Original author: Elena Giralt
Original title: sBTC vs WBTC: A Comparison of Tokenized Bitcoin
Original source: https://www.hiro.so/blog/sbtc-vs-wbtc-a-comparison-of-tokenized-bitcoin
To fully unlock Bitcoin DeFi and make Bitcoin a programmable, productive asset, you need to wrap Bitcoin (sometimes referred to as tokenized Bitcoin or synthetic Bitcoin). In this article, we will compare WBTC (the most popular wrapped Bitcoin version on Ethereum) with sBTC, a decentralized, 1:1 Bitcoin-backed asset supported by Stacks, launching in December.
In the world of cryptocurrency, Bitcoin is king. It holds over 50% of the industry's market capitalization and is widely regarded as the most powerful and decentralized blockchain.
In the world of cryptocurrency, Bitcoin is king.
However, despite Bitcoin's dominance, Bitcoin holders have limited options for utilizing Bitcoin liquidity in applications. The most common way to participate in Bitcoin DeFi today is to tokenize BTC and transfer synthetic assets to another chain via a bridge.
Wrapped Bitcoin (WBTC) is the most popular tokenized Bitcoin. Today, 0.7% of Bitcoin is locked in DeFi through WBTC. While WBTC's product-market fit looks promising, it requires trade-offs on speed, cost, and centralization, making it a less-than-perfect solution. sBTC is a new design of a programmable 1:1 Bitcoin-backed asset supported by Stacks, expected to launch in December 2024.
Uncustodied wrapped Bitcoin has a tremendous opportunity to unlock over $1.5T of potential capital — even utilizing just 1% of it represents a multi-billion dollar opportunity. This is the opportunity that sBTC focuses on.
So how does sBTC compare to WBTC?
Note: sBTC will be launched in phases. The first phase of sBTC (launching December 16) will be maintained by 15 elected signers and will allow deposits. Withdrawals will occur in the later phase in February 2025, after which a more decentralized sBTC design will adopt an open, rotating signer set. This blog mainly describes the final phase of sBTC, but we will discuss the gradual decentralization of the protocol in more detail below. You can learn more about the launch phases of sBTC here.
sBTC vs WBTC Overview
What is WBTC?
WBTC is a digital token that represents Bitcoin on Ethereum and other EVM-compatible blockchains. It is the oldest and most popular tokenized Bitcoin used in DeFi.
WBTC is the oldest and most popular tokenized Bitcoin in DeFi.
As for how it operates, WBTC is an ERC-20 token, pegged 1:1 to Bitcoin; for every WBTC in circulation, BitGo and BiT Global (the central custodians of wrapped Bitcoin) hold 1 BTC. To buy/sell WBTC, users must go through an authorized merchant network.
WBTC brings greater liquidity to decentralized exchanges (DEX) and financial applications in the Ethereum ecosystem, allowing users to interact with DeFi using Bitcoin as collateral. Currently, the circulating supply of WBTC is around 147,000, representing 0.7% of the total Bitcoin supply.
What is sBTC?
sBTC is an upcoming asset representing Bitcoin on the Stacks network. The design of this trust-minimized, 1:1 Bitcoin-backed asset is detailed in the sBTC whitepaper, but at a high level, sBTC allows anyone to move BTC in and out of the Bitcoin layer (and other Web3 ecosystems) in a secure and decentralized manner.
sBTC is a new design of a decentralized, 1:1 Bitcoin-backed asset.
sBTC differs from WBTC in several ways.
— sBTC has no centralized custodian. Instead, sBTC is maintained by a network of smart contracts and an open, decentralized network of validators (called signers).
— All sBTC transactions are settled in Bitcoin, with 100% Bitcoin finality, meaning sBTC benefits from the full security budget of Bitcoin itself.
— sBTC is more cost-effective than WBTC because there are zero custodial fees related to wrapping and unwrapping, and the transaction fees for users to deposit and withdraw BTC are also lower.
sBTC is planned to launch its mainnet in December 2024.
Protocol Design
Bitcoin lacks a stateful smart contract system and requires a separate smart contract-driven blockchain along with a method for depositing/extracting BTC from the second blockchain to use Bitcoin in DeFi and other applications. The deposit/withdrawal mechanism is commonly referred to as a 'peg' or 'bridge,' and it must meet two basic functions:
— Deposits: BTC holders deposit BTC onto the Bitcoin chain in exchange for an equivalent tokenized Bitcoin asset on the smart contract chain. This process is sometimes referred to as 'pegging' or 'minting.'
— Withdrawals: Holders of tokenized Bitcoin assets destroy their synthetic assets on the smart contract chain and receive an equivalent amount of BTC on the Bitcoin chain. This is sometimes referred to as 'unpegging' or 'burning.'
WBTC and sBTC adopt two different design approaches to handle these operations.
WBTC: Custodial Bitcoin Peg
The WBTC peg is maintained by the WBTC DAO and an approved merchant network. These merchants are the only entities that can request the minting or burning of WBTC. Users purchase WBTC directly from merchants in that network. Merchants verify the identity of the user, and once approved, the individual sends BTC to the merchant. The merchant then sends the corresponding amount of WBTC to the user.
All circulating WBTC is backed at a 1:1 ratio by BTC, and the BTC is held in custody by WBTC's primary custodians, BitGo and BiT Global. These custodians are the only entities that can mint new WBTC, storing the deposited BTC assets in cold storage and multi-signature wallets.
The proof of reserves corresponding to the deposited BTC is on-chain, so anyone can verify that the minted WBTC tokens correspond to a 1:1 supply of BTC stored by BitGo and BiT Global. When an individual wants to 'peg' or withdraw their BTC, they must send WBTC to an approved merchant, who will then 'burn' (or destroy) the WBTC tokens and return an equivalent amount of BTC. The amount burned is deducted from the merchant's WBTC balance on-chain, reducing the overall supply of WBTC to maintain the 1:1 peg with BTC.
It is important to understand that WBTC is a custodial asset being deployed into non-custodial products. This means that third parties hold the BTC backing WBTC, and users do not control the underlying assets. This increases counterparty risk — there is a reason the saying 'not your keys, not your coins' exists.
It is also worth mentioning that the recent change in custodianship to add BiT Global as a custodian of BitGo has sparked controversy, as BiT Global has ties to Justin Sun, who is himself a controversial figure in the industry.
sBTC: Decentralized Bitcoin Peg
Similar to WBTC, sBTC is backed by Bitcoin at a 1:1 ratio. However, from this point, the design diverges. In sBTC, users deposit BTC into a threshold signature wallet controlled by an open, decentralized network of validators (also known as signers).
This open signer membership is achieved through Proof of Transfer (PoX), which is a unique consensus mechanism of Stacks. sBTC will be maintained by a public, open, permissionless network rather than having a set or static group of custodians.
To become a signer in the Stacks network, signers must lock a dynamic threshold of STX tokens in PoX and run software nodes that process sBTC deposits/withdrawals. In exchange for this work, validators can earn BTC rewards generated by PoX, incentivizing their participation in the network.
Note: In the first phase of the sBTC launch, sBTC will be maintained by 15 signers elected by the community. You can learn more about the signer standards and responsibilities here. An open, rotating signer set will be introduced in later versions.
Every time BTC is sent to the sBTC multi-signature wallet (deposit operation), an equivalent amount of sBTC is sent to the address chosen by the sender. This process occurs automatically through a smart contract rather than a series of intermediaries (merchants, custodians). Signers handle withdrawal requests by destroying the requester's sBTC and transferring BTC to the requester's Bitcoin address, thus maintaining the peg.
The connection of sBTC to Bitcoin
sBTC has a unique close connection to Bitcoin, as Bitcoin brings its value proposition to the peg. Specifically, sBTC can have greater fidelity to the state of Bitcoin due to the following two characteristics:
— Clarity smart contracts have read access to Bitcoin.
— sBTC and Bitcoin forks.
For Ethereum-based tokenized Bitcoin like WBTC, oracles or intermediaries are required to stay up-to-date in the event of a Bitcoin fork, while forks or reorganizations may temporarily disrupt operations or create discrepancies between the prices of Bitcoin and WBTC, referred to as 'decoupling.'
sBTC does not experience this issue. Stacks has a native Bitcoin oracle built into its blockchain, and the sBTC bridge will always fork with the Bitcoin chain. The proximity of sBTC to Bitcoin also means sBTC is guaranteed by 100% Bitcoin finality.
Fees
WBTC
For WBTC, merchants typically charge a fixed fee to convert Bitcoin to WBTC and vice versa. This is referred to as 'wrapping/unwrapping' fees. Additionally, merchants may require a minimum withdrawal amount. These fees vary by merchant and total withdrawal amount. Since WBTC is an Ethereum token, any transaction will also incur Ethereum gas fees for processing.
sBTC
For sBTC, converting Bitcoin to sBTC is free, and vice versa, making sBTC cheaper for users than WBTC. sBTC has no minimum deposit/withdrawal amounts, but it is worth noting that there will be a limit of 1,000 BTC upon sBTC's initial launch (this limit will increase over time).
Since sBTC is a Stacks token, any transaction will incur typical STX transaction fees for on-chain processing.
Security
World Bitcoin Exchange
The security of WBTC pegged to Bitcoin relies on its custodians BitGo and BiT Global, as well as the merchants and signers participating in the WBTC DAO. This introduces counterparty risk, which is inherent in any exchange that relies on centralized intermediary institutions. This risk includes participants losing keys, intermediaries becoming inactive or engaging in malicious collusion, bankruptcy, etc.
Today, you can see evidence of this risk in WBTC. For example, there is an issue where several initial signers of the DAO multi-signature have become inactive or lost control of their keys. With the addition of BiT Global, we have seen community resistance, risking Justin Sun's involvement in WBTC, and Coinbase has just announced they will delist WBTC in December 2024. In fact, the number of bridged WBTC has already decreased by 5% since the announcement of WBTC.
Merchants may also pose counterparty risks, as was the case when WBTC traded at a slight discount, because the two largest merchants, Alameda Research and 3 Arrows Capital, filed for bankruptcy and could not process new or existing peg requests. The WBTC pegged exchange rate has since stabilized.
sBTC
sBTC represents a significant leap in the security of Bitcoin pegs because it achieves a decentralized design. For custodial pegs like WBTC, the aforementioned counterparty risks exist, primarily concentrated on custodians BitGo and BiT Global and among authorized merchants.
The design of sBTC has no central custodian. Instead, a rotating group of signers maintains the peg and is economically incentivized to do so honestly by being rewarded in Bitcoin for their work.
Unlike other tokenized Bitcoin assets, sBTC does not rely on a fixed consortium or multi-signature hardware wallet consortium for its peg, a design that brings greater counterparty risk. Instead, it achieves economic security through an open signer network integrated with the Stacks consensus protocol.
Again, it is worth noting that in the initial version of sBTC launching in December, sBTC will not have this permissionless, rotating signer set. Instead, the sBTC peg will be maintained by a group of 15 elected signers, similar to how other tokenized Bitcoin assets exist today. As the sBTC protocol evolves, more advanced features will be introduced, including gradual decentralization of the signer set.
Finally, in terms of security, sBTC also offers 100% Bitcoin finality, meaning all sBTC transactions are recorded on the Bitcoin main chain. This makes it very costly/difficult to attack or 'reorganize' sBTC transactions, which may not be the case for other tokenized Bitcoin assets, depending on the chains they use.
Traction and Use Cases
wBTC
Today, WBTC is the most popular wrapped Bitcoin asset form, with over 145,000 WBTC minted (equivalent to $13B). WBTC is held by over 104,000 addresses, and in fact, over 50% of all wrapped Bitcoin is WBTC.
Today, you can access WBTC in many different ecosystems, and the network boasts numerous impressive partners, including the aforementioned BitGo and BiT Global, as well as dozens of others like Sky (Maker), Uniswap, Loopring, etc.
The primary use case for WBTC is lending on DeFi platforms like Maker, Curve, Aave, etc. In addition to lending WBTC or borrowing against WBTC, WBTC holders can also provide liquidity and yield farm with their WBTC to earn rewards and interest on their holdings. So where exactly is WBTC used? Here are some of the most popular destinations as of November 27:
— Average: 27.8%
— Compound: 7.7%
— Arbitration: 7.1%
— Sky: 3.2%
— Polygon: 2.6%
Interestingly, due to the lack of a native Bitcoin bridge, WBTC is also quite popular on the Bitcoin layer.
sBTC
sBTC has not yet launched, so we can provide fewer traction statistics. However, partners have shown strong interest in sBTC, signaling a promising launch. Figment, Luganodes, Kiln, and others have announced that they will be one of the community-reviewed signers for the launch of sBTC. Both the Solana and Aptos ecosystems have expressed interest in connecting sBTC to their networks.
sBTC holders can earn BTC rewards instead of other tokens or points.
As for use cases, the primary use cases of sBTC are similar to those of WBTC. Here are some operations users can perform with sBTC:
— Trustless, Bitcoin-collateralized stablecoin loans
— On-chain, under-collateralized BTC lending
— Trustlessly deploy BTC for BTC earnings
— BTC DAO Treasury
— sBTC Stacking Pool
While the actual activities holders can engage in are similar (borrowing, lending, liquidity mining), the two main differences are the ability to borrow trustlessly in BTC and that holders can earn BTC rewards instead of tokens or points on the DeFi platform used (this is possible due to Stacks' unique consensus mechanism, Proof of Transfer).
Given that Stacks has Bitcoin finality and sBTC is decentralized, we believe sBTC can effectively harness Bitcoin's potential and attract users who want to put BTC to productive use without compromising security.
Conclusion
Stacks' unique properties, from Proof of Transfer to the Clarity programming language, make Stacks an ideal Bitcoin layer for smart contracts. The STX token is crucial for this Bitcoin layer as it provides economic incentives to support the open network of miners and signers maintaining the sBTC peg.
All these features ensure that Stacks stays aligned with the decentralized spirit of Bitcoin, allowing anyone to participate and contribute actively. Ready to learn more about sBTC?
