The Bitcoin and Ethereum blockchain are incompatible with each other, and can’t communicate with each other. That is, transactions recorded on one are not visible on the other, including smart contracts. Many DeFi projects are based on the Ethereum blockchain, whereas BTC continues to be the most attractive and used crypto-asset in the world.
For this reason, many projects were created to “bring” bitcoin to the Ethereum blockchain. These are essentially initiatives that create an ERC-20 token that replicates the value of BTC, allowing it to be traded on Ethereum as if it were bitcoin for all intents and purposes.
WBTC (Wrapper Bitcoin)
The most important and widespread of these projects is WBTC, i.e. Wrapped Bitcoin, which is the tenth DeFi project ever in terms of total locked value. It is a project born at the end of 2018, and that until April 2019 had enjoyed very limited success. However, with the explosion of decentralized finance in 2019, the WBTC project literally took off last year.
By April 2019 it had reached a locked funds value of just under $400,000, but within a few months it jumped to over $2 million. Since it is in fact the main project of its kind, over the months it spread again, reaching almost $7 million locked in July 2019.
After a decline that brought it back below 4 million at the end of 2019, it had a new boom that, thanks mainly to the growth in the value of BTC, led it to record the highest ever record of almost 9 million dollars locked on February 24th, 2020. Since then, due to the collapse of the price of BTC, it fell first to just over 4 million on March 13th and then rose again to over $7 million.
However, these fluctuations are greatly affected by the dollar value of bitcoin, because when analyzing the curve in BTC, it turns out that in April 2019 it had reached 80 BTC, then over 300 in June, and then soared to over 500 in July. On February 24th, 2020 the BTC locked by this project had become almost 900, and the curious thing is that after March 22nd they started to rise again, up to over 1000 BTC in April. Basically, since the project was born, the total volume of BTC locked has never fallen, and indeed it has always grown more or less constantly.
The fact is that being able to exchange a token that represents bitcoin on the Ethereum blockchain is really very useful, especially within the decentralized exchanges, where BTC should not miss. As these DEXs part of DeFi are based on Ethereum, it would be impossible to use them to exchange physical BTC, and so a token like WBTC becomes indispensable.
To be specific, initially the custody of BTC that backed 1:1 WBTC was managed by BitGo, and after issuing these tokens they were commonly exchanged on many DEXs, or even on centralized exchanges.
However, it is now possible to exchange a BTC with a WBTC, and vice versa, on eight distribution platforms, namely Dharma, Kyber, Set Protocol, GOPAX, AirSwap, Prycto, Ren and DiversiFi, which require a KYC/AML procedure. The procedure requires the distribution platform to collect users’ BTC and provide them to the custodian. This creates an equal amount of WBTC and delivers it to the user via the distribution platform.
The procedure obviously works the other way around, i.e. a user can return WBTC to the distribution platform that sends them to the BTC keeper. This burns the delivered WBTC tokens, and releases an equal amount of BTC which is delivered to the user via the distribution platform.
One important thing is that anyone can verify that all issued WBTCs are supported 1:1 by BTC through the so-called proof of reserves on-chain, so as to ensure that they faithfully represent the underlying.
The WBTC project is managed by a DAO consisting of 16 consolidated projects, such as Dharma, Compound, MakerDAO and Set Protocol. In addition, distributors and custodians can be added or removed through an open process controlled by a multi-signature smart contract managed by DAO members.
A similar project is imBTC, a tokenized BTC in ERC-20 format based on Ethereum. It is implemented by Tokenlon, and works in a very similar way to WBTC. The main difference is that imBTC is a project managed by the Tokenlon DEX, i.e. a decentralized non-custodial exchange based on Ethereum and the 0x protocol.
To obtain imBTC, it is sufficient to send BTC to Tokenlon using the appropriate functionality, wheres to redeem it, the same thing happens but in the opposite direction. This project, which makes the swap easy and fast, aims to make tokenized BTC available to the general public, and not only to insiders.
Another difference is that Tokenlon distributes the commission on the transaction of imBTC purchases to users who already own imBTC. In fact, when a user purchases imBTC on Tokenlon the smart contract retains 0.3% of imBTC as commission, and these commissions accumulate in the smart contract. Users can then request payment of dividends via dApp or directly to the imBTC smart contract. Dividends are paid automatically according to the imBTC currency ratio to the address of the wallet that holds the imBTC tokens.
Another similar token, pBTC, has recently been launched as part of the so-called pTokens created by Provable. It is another ERC-20 token supported 1:1 by BTC, and managed by a decentralized process by which anyone can freely peg-in and peg-out through the pTokens dApp. Although it was released only very recently, in January 2020, pBTC is already in use on some DeFi platforms, including the Kyber Network DEX.
The interesting thing is that the pTokens project is not only bringing bitcoin to Ethereum, but is already testing other similar tokens, such as pEOS and pLTC, already present on the testnet. The goal of Provable is to issue a large number of pTokens, from pDAI to pUSDT, including pETH, pEOSDT, and dozens of other tokens that will not only bring other tokens and cryptocurrencies on Ethereum, but with the same mechanism will also bring them on the EOS, Liquid and TRON blockchains.
For example pETH, pDAI and pUSDT will be tokens on the EOS blockchain that will replicate the value of ETH, DAI and USDT, i.e. supported 1:1 by the respective ERC-20 tokens.
The project is therefore very large, and using blockchains such as that of Liquid can also allow increasing the privacy of transactions even for cryptocurrencies such as ETH, or USDT, which from this point of view have no protection other than pseudo-anonymity.
One more complicated project is the BTC++ token, which, although it is a classic ERC-20 token on Ethereum, is actually a so-called meta token composed by a basket of tokens: wBTC, imBTC, pBTC and sBTC.
Each of these tokens is represented at 25% in BTC++, and this allows, for example, to avoid losing all the capital in case one of them has problems.
For example, if one of the tokens in the BTC++ basket has problems, at most you risk losing 25% of the capital, and not all of it. Furthermore, by buying BTC++ on Uniswap it is possible to earn commissions by providing the token on Unipools.
A project similar to imBTC, and which will be launched at the end of April 2020, is tBTC, which is already active on the Ropsten testnet since February.
It is a project supported by Keep, Summa and Cross-Chain Group, and the goal of the project would be to allow smart contract developers to integrate tBTC into their dApps as collateral.
A project similar to pBTC is renBTC of the Ren project, but it focuses on privacy. In fact, it is based on zero-knowledge encryption, but it is still under development. The SubZero Mainnet will feature Darknodes, based on several Ethereum smart contracts.
These Darknodes will actually be able to see and send transactions on more than one blockchain at the same time, thus allowing, for example, to make high-level privacy transactions with renBTC. However, the project is still in its early stages, and it may take some time before it can reach the market.
This is actually a different project compared to the previous ones, but with the common goal of making cross-chain transactions possible. In addition to this, it wants to provide a much higher level of privacy for these transactions compared to what is currently possible on Ethereum.