Decentralized Representation Of Bitcoin: WBTC And renBTC
Bitcoin, the pioneer cryptocurrency, has been in circulation since 2009 now. Ethereum’s open-source blockchain with smart contract functionality then allowed ERC-20 tokens to be built on it, and the DeFi community could take off.
Because Bitcoin and Etheruem are different blockchains they are not exactly compatible with each other. While Etheruem can host thousands of different tokens and protocols to be built, Bitcoin remains somewhat limited with its uses. BTC’s market cap being the largest of any crypto on the market, so there must be a way for Bitcoin to participate in the DeFi ecosystem.
As the first crypto on the market, BTC has built strong user trust and is very secure, but with limited use cases. Its uses include trading and storing of value, but can only generate yield with centralised solutions. BTC can’t be put to work in DeFi as is so this is where WBTC and renBTC come in.
WBTC and renBTC are both ERC-20 tokens that are backed 1:1 to BTC. An ERC-20 token is a standard used for creating and issuing smart contracts on the ethereum blockchain, smart contracts can then be used to issue tokenized assets that people can invest in. Unlike BTC, ERC-20 tokens can be used as collateral across multiple DeFi protocols and can generate yield in a permissionless way.
WBTC and renBTC are both ‘ethereum compatible’ as they represent 1:1 BTC on the Ethereum network. Actual Bitcoin is never on ethereum: the BTC is locked on the Bitcoin Network and the protocols issue the locked BTC equivalent on the ethereum network.
What is Wrapped Bitcoin
WBTC was the first and is currently the most popular option for moving BTC to Ethereum with a circulating supply of <245,000.
In short, the wBTC protocol works by allowing merchants to mint and burn wBTC. Below is a simple diagram of the BTC to wBTC process.
Image taken from Tokpie
If a merchant wants to exchange their BTC to wBTC they will provide an Ethereum address to the wrapped token contract to initiate the minting process. Merchants are usually companies or protocols that are able to mint and burn wBTC. Here is an example of the process:
- Merchant provides Ethereum address to wBTC contract
- Merchant send BTC to a trusted custodian (Bitgo)
- Custodian mints wBTC and sends merchant’s address
The original BTC is now held by the Bitgo custodian and the total supply of wBTC will increase by the amount of the BTC that was provided.
If a merchant wants to redeem their BTC they must request a withdrawal. The merchant then burns their wBTC by sending them to the wrapped token contract. The custodian will then confirm and release the BTC back to the merchant.
Although wBTC increases the use cases of Bitcoin, it does use a custodian. The nature of how it works and is exchanged means it is centralised, however it can be used in a decentralised way on dApps once it has been converted from BTC to wBTC.
WBTC can be used across multiple DeFi protocols. It can be traded in a completely permissionless way on Uniswap. You can use wBTC as collateral on a lending protocol like Compound or Aave. On top of that it can be used to generate yield, for example using it as a collateral on Oasis.app.
What is Ren Bitcoin
RenBTC is the RenVM ERC-20 version of Bitcoin and is a more decentralised solution to using Bitcoin in DeFi. The simplest way to describe RenVM is that it’s a decentralized interoperability protocol. The open protocol enables the movement of value between blockchains, and therefore allows for permissionless bridging of assets between networks. One of the most popular assets to move is of course Bitcoin, and each RenBTC is also backed 1:1 by BTC.
Similar to wBTC, RenVM allows for minting of renBTC by supplying BTC and redeeming BTC by burning renBTC. The main difference between RenBTC and wbTC is that Ren decentralises the custody of BTC. This makes the process of minting and burning available to everyone, not only merchants. The protocol runs by operating a network of decentralised nodes called dark nodes instead of using a custodian. Ren also leverages Shamir’s Secret Sharing and Secure Multiparty Computation which are two interesting elements in cryptography.
The following steps are an example of the exchange from BTC to renBTC:
- User sends BTC to dedicated Bitcoin address (generated by a dApp and verified by RenVM)
- BTC is locked in RenVM via the network of Darknodes
- RenBTC is minted at a 1:1 value on Ethereum (used like any other ERC-20 token)
Image taken from Medium.com
The reversal process is just as simple. Using an app with RenVM integration, the UI will prompt the user to provide the Bitcoin address. After confirmation, the renBTC will be burned and released back into a specified Bitcoin address and the BTC will be back in your wallet (minus some potential gas fees and RenVM transaction fees).
The easiest way to think of Ren is like a trustless custodian. It will hold your digital assets and move them across blockchains. And there are also a host of use cases for renBTC.
Use your BTC on Oasis.app
Once you have converted your BTC into ERC-20 tokens, as WBTC or renBTC you can use them to Borrow Dai and to Multiply your exposure on Oasis.app. It is exactly the same as with other collaterals.
You can use either renBTC or wBTC to access extra capital by borrowing Dai against those tokens. And you can protect your borrowing from liquidations by setting Stop Loss and automation strategies to buy or sell according to your needs. That's not all, if you want to be long BTC you can use Multiply features to gain extra exposure to renBTC or wBTC by immediately swapping your Dai for extra BTC.
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November 10, 2022