BITCOIN

Unlocking the Ren and Du meridians of Bitcoin? Pros and cons of cross-chain anchoring Bitcoin projects

2020/4/23

share

The original title is: "A Comprehensive Analysis of Cross-Chain Anchoring BTC Projects: Decentralization and Scalability Challenges"

From the perspectives of decentralization and scalability, the advantages and disadvantages of mainstream cross-chain anchoring BTC projects are analyzed.

Author: Andrew Kang, Blockchain Investor
Translator: Perry Wang
Originally published in The Defiant, a publication focusing on decentralized finance, the author has authorized ChainNews to translate and publish the Chinese version.

Advertisement - Please scroll down for more content

Integrating Bitcoin into the decentralized finance (DeFi) ecosystem has always been the ultimate goal of DeFi. In the larger centralized finance (CeFi) market, Bitcoin and stablecoins hold the top two positions in terms of trading volume, ranging from spot exchanges, lending, to derivative trading. Ethereum's token ETH, as the primary collateral for DeFi borrowing, has fueled the rapid growth of the crypto lending market. Integrating Bitcoin would unlock a massive market to unprecedented heights.

The CeFi lending market is about 11 times larger than the DeFi market

A common concept is to create an ERC20 token pegged to the value of Bitcoin. The advantage of ERC20 tokens anchored to Bitcoin lies in the full utilization of composability, making it easy to integrate into existing DeFi protocols without significant restructuring of the underlying applications.

There are many projects in development that anchor BTC, but so far, the only implemented projects that have been activated and interoperable with DeFi are centralized custodial solutions, such as wBTC and imBTC.

Projects with less centralized and permissionless anchoring mechanisms for BTC include tBTC by Keep Network, sBTC by Synthetix, renBTC by Ren, and pBTC by ptokens.

All these projects support their own BTC-anchored tokens as collateral, but their security mechanisms and anchoring modes vary. These assets utilize different models with varying degrees of trust and scalability properties.

Trust

All the above-mentioned tokens, except sBTC, are anchored by physical BTC on the Bitcoin blockchain network, which is managed by one or multiple entities. To ensure full collateralization of the anchored BTC, the BTC used for collateral must be sent to a Bitcoin address held by a centralized entity or a multi-party entity (such as validators).

For these projects to function properly, there must be a trust mechanism in place to ensure that the relevant party or parties managing the system operate as expected.

Multiple elements within these projects may require trust, and the amount of trust needed may vary. For imBTC and wBTC, trust is centered around BTC custodians. For pBTC, renBTC, and tBTC, a group of validators must coordinate to perform the necessary functions of the anchoring system, such as minting, burning, and ensuring asset security. These validators must reach a consensus on collective actions, and the various methods of achieving consensus will lead to different trust assumptions. On-chain transaction flows (price feeds) may vary due to different trust assumptions and internal notification mechanisms within the system (e.g., settlement, minting/burning fees, custody of collateral, etc.).

Considering this, it can be said that these projects anchoring BTC are scattered across different positions on the decentralization spectrum.

The degree of decentralization can be roughly measured using a framework that primarily analyzes custody, consensus mechanisms, and the trust elements of each project's on-chain transaction flow.

Custody: The BTC supporting imBTC is custodied by TokenIon, a startup with a medium-low default risk. There is on-chain reserve proof.

Consensus Mechanism: Bi-directional anchoring is permissionless and managed by Ethereum smart contracts, but TokenIon inevitably controls the bridge between Bitcoin and Ethereum.

Price Feeds: As the bridge is centrally controlled, there are no price feeds.

... (continues)