The emergence of Ethereum ERC-20 tokens fully collateralized 1:1 by BTC has begun. In 2019, we’ve primarily seen two systems bringing BTC to the Ethereum network. These systems being wBTC and most recently, TBTC.
With Ethereum blocks created every 15 seconds compared to every 10 minutes on Bitcoin, these tokens provide users with faster transactions at a lower cost. Moreover, with wrapped BTC, Bitcoin can now benefit from the utility derived from DeFi applications while simultaneously providing more liquidity to the Ethereum ecosystem.
With an Ethereum-based Bitcoin token, users could use BTC to take out a loan through MakerDAO, trade on Uniswap or Kyber with minimal counterparty risk, or stack sats by earning interest through Compound Finance.
Last year, we saw the first proposal for wrapped Bitcoin, called WBTC, which garnered a substantial amount of interest within the Ethereum community. Since its launch in early 2019, WBTC has seen nearly 600 BTC locked, culminating around $6M in total value locked (TVL). While the value is rather small, it does signal a growing market interest for the asset.
For those unfamiliar, WBTC relies on a consortium model where a handful of verified entities handle the minting, burning, and custody of the assets. With this, the model isn’t necessarily trustless as users must rely on and trust a certain group of entities for the minting and burning of WBTC.
As we know, the core values of crypto are to provide decentralized and trustless applications to eliminate the reliance on large institutions. With this in mind, it would only make sense for a trustless method for wrapping BTC to emerge in order to properly appeal to the nature of crypto and DeFi.
Fortunately, in August 2019, the Keep Project team released the spec for TBTC, a decentralized BTC-backed ERC-20 token. The release of the spec is a drastic shift from the WBTC model as it creates a trustless cross-chain system for minting, burning, and custody of Bitcoin.
Comparing WBTC to TBTC
Outside of the overarching system architecture, WBTC and TBTC both hold a range of similarities and differences.
In terms of similarities, both models are fully collateralized with on-chain proof of reserves. This means that every WBTC or TBTC in circulation is backed 1:1 with BTC held in a custodial wallet. Given that the collateralization is on-chain, anyone can verify the backing of the underlying token. So, even though these systems may drastically be different in system architecture, both WBTC and TBTC offer highly transparent systems for verifying the backing of the underlying asset.
|Ecosystem Actors||Merchants, Custodians, WBTC DAO||Bonded Signers|
|Deposit Size Requirement||N/A||1 BTC|
|Lock-up Period||None||6 months|
|Fees||Custodian + Merchant + Network Fees||Custodian + Network fees|
Given that TBTC spec was only released last week, WBTC’s biggest benefit is the first-mover advantage. WBTC has already amassed nearly 600 BTC along with its recent integration into Compound Finance. With this, investors can now borrow or lend WBTC in an entirely trustless manner. In addition, unlike TBTC, the WBTC system is rather robust allowing any deposit size with minimal lock-up periods.
First and foremost, users looking to mint or redeem WBTC must pass KYC/AML. While KYC/AML is not a bad thing, having this requirement does add friction to the system and can draw some critiques from the crypto community. It is important to note that while users who wish to mint or burn WBTC through merchants and custodians must pass KYC/AML, users are still able to transact and hold WBTC without KYC/AML once it is in circulation.
The last major drawback is the system’s reliance on the consortium model. Users will have to trust a handful of crypto institutions to mint, burn, and custody the tokens. While no single institution controls the entire system, the consortium model does not completely fill the core values of crypto and decentralized architectures.
The biggest benefit to TBTC over WBTC is the elimination of trust within the overarching system. Rather than relying on merchants and custodians, TBTC relies on math and game theory (i.e. incentives) to drive the ecosystem. With this, users looking to mint TBTC or redeem BTC do not have to complete KYC and AML as the entire process is executed in a trustless and pseudonymous manner.
The TBTC spec was released early last week and is still in the early phases of development. As such, many of these drawbacks generally derive from the fact that the system is untested and hasn’t had the opportunity to mature yet.
Regardless, the biggest drawback for TBTC is the 6-month lock-up requirement and the strict limitations on Bitcoin deposit sizes. As it stands today, users who wish to mint TBTC by locking BTC can only do so in intervals of 1 BTC. Therefore, anyone looking to mint multiple BTC must go through the minting process multiple times. Moreover, this strict deposit requirement creates fairly high capital requirements as anyone with <1BTC is unable to participate.
While both TBTC and WBTC both offer highly transparent systems with verifiable on-chain reserves, each system has its trade-offs. It is important to note that TBTC is not live yet and is still in testing phases, but it will be interesting to see how these two assets continue to evolve over the coming years.
Analyst at Bankless – one of the leading resources for open finance. Lucas is an active contributor to the DeFi ecosystem with appearances in other notable DeFi outlets including The Defiant and Our Network. He has years of experience working with dozens blockchain and token startups where he focused on token economics, marketing, and growth.