20 tokens anchored to BTC released on the Ethereum ecosystem is one of the directions they captured.
What is the use of ERC20 BTC?
The first is to expand the market size of DeFi (or it can be understood as market penetration) by attracting BTC holders and their assets.
This begs the question why does DeFi on Ethereum need BTC.
In the eyes of many practitioners, the reason may be simple and crude.
"The biggest problem with DeFi now is that it is limited to the Ethereum ecosystem." Miao Kai, a digital currency practitioner, said bluntly. "The only valuable underlying asset in this circle is Bitcoin. Therefore, DeFi without Bitcoin will embarrass the task of open finance. Because its underlying assets (mainly Ethereum and USDT) are doubtful."
We have indeed seen that DeFi based on Ethereum is facing the problem of "poor soil", and its ceiling is ETH itself.
"In DeFi lending, the lack of collateral is an unavoidable problem. People who own other mainstream cryptocurrencies, especially Bitcoin users, cannot borrow money in Europe through DeFi. The first question is whether they will configure Ethereum. Even if it can, the market value of Ethereum is 28.7 billion US dollars, and the ceiling of the amount of loans (collateral) is obvious, so it is difficult for the market size of DeFi lending to expand horizontally.”
So for a BTC holder, what is the reason that attracts him to exchange his real money bitcoin for an ERC20 token?
The most straightforward, we can see two points, BTC-anchored currency has lower transaction costs and can be used in Ethereum’s DeFi ecosystem.
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Ethereum transfer rate, data from: Ethgasstation.info
Second, until now, the mainstream function of Bitcoin is still transactions and storage of value. But there is no intention that BTC is the blockchain asset with the strongest consensus, and many people still hope that Bitcoin can complete the mission of "peer-to-peer electronic transfer system" and promote economic freedom.
Previously, Bitcoin holders were limited by the lack of ecological applications (the most likely to be used for offline payment, but it is limited by time and space), but now there is a Bitcoin-anchored currency, perhaps just like the slogan of the WBTC project, People can "Do more with Bitcon".
WBTC is a Bitcoin-anchored currency issued based on Ethereum. After BTC users exchange their currency into WBTC, they can go to MakerDAO to mortgage loans, lend on Compound, or go to Uniswap/Kyber and other DEXs to open leverage on Bitcoin trading pairs (to open leverage, you need to have this asset in sequence, before It is difficult to operate without Bitcoin or its anchor currency)...
Of course, if there are only two benefits of transfer funds & time cost, and a wide range of uses, for the vast majority of BTC users, there is still a lack of motivation to try complex products on Ethereum.
After all, using USDT as a currency is also cheap and efficient, and the asset itself is more stable; as for the demand for borrowing or leverage with BTC, there are also centralized exchanges and lenders who have been cultivating for many years, and have reached a good level in terms of service fees and convenience. level. Unless, the BTC anchor currency can further reduce costs and improve efficiency.
In some scenarios, we already see this potential.
Mr. Zhang, the community leader of the core protocol of the DeFi project dForce, told Odaily that he saw a better use case that users can use the BTC anchor currency to arbitrage between CeFi and DeFi loans.
At present, the rate of collateralizing Bitcoin to borrow USDT and other stablecoins in centralized lenders is usually around 10%, while on most decentralized lending platforms, this rate can be reduced by 25% or even 50%. The cost of using funds on the lending platform is significantly lower.
Cheaper sources of funding allow lenders to take advantage of lower lending rates. On the whole, regardless of whether the cheap funds flow to users or to peers through interbank lending (which will eventually reduce the overall lending rate in the market), the market size is expected to grow further.
So how can lenders who hold a large amount of BTC obtain USDT on DeFi?
Pledging and lending on DeFi through the BTC anchor currency makes things a lot easier. According to Mr. Zhang, lenders have started arbitrage on the decentralized lending platform Lendf.Me (dForce sub-project) through this method.
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How does the BTC anchor currency work?
After understanding the problem of "law", let's take a look at what "art" is.
In theory, BTC-anchored coins can be issued on any Turing-complete public chain. Judging from the current situation, most BTC-anchored coins with circulation and users choose Ethereum.
The operating mechanism of ERC20 BTC is roughly divided into three types, centralized (HBTC, imBTC), semi-centralized (WBTC) and decentralized (TBTC).
1. Semi-centralized WBTC
WBTC is the first BTC-anchored currency to go online, and many of its rules have been referred to by latecomers.
In October 2018, WBTC was co-sponsored by DeFi projects such as Kyber Network and BitGo, and it was officially launched in January 2019.
WBTC operates around one institution (WBTC DAO) and two roles (Merchant Acceptor and Custodian Custodian)
Image source: WBTC official website
Image source: WBTC official website
What should the user do if he wants to return WBTC after obtaining it from the acceptor?
Simple, the acceptor will be responsible for recovering WBTC and sending it to the contract for destruction, and then redeeming Bitcoin from the custodian.
Up to now, WBTC has obtained more than 20 acceptors, but there is only one custodian, namely BitGo, which is also the most centralized place.
According to Bowen, the head of DDEX operations, one of the acceptors, in order to improve the compliance and security of lenders, BitGo will conduct KYC/AML audits for new acceptors; in order to prevent contract loopholes from over-issuing tokens, BitGo will also Manual review of each minting request. Of course, WBTC stipulates that BitGo can obtain two thousandths of the coinage as a service fee for these services.
Of course, BitGo publishes its Bitcoin custody address to ensure that WBTC is 100% reserve.
To obtain WBTC, users do not necessarily have to go through an acceptor, but can also purchase directly through the DEX that has WBTC listed. At this time, the payment method is no longer limited to Bitcoin, as long as the exchange supports the transaction pair of WBTC and XX coins.
Acceptors, custodians and exchanges constitute the governance organization of this ecology - WBTC DAO.
According to the official introduction of WBTC, there are 16 initial members of DAO, and its task is to jointly manage all important changes of WBTC, including the addition and deletion of acceptors and custodians. "This is an open and transparent decision-making process controlled by a multi-signature contract."
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Data from: WBTC official website
2. Centralized issuance of HBTC and imBTC
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HBTC operating mode, picture from: HBTC white paper
HBTC supports multi-acceptor acceptances, and is currently connected to Huobi Global, Huobi Korea, and Huobi Cloud, and plans to list MakerDAO-Oasis, DDEX, and dForce. On Huobi Global, users can choose BTC-ERC20 to exchange for HBTC when withdrawing BTC.
Etherscan.io data shows that 500+ HBTC has been issued in the current HBTC contract address, distributed in 18 addresses. In comparison, imBTC issued earlier than HBTC has a coinage of 500+, but its distribution addresses have reached 1000+, and the number of transfers has reached 8000+.
A person familiar with the matter said that this is likely because the current users of HBTC are mainly acceptors and institutions, and they mostly use these funds to deposit and lend on DeFi.
imBTC, which is also a centralized BTC anchor currency, has its own unique features.
imBTC is issued + managed + accepted by the decentralized exchange Tokenlon. In other words, the endorsement of imBTC depends entirely on Tokenlon.
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Data from: Tokenlon.im
As the issuer, Tokenlon will charge users a fixed fee of 0.0005BTC, which is worth $4.8 in terms of $9600 in Bitcoin.
The special thing about imBTC is that it will share the handling fee, "to make up for the liquidity loss caused by the user's pledge of BTC. According to official data, based on the current handling fee, the current annualized income of imBTC users is 0.79%, which is not high. .
3. Decentralized TBTC
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The previous slogan of TBTC has now been changed to No games, just math.
As mentioned above, the biggest feature of TBTC is decentralization. In order to realize this idea, TBTC has carefully designed a set of "self-issuing" rules, which are far more complicated to implement than the scheme based on central licensing + smart contract automation.
After nearly 10 months of dull research and development, TBTC released the white paper in August last year, and half a year later, that is, on the 21st of this month, Matt Luongo, the project leader of TBTC, announced that the project code has been completed, and the code is currently being frozen and audited. If successful, the V1 mainnet will be launched next month.
From the white paper of TBTC, the operating mechanism of TBTC is somewhat similar to the POS consensus algorithm. First of all, in this ecology, there will be some users who want to obtain minting fees and obtain qualifications through pledge deposits. Let us call them "nodes"; "People" form a signing group (Signing Group), and create a multi-signature co-management address on Bitcoin for them to store the Bitcoin that the user is going to lock; after locking the user's Bitcoin, the signing group will generate a TBTC.
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TBTC issuance rules, picture from TBTC white paper
The trust-free experience brought by the TBTC decentralized system (just trust the contract and logic without problems) is its biggest highlight. But at the same time, the shortcomings are also very eye-catching.
In order to make this absolutely decentralized system work well, TBTC has set up many rules, such as nodes, exchange users need
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The advantages and challenges of the development of BTC anchor currency
After reading the above content, I believe you have a more comprehensive understanding of this field.
However, judging from the fact that there are only a handful of publishers, and most of them are still just online or even not online, we can see that this field is still in the early stages of development.
However, Huobi, which entered the market recently, is undoubtedly an important event in this industry.
As Mr. Zhang said, every move of a leading exchange will have a major impact on the blockchain ecology.
In the Staking economy, the exchange has become the number one player with its huge capital pool. On the BTC anchor currency, I believe that as long as the demand is real, there will be exchanges entering the market one after another.
"The entry of such resource-based players will be a strong catalyst for ERC20 BTC. If there is no exchange involved, other centralized or decentralized ERC20 BTC solutions will be difficult to develop in the short term, and there will be insufficient incentives. There are also trust issues, and more importantly, there is a lack of a participant that radiates a large number of users and has a complete ecosystem. In this case, 100 BTC coming in will not make a splash, and neither will 1,000.”
Mr Zhang believes that exchanges may be part of the game-changer. For exchanges, it is also attractive to enter the BTC anchor currency.
Looking carefully at the comparison chart of several major BTC-anchored coins above, we can see that only Huobi currently provides this currency exchange service for free. This may be due to the small amount of coinage in the early days, unlike USDT, which has issued billions of dollars, and this income may not be able to make a lot of money at present. On the other hand, what Huobi is interested in is that HBTC can help itself access DeFi, thereby obtaining the benefits of capital flow in this field, and paving the way for its own public chain and DeFi applications, which can be said to kill two birds with one stone.
"Just like USDT is issued by Bitfinex, the first-hand USDT is all in and out from Bitfinex. Similarly, the minting and redemption of HBTC will eventually pass through Huobi. After HBTC accesses more application scenarios, Huobi will therefore Enjoy the network effect brought by HBTC." Mr. Zhang elaborated on this.
"Every time HBTC is used in DeFi, it increases the minting demand of HBTC. In the long run, no matter whether the acquisition mode is direct or indirect, there will be a net inflow of BTC to Huobi Exchange."
Based on this logic, Mr. Zhang also believes that Binance, which also released BTC-anchored coins, did not choose a good enough scenario.
"Issuing BTCB on Binance Chain, they should want to strengthen their ecology, which is no problem, but what Binance didn't understand is that there is no complete DeFi ecology on Binance Chain, and this cycle has not turned."
In addition to being favored by giants, many people have another great confidence in the rapid development of BTC-anchored coins. Its asset value has been recognized by the industry, but its penetration rate in the open financial market is very low.
According to the statistics of DappTotal, the current locked position of Ethereum is 3.65 million (about 900 million US dollars at the current price), accounting for 3.33% of the total supply; in contrast to Bitcoin, the total locked position of the three major BTC anchor coins issued Only less than 20 million US dollars, it can be seen that the participation of BTC in DeFi is still close to 0. Although it is still too early to say that 3% of Bitcoin lockups enter DeFi, even if only 100,000 Bitcoins come in (that is, less than 1% of Bitcoin), the DeFi market can double. This imaginary space is enough to make BTC-anchored currency issuers and members of the DeFi ecosystem excited, and continue to work hard for it.
Before that, as mentioned above, practitioners still need to solve the problem of insufficient incentives for early adopters of BTC anchor currency, or the problem that the selected scenarios are not rigid enough. At the same time, the current solution still has many centralized parts. Potential trust issues may arise.
Furthermore, although there are attractive discounts such as low fees, DeFi still has a threshold that cannot be ignored for ordinary users. Just as DEX still cannot shake the status of centralized exchanges, it is not yet known how many users can be converted.
However, it is optimistic to say that if the BTC-anchored currency slowly realizes the lock-up of 1% of the total amount, some practitioners will have to worry instead. Because this will greatly benefit the DeFi ecosystem of Ethereum, but at the same time it will shake the dominance of Ethereum in DeFi assets.
