Editor's Note: This article comes fromBabbitt Information (ID: bitcoin8btc), by Kyle, published with permission.

Editor's Note: This article comes from

Babbitt Information (ID: bitcoin8btc)

Babbitt Information (ID: bitcoin8btc)

, by Kyle, published with permission.

According to Debank data, the number of BTC-anchored coins has exceeded 150,000, and the value of the largest BTC-anchored coin-wBTC has exceeded US$3.2 billion, surpassing Maker, the DeFi project with the highest locked value (US$2.8 billion). This article will describe the respective options for migrating Bitcoin to the Ethereum network: wBTC, tBTC, renBTC, and sBTC.

BTC goes from its own network to the Ethereum network - is this a good thing or a bad thing? What is the use case for transferring your precious BTC holdings to the Ethereum network? what's the risk? What protocols make this migration of BTC possible? You will find answers to these questions in this article.

Why migrate BTC to the Ethereum network?

Alright, so let's start with why would anyone want to move BTC to Ethereum?

In one word, decentralized finance (DeFi). Let's understand why this is the case.

DeFi has taken the cryptocurrency space by storm, showing that payments aren't 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 manner. Most importantly, it allows the creation of financial applications that were not possible before.

Native ETH and ERC-20 tokens of the Ethereum blockchain can take full advantage of this amazing new space. These tokens can be used as collateral in lending protocols such as Compound or Aave. They can also be traded in a completely permissionless manner on Uniswap.

Most importantly, these tokens can generate income. For example, by lending or providing liquidity to decentralized exchanges.

BTC on the Bitcoin network, despite being extremely secure, has very limited use cases. You can basically send your BTC from one address to another, or just hold it and wait for it to appreciate in value.

When it comes to other financial services, you have to rely on centralized companies. Let's take a loan as an example. If you want to generate yield on BTC or use it as collateral to get a loan, you have to use a centralized company such as BlockFi. This means giving up custody of BTC and having to provide KYC information, which is not an ideal solution, especially for those who believe in the decentralized and permissionless nature of cryptocurrencies.

The inability to use DeFi on the Bitcoin network was one of the main drivers behind the migration of BTC to Ethereum. Using BTC in DeFi also makes sense. For example, BTC, as a store of value for a fixed asset with a fixed history, could be valuable collateral. Users will be able to lock up their BTC and lend it out in a decentralized manner.

Currently, there are more than 140,000 BTC locked on Ethereum, worth more than 2.5 billion - a surprising amount, especially considering that in early 2020, there were only about 1,000 BTC on Ethereum.BTC。

Now, let's look at the options available when transferring BTC to Ethereum.

Wrapped BTC (Wrapped BTC)

Wrapped BTC or wBTC is an ERC20 token pegged 1:1 to real Bitcoin. The current number of wBTC is more than 115,000, and it is the most popular option for transferring BTC to the Ethereum network. The current value of wBTC is $2.5 billion, ranking first among DeFi projects.

The Wrapped BTC protocol allows merchants to mint and burn w

If a merchant wants to exchange their BTC for wBTC, they initiate the minting process by providing an Ethereum address to the Wrapped token contract. In the next step, the merchant needs to send the actual bitcoins to the custodian. The custodian mints wBTC, which is then sent to the merchant’s Ethereum address.

Now that the original BTC is held by custodians, the total supply of wBTC increases with the amount of BTC provided.

If a merchant decides to redeem their wBTC back to the Bitcoin network, they must request a withdrawal. After the withdrawal process is initiated, users burn their wBTC by sending it to the Wrapped token contract. The custodian confirms the burn and releases the BTC to the user.

Once the original BTC is withdrawn, the total supply of wBTC will be reduced by the amount burned.

Merchants are typically 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 move their BTC to wBTC using services like wbtc.cafe powered by RenVM.

RenBTC

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

All of this sounds cool, but as you've probably noticed, there's one major problem here. wBTC uses a custodian, which means it is centralized.

A good analogy is a centralized stablecoin backed by the U.S. dollar, such as USDC. Both wBTC and USDC are very useful as they unlock the potential of Bitcoin and USD in DeFi. That said, I personally don't think that's the end goal. The DeFi community is committed to decentralization, and we can observe ongoing attempts to bring multiple external assets to Ethereum and DeFi in a more decentralized manner.

There is also a good option that is more decentralized - 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 transfer across blockchains is Bitcoin. renBTC is an ERC20 representation of Bitcoin based on the RenVM protocol.

tBTC

Ren is similar to wBTC in that it mints renBTC by offering BTC and redeems BTC by burning renBTC. Each renBTC is backed 1:1 by BTC. The main difference is that Ren decentralizes custody of BTC and makes the minting/burning process accessible to everyone, not just merchants.

The Ren Protocol operates by operating a network of decentralized nodes called Darknodes. It also exploits some interesting elements from cryptography, such as Shamir's secret sharing and secure multi-party computation.

renBTC is currently the second most popular option with around 17,000 renBTC in existence.

Ren, while intending to be fully decentralized, is not yet. I recommend reading this Medium article on RenVM's road to decentralization.

Next up is tBTC. tBTC is the next contender in the race to bring Bitcoin to Ethereum in a decentralized manner.

After a rocky start earlier this year, KEEP, the team behind tBTC, fixed the underlying issues and successfully relaunched the protocol.

sBTC

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

tBTC allows users to create tBTC with BTC through a network of signers. Signers are chosen randomly, and a different set of signers is chosen for each tBTC minted. Signers must provide ETH as collateral to ensure they cannot take the locked BTC. In effect, signers 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.

tBTC is gaining traction — around 1,900 BTC are currently locked in the protocol.

Compared to renBTC, tBTC uses a different approach to achieve the same goal - decentralized custody of BTC.

sBTC is another way to make Bitcoin useful in DeFi. sBTC is different from the previous options because there is simply no underlying Bitcoin backing in this scenario. sBTC 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&P500 index, TESLA stock, oil prices, or Bitcoin.

In Synthetix, all synthetic assets are backed by collateral in the form of SNX tokens. The protocol is overcollateralized, with a current collateralization ratio of 750%. This is mainly to absorb any sharp price changes of the synthetic asset.

There are currently around 1,700 sBTC.

sBTC, wBTC, renBTC, and tBTC can all trade at slightly different prices, often higher than the actual BTC price. This is mainly because the demand for each token is different. Also, besides sBTC, the difficulty of redeeming the underlying BTC matters.

So is Bitcoin migrating to the Ethereum network a good thing?

So, is it worth it to transfer your precious bitcoins to the aforementioned protocols?

It depends. First, we have to understand if there is a practical way to benefit from migrating from BTC to Ethereum. Maybe we want to use it as collateral in one of the DeFi lending protocols and get a loan against that collateral.

Or, maybe we found an amazing yield mining opportunity. For example, providing liquidity to Uniswap’s wBTC-ETH liquidity pool has the potential to earn around 20% APY. Of course, providing liquidity on Uniswap presents challenges such as impermanent losses. However, Uniswap liquidity mining brought a large amount of BTC to the Ethereum network in the form of wBTC.

Even after discovering that we can make good use of BTC in DeFi, there are still other factors to consider. For example, we are comfortable with the decentralization and security assumptions of the protocol to be used. We must also be aware of potential smart contract or administrator key risks, especially in DeFi protocols that have not yet been established.