Decentralized Finance (DeFi) is building a new financial system. The DeFi movement is picking up steam. DeFi has been successful in remittances, loans, stable coins, and other core elements of the fiat world. With a little over a year under its belt, DeFi hit a major milestone a couple of months ago, with more than $1 billion in value locked in the DeFi markets. Bitcoin (BTC) dominates the cryptocurrency market, its 8x bigger than the Ethereum, the second cryptocurrency by market cap, but Bitcoin doesn’t have Ethereum’s sophisticated on-chain lending, derivatives, trading capabilities . While there are already several centralized BTC lending platforms like BlockFi/Nexo/Celsius. Bitcoin DeFi has been a dream for Bitcoiners. Maybe the dream is over and new tBTC project will bring Bitcoin to the DeFi world. Maybe it will do a lot more than that!
Bitcoin could greatly transform DeFi and that is exactly what the team behind the Keep protocol understands. They recently raised $7.7 million, led by Paradigm Capital and other companies including Fenbushi Capital and Collaborative Funds, to launch a trustless platform for creating Bitcoin-backed tBTC tokens, on Ethereum. The tBTC platform extends on multiple concepts like Multisig custody, SPV, and MakerDAO’s bonding system to build a decentralized Bitcoin peg, better than anything else we’ve already seen.
The tBTC token is an ERC-20 token fully backed by BTC that allows people to safely use BTC on the Ethereum blockchain. The tBTC is a 1:1 Bitcoin-backed ERC-20 token. This means that if you have 1 tBTC, you can redeem it for 1 BTC. The new tBTC token combines the strengths of both chains, and offers BTC holders a way to spend their BTC on Ethereum.
To spend Bitcoin, users have to deposit BTC into a threshold signature contract. Once the deposit has been made, the “signers” submit a proof of deposit to the Ethereum network, and then a tBTC token is created and transferred to the BTC holder’s Ethereum (ETH) wallet.
To process transactions, tBTC uses a system of “signers”. Signers operate in groups of three, reducing risk and eliminating trusted middlemen, to ensure transaction safely and transparency. All three signers must approve a transaction. The network incentivizes signers for their role, with a micro fee of 20 basis points (bps) for every tBTC “minted” in exchange for a BTC.
But, Bitcoin on Ethereum is nothing new.
In the past we’ve seen other Ethereum-based tokens pegged to Bitcoin, the most notable being wBTC, an ERC-20 token created by BitGo. tBTC is unique from its competitors, because it offers a redemption feature for Bitcoin, something not offered by other projects.
What impact will a Bitcoin pegged token on DeFi have on crypto and the world?
DeFi scales with Ethereum, but imagine what will happen once DeFi has access to Bitcoin’s liquidity. Ethereum is the home for protocols, like MakerDAO, Compound, and Uniswap. Bitcoin’s hard money features make it fantastic for collateral. Using BTC within these protocols will instantaneously bring more liquidity and let Bitcoin holders access a variety of new services.
Bitcoin is synonymous with crypto. When people thing of Bitcoin they think of crypto and vice versa. With Bitcoin being a strong store of value, it will become far more easier for non-crypto holders to join crypto and earn interest with their Bitcoins or get a loan.
What does that mean? For starters, the price of BTC will go up, sky high!
Being able to use Bitcoins for more things, beyond speculation, will increase demand for BTC and as a consequence its price. It will also limit its supply. Circulating Bitcoins will become harder to find, since people will have the option to keep them locked and make passive returns.
With the Bitcoin’s halving approaching and Ethereum 2.0 being deployed, the value of Bitcoin will rise and Ethereum’s use will grow exponentially.
But what this really means is that Bitcoin on DeFi can potentially displace the existing financial systems. By the time we recover from the coronavirus, we will be able to opt-out of the existing financial system and find the liquidity, cash flow, loans and everything else we’ve come to expect from banks, from the crypto world.
Ilias Louis Hatzis is the Founder at Mercato Blockchain Corporation AG and a weekly columnist at DailyFintech.com.
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