How does TBTC work?
TBTC is a decentralized and trustless system for wrapping Bitcoin proposed by Keep Project and the Cross-Chain Working Group. The goal of TBTC is to create a trustless system for using Bitcoin on Ethereum-based systems and could be seen as critical infrastructure for the success of the broader ecosystem.
Below is an overview of the minting and burning process for TBTC for anyone looking to understand this trustless cross-chain system on a deeper level.
Users who are looking to mint TBTC can do so by sending a deposit request to the TBTC smart contract on Ethereum. The depositor must also stake some ETH, known as a deposit bond, as an anti-spam mechanism for the system where the deposit bond is returned following the completion of the deposit process.
Once the user submits the deposit bond, a randomly selected signing group generates a public BTC wallet address to the user. Signing group members are picked from an eligible pool of signers who agreed to bond ETH as collateral. This bonded ETH is an incentive to align interests of the signers and can be used to penalize members in the case of misbehavior. With this in mind, signers must bond 150% of the total deposit size in ETH as collateral in order to generate a key pair. This mechanism is very similar to the MakerDAO and Dai stablecoin system.
As an example, if the BTC deposit is 1 BTC and requires 15 signers, each signer must have an ETH equivalent of 0.1 BTC collateralized (for a total of 1.5 BTC) in order to generate a key pair.
Once the depositor has sent the BTC to the signing group deposit address, proof of the deposit is verified with an on-chain simple payment verification (SPV) system on Ethereum. Once verified, the smart contract enables a 1:1 minting of TBTC.
As a security feature to prevent denial of service attacks, 0.005 TBTC is withheld on minting and is returned to the beneficiary when the deposit is closed. Initially, the beneficiary and the depositor are the same actors, however, on Ethereum the beneficiary status is transferable through a non-fungible token (ERC721).
We’d like to note that as it stands right now, TBTC will only be able to handle deposits of exactly 1 BTC and any deposited BTC is locked for 6 months. However, we can expect that as this system is tested and matures, the system will ultimately allow any deposit size above a minimum amount to cover network and custodial fees.
Demo video: https://twitter.com/mhluongo/status/1162492082596057088
Redemption of TBTC
The TBTC redemption systems are aimed at providing access to the deposited BTC via a publicly verifiable process. If the deposit has not been accused of fraud or liquidation and the 6 months has elapsed than it is eligible for a redemption request. With this, any actor may perform a redemption request by repaying the outstanding TBTC and accrued custodial fees and provide their Bitcoin wallet address. Upon receipt of the request, the tBTC smart contracts burn the equivalent of the deposit size and distribute the signer fees and the beneficiary bonds to the valid actors and notify the bonded signers that a signature is needed.
Once this process is completed and all fees are paid, the tBTC is burned on Ethereum and the user who performed the redemption receives their native BTC.
Fees and Repayment
Taking into account the fees from centralized custodians (0.0025-0.0075 BTC), signers are rewarded a flat 0.005 TBTC per 1.0 TBTC minted, meaning the total signing revenue is 0.5% of the market cap of the minted amount of TBTC each year.
In total, the repayment amount is calculated as the summation of the following:
Deposit Size = 1 TBTC
Signer fees = .005 TBTC
Deposit Beneficiary = 0.0005 TBTC
This is a high-level overview of the process and does not account for many of the specific nuances involved with the system including collateralization ratio for bonded signers, slashing penalties, price feeds and other system specifics.
However, as a simplified concluding summary: Bitcoin is deposited into a multi-sig wallet where the key holders are incentives to act accordingly by locking up other crypto assets as collateral (in this case ETH). Once this is confirmed on-chain, the TBTC smart contract mints the user with a 1:1 equivalent of the token on Ethereum.
If you’re interested in getting a full understanding of the TBTC system, you can review the official tBTC spec here. Also, take a look at Wrapped Bitcoin another bitcoin alternative on the Ethereum blockchain.
Additional DeFi Rate reading on wrapped Bitcoin and other similar assets: