Written by: Hotcoin Research
introduction
Recently, the market has been paying close attention to the transfer of control of the WBTC project. The news that Justin Sun (founder of Tron) announced his participation in the WBTC project quickly sparked widespread controversy in the crypto community. The focus of discussion was mainly on the security and decentralization of WBTC and the potential impact of Justin Sun’s personal influence on the project.
Since its launch in 2019, WBTC has become an important bridge for Bitcoin cross-chain applications. By anchoring Bitcoin as an ERC-20 token, WBTC has brought a wider range of DeFi applications to Bitcoin. However, WBTC's centralized custody model has also made it controversial for a long time. Sun Yuchen's entry has once again aroused people's discussion on this issue, especially in terms of cross-chain asset security and the importance of decentralized governance.
This article will explore the root causes of the controversy caused by Justin Sun’s entry into WBTC through an overview of BTC-pegged coins, in-depth analysis of their mechanism principles and representative projects, and look forward to the future development direction of BTC-pegged coins.
1. Overview of BTC-pegged coins
1.1 Definition and Basic Principles
BTC-pegged coins are digital assets that map Bitcoin to other blockchain networks through specific technical means. Such tokens are usually linked to Bitcoin in a 1:1 manner, that is, each BTC-pegged coin issued is backed by an equal amount of Bitcoin as collateral. This mechanism allows BTC-pegged coins to have the value attributes of Bitcoin on other blockchains (such as Ethereum) and to participate in the decentralized applications DApps of these blockchains.
The creation of BTC anchor coins is mainly to make up for the shortcomings of Bitcoin's own network in smart contract functions, so that Bitcoin can play a role in a more complex financial ecosystem. Although Bitcoin is the earliest and most consensus-based cryptocurrency, its network lacks Turing completeness and cannot directly support smart contracts and other complex decentralized financial operations. For example, the ERC-20 standard token on Ethereum can be easily integrated into the DeFi protocol, and 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, thereby greatly expanding the scope of Bitcoin's application.
1.2 The need and significance of BTC-pegged coins
(1) The need for cross-chain liquidity
As the cryptocurrency with the highest market value and the strongest liquidity in the world, Bitcoin has far more users and holdings than other crypto assets. If Bitcoin can flow seamlessly to other blockchains, especially those platforms with smart contract functions, it will greatly enhance its usage scenarios and value creation capabilities. BTC anchor coins are designed to meet this demand for cross-chain liquidity. Through BTC anchor coins, Bitcoin can play its asset advantages on other blockchains and participate in more diversified decentralized applications, such as lending, liquidity mining and derivatives trading.
(2) Driving force behind the development of decentralized finance (DeFi)
As "digital gold", Bitcoin has great potential in DeFi. However, due to the technical limitations of the Bitcoin network itself (such as the lack of smart contract functions), it is quite challenging to develop DeFi applications directly on the Bitcoin network. Therefore, "relocating" Bitcoin to a blockchain with smart contract functions (such as Ethereum) has become a key path to achieve this goal. BTC anchor coins enable Bitcoin to participate in the DeFi ecosystem by mapping it to blockchains such as Ethereum. This not only improves the utilization rate of Bitcoin, but also injects more liquidity and stability into DeFi applications.
(3) Asset appreciation and risk management tools
Through BTC-pegged coins, holders can obtain additional benefits by participating in the DeFi ecosystem without giving up long-term holding of Bitcoin. For example, users holding WBTC can pledge it on the DeFi platform, lend stablecoins for other investments, or participate in liquidity mining to earn rewards. In addition, some decentralized exchanges also provide trading pairs between BTC-pegged coins and other assets, providing investors with more arbitrage opportunities. In addition, BTC-pegged coins can also be used as a risk management tool. Using BTC-pegged coins as collateral can effectively reduce the risk of the investment portfolio and act as a stabilizer.
(4) Improving the practical utility of the Bitcoin network
The Bitcoin network is the earliest blockchain, with high security and consensus strength. However, its own technical limitations make Bitcoin's application scenarios relatively limited, mainly focusing on value storage and simple payment transfers. Over time, the market demand for Bitcoin is no longer limited to these basic functions, but hopes to use Bitcoin in a wider range of financial services. The emergence of BTC anchor coins has provided a broader application stage for Bitcoin. By issuing anchor coins on other blockchains, Bitcoin is able to participate in more complex financial operations on these chains, which not only improves the actual utility of Bitcoin, but also consolidates its position as the world's preferred digital asset.
2. The mechanism principle of BTC anchored currency
2.1 Centralized Anchoring and Decentralized Anchoring
The core of BTC pegged coins lies in how to lock Bitcoin on its native chain and generate tokens of equal value through cross-chain technology. According to the difference of this core mechanism, the working mechanism of BTC pegged coins can be divided into two categories: centralized and decentralized.
The centralized anchoring mechanism relies on trusted third-party custodians, which are responsible for keeping the bitcoins locked by users and minting corresponding anchor tokens based on the number of locked bitcoins. For example, WBTC is a typical centralized anchor coin. Users send bitcoins to custodians (such as BitGo), which manage these bitcoins and mint an equal amount of WBTC tokens on the Ethereum network. When users want to redeem bitcoins, the custodian destroys the corresponding amount of WBTC and returns the bitcoins to the users. The advantages of this model are simple operation and fast transaction speed, but due to its reliance on centralized institutions, there are trust risks and potential security risks of centralized management.
The decentralized anchoring mechanism uses distributed networks and encryption technology to achieve cross-chain transfer and tokenization of Bitcoin. Taking renBTC as an example, its working mechanism does not rely on a single institution, but manages and verifies the locking and token minting of Bitcoin through the distributed node network of Ren Protocol. Ren Protocol uses secure multi-party computing (MPC) technology to distribute the custody process of Bitcoin on multiple independent nodes to ensure that no single node can control the private key of Bitcoin. This mechanism greatly reduces the risk of centralization and enhances the security and transparency of the system. However, due to the high technical complexity, the minting and redemption process of decentralized anchor coins is usually more complicated and time-consuming.
2.2 Minting and destruction process
The minting and destruction process of BTC pegged coins is the core link of its working mechanism. These two processes represent the conversion between Bitcoin and pegged coins respectively.
Minting process: The process of minting BTC-pegged coins usually involves locking the native Bitcoin in a multi-signature address or smart contract and generating an equal amount of anchored tokens on the target blockchain (such as Ethereum). Taking WBTC as an example, when users want to obtain WBTC, they need to send the same amount of Bitcoin to the custodial address managed by BitGo. Once the Bitcoin transaction is confirmed by the network, BitGo will mint the same amount of WBTC on Ethereum through a smart contract and send it to the user's Ethereum address. Users can verify each step through the block browser.
Destruction process: When a user wants to redeem BTC anchored coins back to Bitcoin, the destruction process needs to be triggered. The user first sends the anchored coin (such as WBTC) to the corresponding smart contract for destruction, and at the same time sends a request to the custodian to redeem Bitcoin. Once the destruction transaction is confirmed, the custodian will release the originally locked Bitcoin and send it to the Bitcoin address specified by the user.
In a decentralized model, the minting and destruction process of renBTC is more complicated, involving the consensus and collaboration of distributed network nodes. After the user sends Bitcoin to the escrow address of Ren Protocol, multiple independent nodes will verify it and jointly generate renBTC through secure multi-party computing technology. The destruction process is through the reverse operation. After renBTC is destroyed, multiple nodes jointly decide to release the corresponding Bitcoin.
2.3 Decentralized hosting and trust model
Unlike centralized custody, decentralized custody ensures the secure management of Bitcoin through distributed networks and encryption technology, avoiding over-reliance on a single institution.
Multi-party signature mechanism: Taking tBTC as an example, it uses a multi-party signature (threshold signature) mechanism to randomly select multiple signers to jointly manage the private key of Bitcoin. These signers ensure the legitimacy of their actions by providing collateral (such as ETH). If the signers attempt to perform malicious operations, they will face financial losses. This mechanism can theoretically achieve higher security and decentralization.
Secure Multi-Party Computation (MPC): Ren Protocol uses MPC technology to allow multiple nodes to jointly participate in the management of Bitcoin without revealing private keys. This technology ensures that even if individual nodes are attacked, the security of the entire network will not be affected. In this way, Ren Protocol achieves decentralized management of BTC anchor coins.
2.4 Cross-chain communication and smart contract execution
The cross-chain operation of BTC anchor coins is inseparable from the execution of cross-chain communication protocols and smart contracts. The cross-chain communication protocol is responsible for transmitting information between the Bitcoin network and the target blockchain (such as Ethereum), while smart contracts are used to automatically manage operations such as casting and destruction.
Cross-chain communication: Cross-chain communication usually relies on repeaters or observers, which monitor transactions on the Bitcoin network and pass relevant information to the target blockchain. Taking Ren Protocol as an example, Ren's Darknodes are responsible for monitoring transactions in the Bitcoin network and broadcasting their information to the Ethereum network, triggering corresponding smart contract operations.
Smart contract execution: Smart contracts are the automated core of BTC-pegged coins. Both the centralized minting process of WBTC and the decentralized minting process of renBTC are inseparable from the execution of smart contracts. These contracts ensure that the minting and destruction of each token is transparent and tamper-proof, while automatically processing user requests, verifying transactions, and updating on-chain data.
3. Analysis of representative projects and current status of BTC-pegged coins
The earliest attempts to anchor BTC mainly focused on the exploration of cross-chain technology. Early attempts included the concept of Bitcoin sidechains, such as Rootstock (RSK), which attempted to achieve interoperability between Bitcoin and other blockchains through sidechains. However, these early projects were not widely used in the market due to their technical complexity and difficulty in implementation.
3.1 The birth and market application of WBTC
In 2018, the WBTC (Wrapped Bitcoin) project was officially launched, becoming an important milestone in the development of BTC-pegged coins. WBTC was jointly initiated by BitGo, Kyber Network, Ren Protocol and other institutions, and is the first ERC-20 token to achieve 1:1 Bitcoin peg on Ethereum. WBTC locks Bitcoin in BitGo's custody account through centralized custody, and mints an equal amount of WBTC tokens on Ethereum. The emergence of WBTC has opened the door for the application of Bitcoin in the Ethereum ecosystem, allowing Bitcoin to participate in DeFi applications. Due to its transparency and high market acceptance, WBTC has quickly become one of the most popular BTC-pegged coins on the market.
According to the WBTC official website, the current issuance of WBT 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 rapid development of the DeFi market, users' demand for decentralization and security is increasing. Some decentralized BTC anchored coin projects have emerged to avoid the trust risks brought by centralized custody.
renBTC: renBTC is a decentralized BTC-pegged coin launched by Ren Protocol. Ren Protocol uses secure multi-party computing (MPC) technology to achieve cross-chain transfer and custody of Bitcoin. Ren's network consists of a series of decentralized nodes (called Darknodes), which are jointly responsible for the custody of Bitcoin and the minting of renBTC. The main advantage of renBTC is its high degree of decentralization, which reduces the trust reliance on a single institution, but its technical complexity is also relatively high.
tBTC: tBTC is another decentralized BTC-pegged coin launched by Keep Network. tBTC uses a unique multi-party signature (threshold signature) scheme to randomly select multiple signatories to jointly manage the cross-chain transfer of Bitcoin. The design goal of tBTC is to minimize dependence on centralized institutions and ensure that users have full control over their Bitcoin. However, tBTC also faces certain challenges in promotion due to its complex mechanism and high technical threshold.
3.3 Diversification and ecological expansion of BTC anchored coins
With the emergence of more blockchain platforms and the diversification of market demand, BTC-pegged coins have begun to develop in a diversified and multi-chain direction. Not only on Ethereum, other blockchain platforms such as Binance Smart Chain, Tron and Polygon have also begun to support the issuance and application of BTC-pegged coins.
sBTC (Synthetix BTC): Issued by the Synthetix platform, as a synthetic asset, sBTC simulates the price changes of Bitcoin through overcollateralization. sBTC provides users with more flexibility, especially in synthetic asset trading and DeFi applications.
BBTC (Binance Wrapped BTC): Launched by Binance, it strictly adheres to the 1:1 asset guarantee principle and realizes the seamless flow of BTC on Ethereum and Binance Smart Chain.
3.4 Analysis of the Current Status of BTC-pegged Coins
WBTC's dominance: As of August 2024, WBTC is still the dominant BTC-pegged coin in the market, accounting for 94.7%. This data shows that despite the existence of a variety of BTC-pegged coins in the market, WBTC is still the first choice of users due to its earlier market entry time, extensive DeFi support and high trust.
Performance of other BTC-pegged coins: tBTC, BBTC and HBTC also have a certain market share, but the total amount is relatively small. Among them, tBTC accounts for 1.9% and BBTC accounts for 1.8%. These BTC-pegged coins are mainly used in specific application scenarios or supported by specific communities.
4. The rise of BTC LSD tokens
The rise of the concept of staking and re-staking has brought new development directions for BTC-pegged coins. Babylon launched a non-custodial Bitcoin staking solution, which implements Bitcoin staking through cryptography and generates liquid staking tokens. This project has opened up a new track for BTC staking by improving the capital efficiency of staking assets.
4.1 stBTC
stBTC is an important representative of BTC LSD tokens, launched by Lorenzo Protocol. The minting process of stBTC involves staking native Bitcoin in the custody contract of Lorenzo Protocol, and then generating corresponding stBTC tokens based on the number of staked Bitcoins. Users can use stBTC for other financial activities and redeem native Bitcoin by destroying stBTC tokens when needed. stBTC not only improves the capital utilization of Bitcoin, but also allows holders to freely flow and increase value in the DeFi ecosystem.
4.2 LBTC
LBTC is a BTC LSD token launched by Lombard, which aims to provide Bitcoin holders with more secure and transparent staking returns through decentralized staking management. Similar to stBTC, users are able to participate in the DeFi ecosystem by minting LBTC and use LBTC to earn returns in decentralized exchanges, lending protocols, and yield strategy platforms. Users can also entrust LBTC to Babylon to obtain proof-of-stake (PoS) security benefits. In addition, Babylon also provides additional reward incentives for deposited BTC, including possible returns and other incentives.
4.3 SolvBTC
SolvBTC is a BTC LSD token launched by Solv, which aims to provide an efficient liquidity staking solution by integrating staking income on multiple chains such as Bitcoin and Ethereum. SolvBTC provides users with more flexible staking and liquidity management services through an innovative decentralized asset management architecture. Due to its integration of multi-chain staking income, SolvBTC provides users with a wider range of investment and arbitrage opportunities. Users can use SolvBTC for a variety of DeFi protocols such as decentralized exchanges, lending protocols, and yield farms, and redeem the corresponding assets by destroying SolvBTC when needed.
5. Analysis of risks and opportunities of BTC-pegged coins
As an innovative tool to introduce Bitcoin into other blockchain ecosystems, BTC-pegged coins have shown great potential in improving Bitcoin liquidity and expanding its application scope. However, like other financial innovations, BTC-pegged coins are also accompanied by a series of risks and challenges in their development.
5.1 Risk Analysis of BTC-pegged Coins
(1) Centralization risk: The security of the custodian is of vital importance. Once the custodian is hacked or has poor internal management, it may lead to the loss or theft of Bitcoin, which will seriously affect the value and market confidence of the anchored currency. Centralized custody also means that if the custodian encounters operational problems such as bankruptcy, regulatory intervention or other forms of failure, users may not be able to redeem their Bitcoin and face the risk of losing funds.
(2) Technical risks: Decentralized protocols usually involve complex technologies such as multi-party signatures and MPC (secure multi-party computation). The implementation of these technologies requires highly precise code and meticulous management. Once vulnerabilities or design flaws occur, they may lead to system crashes or security incidents. Decentralized anchor coins rely on consensus among multiple nodes. If these nodes are attacked, fail, or engage in malicious behavior, the stability and security of the anchor coins may be affected.
(3) Smart contract vulnerabilities: BTC anchor coins usually manage the minting and destruction process through smart contracts. Once deployed, the smart contract code is difficult to change, 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 are no exception. BTC anchor coins often interoperate with other DeFi protocols, and this dependency may bring additional risks. If the protocol interacting with it fails or is attacked, it may affect the normal operation of the anchor coin.
(4) Regulatory uncertainty: As the cryptocurrency market develops, regulators in various countries are gradually increasing their supervision of crypto assets. BTC-pegged coins may face compliance pressure, especially in terms of KYC and AML regulations. Strict supervision may limit the liquidity of pegged coins or increase operating costs.
5.2 Analysis of opportunities for BTC-pegged coins
(1) Cross-chain liquidity and expansion of DeFi applications: The biggest opportunity for BTC-pegged coins is that they can bring cross-chain liquidity to Bitcoin, enabling it to participate in the DeFi ecosystem of smart contract platforms such as Ethereum. This capability transforms Bitcoin from being limited to value storage and simple payments to a dynamic asset that can participate in complex financial activities such as lending, liquidity provision, and derivatives trading.
(2) The rise of multi-chain ecology: With the development of cross-chain technology, the application of BTC anchor coins is no longer limited to Ethereum, but has gradually expanded to multiple blockchain platforms, such as BSC, Solana, etc. The rise of this multi-chain ecology has opened up new application scenarios and market space for BTC anchor coins. From DeFi to NFT markets, to decentralized governance, the potential application scope of BTC anchor coins is constantly expanding.
(3) Development of BTC LSD: BTC LSD tokens allow Bitcoin holders to maintain asset liquidity while staking, thereby achieving higher capital efficiency in the DeFi ecosystem. The emergence of LSD tokens makes Bitcoin staking more flexible and efficient, attracting more Bitcoin holders to participate in staking and DeFi activities, and further promoting the market development of BTC-pegged coins.
(4) Participation of institutional investors: As the cryptocurrency market matures and infrastructure improves, more and more institutional investors are beginning to participate in the BTC-pegged coin market. The entry of institutional investors not only brings a large amount of funds, but also improves the trust and stability of the market. The needs of institutional investors have driven project parties to improve technical security and regulatory compliance, and improved the standards and credibility of the entire industry.
Summarize
Sun Yuchen's entry into WBTC has caused controversy, mainly because WBTC has an absolute dominant position in the BTC anchored currency market, with nearly 95% of the market share, and is widely used in the DeFi ecosystem. As a core asset of decentralized finance, the security and custody transparency of WBTC are crucial. Sun Yuchen's participation has aroused the community's concerns about the increase in centralized control and potential conflicts of interest, especially in the context of BitGo's transfer of custody rights, which has increased doubts about the management of WBTC and the security of underlying assets, and concerns that it may affect the stability and trust of the DeFi market.
However, it is undeniable that BTC anchor coins have opened up new application scenarios and value space for Bitcoin. How to fully utilize the potential of BTC anchor coins while ensuring security will be the key to future development. The rise of BTC LSD tokens reflects an important trend in the application of Bitcoin in the DeFi field: transforming static assets into dynamic assets with liquidity and yield attributes. This trend 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 its 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 more abundant and flexible asset management tools.
