Is tokenized BTC good for ETH?

Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji), reprinted by Odaily with authorization.

Editor's Note: This article comes from

Blue Fox Notes (ID: lanhubiji)

, reprinted by Odaily with authorization.

Foreword: Will the emergence of tBTC challenge the economic bandwidth status of ETH on Ethereum? Judging from the mechanism design of tBTC, it requires 150% ETH mortgage, which will only enhance the status of ETH in the economic bandwidth of Ethereum. Although RenBTC does not require ETH collateral, it requires 3 times the REN token binding, and the new economic bandwidth it creates has a natural scalability bottleneck. Taking a step back, if there is a magical design called magical BTC, which can be expanded without ETH over-collateralization, then it is still beneficial to ETH. According to the EIP1559 plan, it will destroy transaction fees. Therefore, even the magical BTC is conducive to the value capture of ETH. All in all, according to author Lucas Campbell, all roads lead to ETH. What do you think? This article was translated by "JoTo" of the "Blue Fox Notes" community.

A few weeks ago Anthony Pompliano, a well-known Bitcoin proponent, tweeted the following post:

While Pomp is not a well-known person who is bullish on Ethereum, he does highlight an interesting point about the future of DeFi: (1) either DeFi is built on Bitcoin; on Ethereum.

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DeFi won't be built on Bitcoin

Personally, the first hypothesis is unlikely to happen. The core argument for DeFi being built on Ethereum is this: Any other platform that wants to popularize DeFi needs to compete with Ethereum’s composability. This is also not easy for Bitcoin because of its weak programming expressiveness.

For the uninitiated, composability is the ability to combine two or more components into a unique combination or solution - almost like a stack of Lego. They are Coin Lego.

Compound is permissionless lending and MakerDAO is a permissionless stablecoin, and they are both monetary Lego pieces in their own right. They allow developers to build and experiment with them to create entirely new financial applications.

Imagine trying to build PoolTogether (lottery without losing stake) on any network. This network requires permissionless stablecoins (similar to MakerDAO) and permissionless lending protocols (similar to Compound) to successfully build such applications. (Blue Fox Note: PoolTogether is a decentralized lottery application. Users deposit DAI into its prize pool, and these DAI will earn interest through the lending agreement. The number of votes will be allocated according to the proportion of DAI invested in the user pool, and then random draws will be made every week. Users in the platform can get all the interest income, and the user's principal will not be lost. PoolTogether needs the support of stable currency and lending agreement, so the combination of MakerDAO and Compound is the basis for building PoolTogether).

This is just the beginning. As Ethereum matures, so does its application. As more currency LEGOs are available, they become more powerful (and more complex). For example, take Augur v2 as an example.

The next version of Augur will require the following LEGO bricks:

*Two liquidity agreements

*Two types of non-custodial wallets

* An identity solution

*Fiat currency deposit

*A permissionless stablecoin (DAI)

The more currency LEGOs available, the stronger the network effect and the deeper the moat. Unless other networks have a diverse ecosystem of permissionless currency LEGOs that anyone can build on, Ethereum will likely continue to be the de facto platform for open finance.

Also, it will take time (probably years) for other networks to get to this point. This is true even if Bitcoin has expressive power. On top of this challenge, all monetary protocols must be liquid and require billions, if not trillions, of capital backing.

Meanwhile, Ethereum and DeFi continue to grow, faster and faster. This means that these networks need to catch up not only to today’s Ethereum, but also to tomorrow’s Ethereum. (Blue Fox Note: There are opportunities here. There is a big bottleneck in the throughput and speed of Ethereum at present, which is evident in the black swan of 3.12. In addition, the arrival and maturity of ETH2 will take time. If there is a network Being able to achieve substantial improvement in scalability while ensuring security, and being friendly to developers, it is very likely to create a new space. After all, the number of DeFi users is far below the 1 million level, and there is no Absolute moat. If Ethereum naps, other networks are not without chance)With all of this in mind, the second option of bringing BTC to Ethereum seems more likely to happen, at least for now. (Blue Fox Note: Judging from the magnitude of USDT issued on the BTC network and the Ethereum network, the same is true. In essence, it is because the scalability of Ethereum is stronger than that of BTC. Under the premise of reaching a certain level of security, Scalability is a major advantage over the competition)》）

So, what about Bitcoin on Ethereum?

Bitcoin is the most trustless form of digital economic bandwidth that exists today. At the same time, it is also the most liquid economic bandwidth. The combination of these two properties gives us one of the most attractive forms of bandwidth for the Ethereum currency protocol, trustless economic bandwidth. (Blue Fox Notes: Regarding economic bandwidth, you can refer to the article "

Ethereum's Economic Bandwidth Theory: ETH's Billion Dollar Market

In order to maintain the trustless nature of Bitcoin on DeFi, the underlying mechanism that brings BTC into Ethereum must also be as trustless as possible, which allows BTC to expand as the trustless economic bandwidth of the Ethereum currency protocol.

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Let's talk about tBTC

tBTC is scheduled to launch on the Ethereum mainnet on April 27, 2020. This release will support users to deposit BTC, mine or redeem tBTC, and it can be used on Ethereum DeFi applications.

With the introduction of tBTC, it appears there will be another form of sound money that can provide DeFi with relatively trustless economic bandwidth. This magnitude is huge. At the time of writing, Bitcoin's market capitalization is $134 billion.

So, does this mean that BTC will replace ETH as the most important form of DeFi's trustless economic bandwidth? And will it make ETH useless? No.

tBTC will not replace ETH as trustless economic bandwidth on Ethereum, it will just consume it.

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The design mechanism behind tBTC relies on the over-collateralization of ETH to ensure the security of each tBTC on the network (150% standard). In other words, every $100 of tBTC on Ethereum requires at least $150 of ETH locked in a "tBTC Vault", which results in an economic bandwidth of at least -$50 on Ethereum. This means that tBTC is consuming ETH's trustless economic bandwidth, rather than creating new economic bandwidth. According to the current exchange rate of BTC/ETH, 1tBTC can consume more than 64ETH. So, what will happen if tBTC becomes widely popular on Ethereum and its DeFi currency protocol? How much ETH's trustless economic bandwidth will tBTC consume?

Looking at the liquid market cap (or total economic bandwidth) of BTC which is $134 billion, if 1% of that is tokenized, it will generate $1.34 billion in tBTC. This, in turn, would require at least $2.01 billion in ETH as trustless collateral to back tTBC. This consumes about 10% of the bandwidth of the trustless economy on Ethereum.

What about a 5% liquid supply? tBTC requires $10.5 billion in ETH collateral, or 56% of available economic bandwidth. Finally, if 10% of the liquid market cap supply were to be tokenized in tBTC to support the Ethereum currency protocol, then it would take all of Ethereum's current economic bandwidth (and more) to do so.

The key point here is that if tBTC is successful in DeFi, then it may bring value to ETH, because it needs to overcollateralize ETH to generate tBTC.

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Other forms of trustless Bitcoin don't generate much economic bandwidth

Other forms of trustless btc on Ethereum, they do not require overcollateralization of ETH, what impact will this have? The Ren protocol is a candidate for this.

Ren does not rely on collateralized ETH, it uses a "trustless custodian" (RenVM) to maintain a 1:1 ledger of assets across multiple networks.

Ren does not use ETH as a security deposit like tBTC, Ren uses its own token REN as a deposit (Blue Fox Note: In a sense, it is similar to Synthetix using SNX to issue synthetic assets instead of using ETH). The value of REN is of course directly related to the income Ren generates. REN is a capital asset, not a store-of-value commodity with a monetary premium. Therefore, in a rational market, its value will be limited by the cash flows it generates.

While Ren's design is attractive, it also suffers from the same self-referential scaling problems as Synthetix and SNX. The amount of renBTC that can be generated is entirely limited by the available economic bandwidth of REN - approximately $40 million at the time of writing.

That's not enough economic bandwidth to support $134 billion in BTC.

Here's the takeaway from tBTC and Ren: creating pure new trustless economic bandwidth is hard, so most trustless tokenized BTC designs end up using ETH, or only generate a very small amount of new bandwidth.

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What if there is a magical tokenized BTC?

Assuming that there is a magical design that can achieve tokenization without trusting BTC and is scalable, will this magical BTC replace ETH as the economic bandwidth of the currency protocol on Ethereum?

No. Ethereum still needs ETH.

If Ethereum successfully tokenizes global financial assets such as BTC and evolves into a global financial infrastructure, then EIP1559 will stabilize ETH's status as Ethereum's native asset and its need for the overall success of the network.

epilogue

Therefore, if the magical BTC replaces ETH as the trustless economic bandwidth on DeFi, then at least we can expect EIP1559 to be able to drive the net consumption of ETH’s economic bandwidth.

Note: Equity pledge is another consumption of ETH as economic bandwidth. It turns economical bandwidth into security.

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epilogue

Ethereum will continue to provide the infrastructure for open finance for the foreseeable future, due to the growing network effects of currency LEGO and its composability on Ethereum.