1. Overview of BTC anchor coins
1.1 Definition and Basic Principles
BTC anchor coins are digital assets that map Bitcoin (BTC) to other blockchain networks through specific technical means. Such tokens are usually pegged to Bitcoin at a ratio of 1:1, that is, for each BTC anchor coin issued, there will be an equal amount of Bitcoin as collateral behind it. This mechanism enables BTC anchor coins to not only have the value attributes of Bitcoin, but also participate in decentralized applications (DApps) on other blockchains (such as Ethereum). As the earliest and most consensus-based cryptocurrency, Bitcoin cannot directly support smart contracts and other complex decentralized finance (DeFi) operations due to the lack of Turing completeness of its own network. By mapping Bitcoin to ERC-20 or other standard token forms, it can be used on smart contract platforms such as Ethereum, and participate in various DeFi scenarios such as lending, liquidity mining, and derivatives trading, expanding the scope of Bitcoin's application.
1.2 The need and significance of BTC anchor coins
(1) The need for cross-chain liquidity
As the world's most liquid cryptocurrency with the highest market value, Bitcoin has far more users and holdings than other crypto assets. Through the BTC anchor, Bitcoin can flow seamlessly to blockchains with smart contract functions and participate in more diverse decentralized applications, such as lending, liquidity mining, and derivatives trading.
(2) Promoting the development of decentralized finance (DeFi)
Bitcoin has great potential in DeFi, but its network technology limitations make it challenging to directly develop DeFi applications. BTC anchor coins enable Bitcoin to play a role in the DeFi ecosystem by mapping it to a blockchain that supports smart contracts, increasing the utilization of Bitcoin and injecting more liquidity and stability into DeFi applications.
(3) Asset appreciation and risk management tools
Through BTC-pegged coins, holders can obtain additional income by participating in the DeFi ecosystem without giving up long-term holding of Bitcoin. BTC-pegged coins can also be used as a risk management tool to help investors reduce the risk of their portfolios through collateral.
(4) Improving the practical utility of the Bitcoin network
Although the Bitcoin network is highly secure, its application scenarios are mainly concentrated in value storage and simple payment transfers. The emergence of BTC anchor coins has expanded the application scope of Bitcoin in a more complex financial ecosystem and consolidated its position as the world's preferred digital asset.
2. The mechanism principle of BTC anchor currency
2.1 Centralized and decentralized anchoring
The working mechanism of BTC pegged coins can be divided into two categories: centralized and decentralized.
Centralized anchoring relies on a trusted third-party custodian to manage the bitcoins locked by users and mint corresponding anchor tokens, such as WBTC. This model is easy to operate and has fast transaction speeds, but there are trust risks and security risks of centralized management.
Decentralized anchoring achieves cross-chain transfer and tokenization through distributed networks and encryption technology, such as renBTC, which manages and verifies the locking and token casting of Bitcoin through a distributed node network. Although the decentralized mechanism has higher security and transparency, its technical complexity is relatively large, and the casting and redemption process is relatively complex and time-consuming.
2.2 Minting and destruction process
The minting and destruction process of BTC anchor coins is its core link.
The minting process involves locking native Bitcoin in a multi-signature address or smart contract and generating an equal amount of anchor tokens on the target blockchain.
The destruction process is that the user sends the anchored coins to the smart contract for destruction and redeems the corresponding amount of Bitcoin. In the decentralized model, the minting and destruction process is more complicated, involving the collaboration and consensus of multiple nodes.
2.3 Decentralized hosting and trust model
Decentralized custody ensures the secure management of Bitcoin through distributed networks and encryption technology, avoiding dependence on a single institution.
Multi-party signature mechanisms, such as tBTC, ensure the security of the system by randomly selecting multiple signers to jointly manage the private key of Bitcoin.
Secure multi-party computing (MPC) such as Ren Protocol, multiple nodes jointly participate in the management of Bitcoin without leaking private keys, ensuring that the security of the network is not affected by a single node.
2.4 Cross-chain communication and smart contract execution
Cross-chain communication protocols and smart contracts are the basis for cross-chain operations of BTC anchored coins.
Cross-chain communication is responsible for transmitting information between the Bitcoin network and the target blockchain, usually relying on relayers or observers.
Smart contract execution ensures the automation, transparency and immutability of minting and destruction operations.
3. Analysis of representative projects and current status of BTC anchored coins
Early BTC anchoring attempts such as sidechain projects such as Rootstock (RSK) explored cross-chain technology but failed to be widely used.
3.1 The birth and market application of WBTC
In 2018, the WBTC project was launched, becoming an important milestone in the development of BTC-pegged coins. WBTC was jointly initiated by multiple institutions. Through centralized custody, Bitcoin is locked in a custody account and an equal amount of WBTC tokens are minted on Ethereum. The emergence of WBTC has provided the possibility for the application of Bitcoin in the Ethereum ecosystem and quickly became one of the most popular BTC-pegged coins on the market. According to the official website of WBTC, the current issuance of WBTC has reached 150,000, with a value of approximately US$9 billion, of which 40.6% is used for lending, 32.6% is for buying and holding, and 11.3% is used for cross-chain interoperability.
3.2 The rise of decentralized pegged coins
With the development of the DeFi market, the demand for decentralization and security has increased, and decentralized BTC-pegged coin projects such as renBTC and tBTC have emerged one after another.
renBTC is launched by Ren Protocol, which manages the custody and token minting of Bitcoin through a distributed node network with a high degree of decentralization.
tBTC was launched by Keep Network and adopts a multi-party signature scheme to reduce dependence on centralized institutions.
3.3 Diversification and ecological expansion of BTC anchor coins
BTC pegged coins are developing in the direction of diversification and multi-chain. In addition to Ethereum, other blockchain platforms such as Binance Smart Chain, Tron and Polygon also support the issuance and application of BTC pegged coins.
sBTC is issued by the Synthetix platform and simulates Bitcoin price changes through over-collateralization.
BBTC, launched by Binance, enables seamless flow of BTC on Ethereum and Binance Smart Chain.
3.4 Analysis of the current status of BTC anchored coins
WBTC’s dominance: As of August 2024, WBTC accounts for 94.7% of the market share.
Other BTC-pegged coins such as tBTC, BBTC and HBTC also have a certain market share, but the total amount is relatively small.
IV. The rise of BTC LSD tokens
The rise of the concepts of staking and re-staking has brought new development directions for BTC-pegged coins.
4.1 stBTC
stBTC is a BTC LSD token launched by Lorenzo Protocol. Users can generate stBTC tokens by staking Bitcoin and redeem them for native Bitcoin when needed.
4.2 LBTC
LBTC, launched by Lombard, provides decentralized staking management and offers secure and transparent staking returns to Bitcoin holders.
4.3 SolvBTC
SolvBTC is a BTC LSD token launched by Solv, which integrates multi-chain staking income to provide users with a wider range of investment and arbitrage opportunities.
5. Analysis of risks and opportunities of BTC anchored coins
In the development process of BTC anchored coins, although facing various risks and challenges, it also shows great development potential.
5.1 Risk Analysis of BTC Pegged Coins
(1) Centralization risk: The custodian of BTC-pegged coins is the key to their security. Once these custodians are hacked or mismanaged, Bitcoin may be lost or stolen, which will seriously affect the value and market confidence of the pegged coins. In addition, the centralized custody model means that if there is a problem with the custodian, such as bankruptcy, regulatory intervention or other failures, users may not be able to redeem their Bitcoin and face the potential risk of capital loss.
(2) Technical risks: Decentralized protocols usually rely on complex technologies such as multi-party signatures and MPC (secure multi-party computation). The implementation of these technologies requires precise code and strict management. Once there are loopholes or design flaws, it may cause system crashes or security incidents. The decentralized BTC anchor coin relies on consensus among nodes, but if these nodes are attacked, fail, or have malicious behavior, it may affect the stability and security of the anchor coin.
(3) Smart contract vulnerabilities: The minting and destruction process of BTC anchor coins is usually managed by smart contracts. Once the smart contract code is deployed, it is difficult to change it, and any undiscovered vulnerabilities may be maliciously exploited, resulting in capital losses. There have been many large-scale attacks caused by smart contract vulnerabilities in history, and BTC anchor coin projects also face similar risks. In addition, the interoperability of BTC anchor coins with other DeFi protocols may bring additional risks. If the associated protocol fails or is attacked, it may affect the normal operation of the anchor coin.
(4) Regulatory uncertainty: As the cryptocurrency market develops, regulatory efforts in various countries are gradually strengthened, and BTC anchor coins may face compliance pressure, especially in terms of KYC and AML regulations. Strict regulatory measures may limit the liquidity of anchor coins or increase their operating costs.
5.2 Analysis of opportunities for BTC-pegged coins
(1) Cross-chain liquidity and expansion of DeFi applications: The biggest advantage of BTC anchor coins is that they can provide cross-chain liquidity for Bitcoin, enabling it to participate in the DeFi ecosystem of smart contract platforms such as Ethereum. This makes Bitcoin no longer limited to value storage and simple payments, but can participate in complex financial activities such as lending, liquidity provision, and derivatives trading, becoming a more dynamic asset.
(2) The rise of multi-chain ecology: With the development of cross-chain technology, the application scope of BTC anchor coins is no longer limited to Ethereum, but has expanded to multiple blockchain platforms, such as BSC, Solana, etc. The rise of this multi-chain ecology has opened up new application scenarios and markets for BTC anchor coins. From DeFi to NFT markets, and then to decentralized governance, the application prospects of BTC anchor coins are becoming increasingly broad.
(3) Development of BTC LSD: The emergence of BTC LSD tokens allows Bitcoin holders to maintain asset liquidity while staking, thereby achieving higher capital efficiency in the DeFi ecosystem. This flexible and efficient staking method has attracted more Bitcoin holders to participate in staking and DeFi activities, further promoting the development of the BTC anchor coin market.
(4) Participation of institutional investors: As the cryptocurrency market matures and infrastructure improves, more and more institutional investors are entering the BTC-pegged coin market. Their participation not only brings a large amount of funds, but also improves the trust and stability of the market. The needs of institutional investors have prompted project parties to make improvements in technical security and regulatory compliance, thereby improving the standards and credibility of the entire industry.
VI. Conclusion
BTC anchor coins have opened up new application scenarios and value space for Bitcoin. Under the premise of ensuring security, giving full play to the potential of BTC anchor coins will be the key to future development. The rise of BTC LSD tokens shows that the application of Bitcoin in the DeFi field is moving towards the trend of transforming static assets into dynamic assets with liquidity and yield attributes. This not only improves the capital efficiency of Bitcoin, but also provides users with more diversified investment opportunities. The success of BTC LSD tokens depends not only on technical implementation and market application, but also on a balance between security, decentralization and user experience. With the further maturity of cross-chain technology, DeFi ecology and liquidity pledge derivatives, BTC anchor coins are expected to play a more important role in the future cryptocurrency market and provide Bitcoin holders with richer and more flexible asset management tools.
