With the development and popularity of DeFi, the bitcoins issued on the Ethereum chain are growing in a considerable trend. As can be seen from the figure below, the current number of Bitcoin-anchored coins has exceeded 180,000, and the value has exceeded 10 billion US dollars.

Before entering the text, let's make a brief introduction first. What is a Bitcoin Pegged Coin?

Bitcoin-anchored currency refers to a type of token that is issued on other networks (non-Bitcoin) and whose price is 1:1 anchored to Bitcoin. Currently, most of them are issued on the Ethereum network.

DeBank has included 9 Bitcoin-anchored coins, including WBTC, HBTC, renBTC, sBTC, BBTC, TBTC, imBTC, oBTC, and pBTC.

Is it a good thing or a bad thing to issue Bitcoin to the Ethereum chain? Is there any risk? Let's analyze it today.

Why would Bitcoin be transferred to the Ethereum chain?

To answer this question, I just need to say one word: DeFi.

DeFi has taken the entire cryptocurrency space by storm, showing that payments are not the only area of ​​finance where decentralization can be achieved. In fact, DeFi aims to rebuild all financial services in a completely decentralized, open and permissionless way. Most importantly, it allows the creation of financial DApps that were previously impossible to make.

This space can be leveraged by ETH and other tokens native to the Ethereum chain (ERC-20), which can be used as collateral in lending protocols such as Compound or Aave, or in a completely permissionless manner on Uniswap Trading.

Most importantly, these tokens can generate income, such as through lending or providing liquidity to DEX.

Although the BTC on the Bitcoin network is very safe, the usage scenarios are very limited. Users can mainly transfer Bitcoin, or just hold it for appreciation.

When it comes to financial services, you have to rely on centralized institutions. For example, let’s take lending as an example. If you want to generate income on BTC or use it as collateral to obtain a loan, you must find a centralized institution (such as BlockFi). Once centralized, you must provide KYC information and lose absolute control. ownership, which goes against the decentralized and permissionless nature of encryption.

The inability to use BTC in DeFi is one of the main reasons for the creation of BTC-anchored coins.

Using BTC in DeFi also makes sense. For example, Bitcoin as a fixed asset value asset store with a fixed history can be valuable collateral, and users can lock their BTC and mortgage loans in a decentralized manner.

To sum it up, additional incentives are arguably the main factor that allows Bitcoin to grow on the Ethereum chain.

BTC anchor currency list

WBTC

WBTC is an ERC20 token backed 1:1 by actual Bitcoin. There are currently 130,000 WBTC in wBTC, which is the most popular option for transferring BTC to the Ethereum chain. WBTC was originally jointly released by Kyber Network and BitGo in October 2018, and officially launched in January 2019.

The WBTC protocol allows minting and burning.

If you want to exchange BTC for WBTC, you can start the minting process by providing an Ethereum address to the WBTC token contract. Next, you send the actual bitcoins to the custodian, who mints WBTC and then sends it to the Ethereum address. .

Next, the original BTC is held by a custodian, and the total supply of WBTC is increased by the amount of BTC provided.

If minters (aka merchants) decide to exchange BTC on the Bitcoin network, they need to request a withdrawal. After the withdrawal process is initiated, merchants destroy their WBTC by sending it to the WBTC token contract. The custodian confirms the destruction and releases the BTC to the merchant.

After the original BTC is withdrawn, the total supply of WBTC will be reduced by the amount consumed.

Merchants are usually companies or protocols that are able to mint and burn WBTC, other DeFi users can buy wBTC on several exchanges including Uniswap, they can also use services like wbtc.cafe powered by RenVM to migrate their BTC to WBTC.

WBTC can be used in a variety of DeFi protocols. For example, it can be provided as collateral to Compound or Aave. Or can be used to provide liquidity to a 50/50 WBTC/ETH 2 pool on Uniswap.

The problem here is that WBTC has a custodian, which means it is centralized, and the DeFi community is committed to decentralization.

Let’s talk about a practical application: In May last year, WBTC obtained the mortgage of DAI on MakerDAO’s Oasis platform, and Bitcoin holders can use their assets through DAI loans on the Ethereum chain.

RenBTC

RenVM is an open protocol that allows assets to be bridged to Ethereum. It allows the valueless exchange of value between blockchains. Of course, one of the most popular assets to move between blockchains is Bitcoin. renBTC is Ren's ERC20 Bitcoin.

Similar to WBTC, Ren allows minting renBTC by offering BTC, and redeeming BTC by burning renBTC. Each renBTC is backed 1:1 by BTC. The main difference is that Ren decentralizes custody of BTC, making the minting/burning process available to everyone (not just merchants).

The Ren protocol works by running a network of decentralized nodes called Darknodes. It also leverages some interesting elements from cryptography such as Shamir's Secret Sharing and Secure Multiparty Computation.

renBTC is currently the second most popular BTC anchor ratio, with a current circulation of 12,658.

In June last year, through the cooperation between Ren, Synthetix, and Curve Finance, WBTC was introduced into the era of "farmer farming" for DeFi liquidity mining. Essentially, as BTC enters a yield frenzy, Bitcoin holders can profit from their holdings by providing liquidity to the BTC ERC20 format.

tBTC 

tBTC is also a go-to protocol that introduces Bitcoin into Ethereum in a decentralized manner. It was initiated by Keep, Summa and Cross-Chain very early, but it was not launched until September 2020. The protocol had some issues before, and this year KEEP, the team behind it, fixed the underlying issues and successfully restarted the protocol.

In tBTC, similar to renBTC, there is no central party to escrow locked bitcoins, and each tBTC is backed 1:1 by BTC.

tBTC allows users with BTC to create tBTC using a network of signers. Signers are chosen randomly, and a different set of signers is chosen for each minted tBTC. Signers must provide ETH as collateral to ensure they cannot walk away with locked BTC. In effect, they must over-collateralize their deposits by providing 1.5 BTC worth of ETH. Signers are willing to lock up their ETH because they will be rewarded with the fees paid on redemption.

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sBTC

sBTC is different from the previous BTC-anchored coins in that it has no underlying Bitcoin and is one of the synthetic assets created by the Synthetix protocol. Synthetic assets, or synthetic assets, track the value of different assets, such as the S&P 500 index, Tesla stock, oil prices, or Bitcoin.

In Synthetix, all synths are backed by collateral in the form of SNX tokens, a protocol that is highly collateralized, currently 750%, primarily to absorb any drastic price changes in synthetic assets.

Currently about 2276 sBTC.

The transaction price of each BTC anchor coin will be slightly different, usually higher than the actual BTC price, mainly because of the different demand for each token.

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The Importance & Security Risks of Bitcoin-anchored Coins

After reading the above cases, do you think that Bitcoin-anchored coins are a hard demand? Is pegging Bitcoin to the Ethereum chain a worthwhile thing to do?

Personally, I think it depends on the situation. We need to see if there is a practical way to migrate, perhaps through borrowing, with BTC as collateral, and get a loan against that collateral.

Secondly, liquidity mining in the DeFi field can generate very considerable or even amazing returns, but since the Bitcoin mainnet does not participate in DeFi, the issuance of BTC anchor coins can leverage huge BTC funds.

In addition, we also need to consider some security factors, the degree of decentralization, the risks of smart contracts in DeFi, and the key risks of administrators.

In addition, even after deciding to transfer BTC to Ethereum, we should still consider only configuring a part of BTC as an anchor currency to participate in DeFi, disperse assets, and prevent unacceptable losses caused by accidents.

It is also worth mentioning that the real BTC will never appear on Ethereum, it will only be locked, and the equivalent will be issued.

Tell us what you think, what do you think about the concept of moving Bitcoin to Ethereum?