Cryptocurrency analyst. Founder and editor at btcpeers.com
Bitcoin users are often unable to explore the decentralized finance market segment. The vast majority of platforms in existence today are built on Ethereum. Even though the BTC and ETH blockchains cannot communicate directly, wrapped tokens can offer a viable solution.
The concept of Wrapped Tokens is simple to explain. Rather than having a crypto asset only exist on one chain, it can be "tokenized" and "wrapped" on another chain. A key example is Ethereum-based wrapped tokens, which convert an existing asset - e.g., Zcash - and wraps it into an Ethereum token adhering to the ERC20 standard. In doing so, these wrapped tokens can be used in any part of Ethereum's growing ecosystem, including dApps and Decentralized Financial(DeFi) solutions.
Every wrapped token is backed by the original asset it represents. In our Zcash example, every wrapped ZEC on Ethereum is backed by 1 original ZEC on the Zcash blockchain. This supply needs to be at a 1:1 ratio at all times, as there can never be more wrapped tokens for ZEC than Zcash-based ZEC used for this tokenization process.
Exploring this option opens up the Ethereum ecosystem to other cryptocurrency assets on different chains. Due to the lack of native cross-chain liquidity among DeFi platforms and dApps, wrapped tokens have become an alternative solution. Bitcoin users eager to put their sidelined assets into play may want to explore the few options currently available on the Ethereum ecosystem.
Over the past few months, Wrapped Bitcoin surged where its overall market cap is concerned. Currently, there are 126,260 WBC in circulation, creating a market valuation of $2.035 billion. Although Wrapped Bitcoin was initially created ahead of the DeFi landscape, this asset has increased demand due to decentralized finance platforms supporting it. On platforms such as DeFi Pulse, it is regarded as one of the top "DeFi platforms" for Total Value Locked.
Initially, Wrapped Bitcoin was created to improve liquidity for Ethereum's ecosystem. Decentralized Exchanges (DEXs) and financial applications support it. Bitcoin has a much larger market cap and trading volume than Ethereum or any of its ERC20 tokens. Tapping into the DEXs’ liquidity pools with Bitcoin would allow them to compete with centralized trading exchanges.
In essence, WBTC has been made possible through the Wrapped Tokens DAO (Decentralized Autonomous Organization). This autonomous system adds and removes merchants and custodians as the need arises. Minting Wrapped Bitcoin occurs through a custodian, who verifies enough Bitcoin collateral to issue the newly requested tokens. If the WBTC tokens are redeemed for Bitcoin again, that supply of WBTC will be burned permanently. However, the major drawback is that WBTC has no user interface and must be obtained from a centralized exchange.
The Ren project hinges on implementing the RenVM, a protocol that provides inter-chain liquidity for all dApps and DeFi solutions. Through RenVM, users can obtain wrapped tokens for Bitcoin, Bitcoin Cash, and ZCash. As the RenVM implementation grows and evolves, and demand increases, more assets may be supported by this open-source protocol.
Through the RenBridge implementation, users can convert the three cryptos assets mentioned earlier into wrapped tokens on Ethereum. It is a very straightforward process that seems a bit more user friendly compared to minting WBTC. However, both WBTC and RenBTC can be traded across various exchanges today, making it pretty straightforward to obtain these wrapped tokens.
In terms of market cap and liquidity, RenBTC is well behind Wrapped Bitcoin. Specifically, RenBTC has a $309 million market cap, with 18,821 RenBTC in circulation today. The deficiency with RenBTC is that there is no central custodian and deposits are not insured making it ineligible for most institutions.
It is not common to see cryptocurrency exchanges creating their own tokenized version of Bitcoin. After all, it appears that there is no immediate need to do so. In Huobi Bitcoin’s (HBTC) case, its inception in February of 2020 was created as means of supporting the Ethereum ecosystem. Huobi Global deployed the contract onto the Ethereum blockchain to create HBTC and help facilitate DEX trading growth.
Similar to the other assets on this list, every HBC needs to be backed by 1 full Bitcoin. By possessing HBTC, Huobi provides some advantages to its users with faster trading and lower trading fees. Today, Bitcoin transactions still require about an hour to achieve 6 network confirmations. In stark contrast, HTBC transfers onto Ethereum's network take only 5 minutes or less, to be fully confirmed.
To obtain HBTC, Huobi Global offers a trading pair with Bitcoin directly. In the spirit of full transparency, Huobi also created a website for all of its HTokens. This page shows there are currently 6010.1049 HBTC in circulation, worth $98.626 million. Historically, there have been a total of 6010.1646 HBTC, of which 0.05964 HBC have since been burned February 2020.
The newest entrant to the wrapped token ecosystem is Bitcoin Proxy. It is unique in the sense that it is the only solution trying to address the "elephant in the room.” Through its multi-institutional decentralized tokenization protocol, Bitcoin can now be put “on-chain” onto the ERC20 protocol with the least amount of friction with the most amount of security, making it the most viable alternative compared to the projects outlined above.
A Different Approach to Wrapped Tokens
Converting Bitcoin into Bitcoin Proxy (BTCpx) - is achieved through the native Proxy framework. Described as the “Proxy Relay,” this protocol solution removes concerns over Gas fees and network congestion, which plague the Ethereum blockchain. With a Layer 2 Matic sidechain integration, fees are significantly reduced to a fraction of a Layer 1 solution only $0.00017 per day. It can interact with the smart contact every 30 minutes to mint or burn BTCpx when necessary.
The Proxy Relay confirms BTC transactions to the Ethereum smart contract. Such an approach introduces an extra layer of transparency and requires far less expense to verify BTC blocks. As a result, faster minting and redemption processing gives the end-user a near real-time settlement experience.
Unlike the other projects that create ERC20 tokens of Bitcoin in a more centralized manner, Bitcoin Proxy is a truly decentralized model. All BTC assets are stored with an insured custodian with the ability to segregate funds for DAO members.. The actual tokenization process is entirely decentralized to provide a permissionless and trustless system. BTCpx.io
Both HBTC and renBTC are uninsured offerings. While HBTC shows that it is mainly a centralized operation, renBTC is not. Nevertheless, the lack of insurance is not up to today’s custodial standards. Although WBTC has some level of insurance, it is centralized with no public interface. None of the options is a “perfect” solution in their current form.
However, BTCpx is the closest to it. It is both decentralized and insured. Most importantly, it offers segregation security, something neither of the other three tokenized versions of Bitcoin can provide. Having institutionalized custody solutions while introducing a decentralized and permissionless process puts BTCpx in a class of its own.
With all of the different options to create wrapped Bitcoin assets on Ethereum, decentralization and security are most important. From a fintech viewpoint, Bitcoin Proxy is at the forefront. Having integrated a Matic sidechain with the Proxy Relay, one can say that this product is a real “Decentralized/Trustless” system. Additionally, having proof of reserves and institutional custodial insurance on deposits is, without saying, “revolutionary” to the concept of wrapped tokens.
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