Are you curious about tBTC and why it is key to the Ethereum ecosystem? Great! You’ve come to the right place. To learn blockchain development and be certified I recommend visiting Ivan on Tech Academy.
Blockchain is currently #1 ranked skill by LinkedIn. Because of that, you should definitely learn more about Ethereum to get a full-time position in crypto during 2020.
In my first and second pieces, I’ve discussed Ethereum 2.0 and the best tools for developers. In my third and fourth articles, I’ve discussed quadratic voting and open governance models. Then, in my fifth piece, I’ve looked into Swarm’s infrastructure.
In my sixth, seventh and eight ones, I’ve dove-deep into consensus algorithms and the blockchain trilemma. Lastly, I’ve looked into blockchain sharding technology, which projects are making it thrive and I’ve done an intro to Plasma and Looms.
To spice things up a bit this week, I’ve explained the importance of blockchain explorers. Today, I’ll look into a project that just emerged, tBTC. Should Ethereum developers pay attention to tBTC? Could tBTC be the first open-source, decentralized and censorship-resistant Bitcoin ERC20 on Ethereum?
tBTC: Bitcoin on Ethereum
tBTC is a really kick-ass project that has just been recently released on the Ethereum testnet. It was developed by Cross-Chain Group. CCG is an industry resource and working group dedicated to furthering the research, design, and implementation of cross-chain architecture.
Ivan discusses how tBTC works on the episode above. If you want to dig-deep, go ahead and take a look. Don’t forget to give it a like and to share it with your community!
Getting back to the topic at hand, the really cool thing about tBTC is the fact it is censorship resistant, seizure resistant and inflation resistant.
To quickly understand what tBTC is, just think of WBTC or wrapped Bitcoin. Essentially, tBTC is a peg 1-to-1 between some Bitcoin in the bitcoin blockchain and a tBTC in the Ethereum blockchain.
As the website states, it is a non-custodial and fully dencentralized version of WBTC. It allows any cryptocurrency trader to convert their BTC into an ERC20 token, tBTC.
tBTC vs WBTC
It is widely known there are mainly two solutions that provide centralized pegs. Both rely on trusted third parties based on variants of the “federated peg” model. In a federated peg, a multi-sig wallet is used to lock up bitcoins. Another blockchain then issues tokens representing those bitcoin. The signers of the multisig on the Bitcoin blockchain are expected to validate the sidechain. Issued tokens can only be burned in exchange for bitcoin withdrawals, following the rules of the sidechain.
As discussed above, WBTC is a Bitcoin-backed ERC-20 token using a similar approach. The token is part of a greater effort called “Wrapped Tokens”.
The WBTC consortium votes on adding and removing custodians that manage the token’s Bitcoin reserves. Each custodian operates a multi-sig Bitcoin wallet, with control of all keys. Custodians are able to move custodied bitcoin at will, and are responsible for minting WBTC on Ethereum.
These custodians act much like a federated-peg consortium, where trust is centralized on these nodes. However, instead of requiring a majority to sign Bitcoin withdrawals, a single member can withdraw their share of the Bitcoin reserves at any time.
Why tBTC rocks?
One of the key intakes of the previous model is that it expects a consortium to manage keys. This is, the Bitcoin trust-model is broken by default.
The authors of the tBTC paper brilliantly discuss the above point, exposing a major flaw:
Custodians need to be fully trusted, either as a group, as in Liquid’s model, or individually, following the Wrapped Tokens model. A malicious custodian can block withdrawals and, in some cases, collude to abscond with funds. Custodians may also be compelled by governments, hackers, or other forces to tamper with reserves, despite their good intentions.
As such, an alternative approach to a centralized peg, is to create a decentralized synthetic asset. Something like…
Decentralized, censorship-resistance, immutable
To explain tBTC the authors use Sai as an example.
Sai is a token synthetically pegged to the US dollar. To make sure the token keeps its peg, the following system has been deployed. First, Ether is locked up in reserves. Then, a robust price feed is added. Finally, a number of stability mechanisms between ETH-SAI, allow for maintenance of the peg under adverse conditions.
Although the mechanism is not perfect, the peg has been maintained most of the time.
Did you understand how a similar mechasism can be applied to a ERC20 token Bitcoin peg? Super. let us get back to tBTC, then. To maintain the hard-money status of its backing BTC deposits, tBTC must tick the following boxes:
- Censorship and seizure resistant, across friendly and unfriendly jurisdictions
- Inflation-resistant. TBTC may only be minted after proof is provided of a backing BTC deposit.
- Leverage-resistant. The existence of tBTC shouldn’t allow cross-chain “printing” of additional synthetic Bitcoin. We can’t stop someone from launching a synthetic, but artificially expanding the Bitcoin supply is not a goal of the project.
- Without middlemen, in the same sense as Bitcoin. The only rent extraction should be from the minimal participation of signers required to secure the network, similar to miners on the Bitcoin network.
- Redeemable. The ability to trade scrip for its backing deposit freely is what distinguishes a backed currency from fiat money. The supply of tBTC is always backed by an equal number of reserved BTC. This means for every token in circulation, 1 BTC has been removed from circulation.
tBTC solutions and flaws
At the moment of writing, the tBTC network is far from perfect. However, the system designed by Cross Chain has some direct advantages over federated models.
The solution proposed basis its assumption on the use of free markets for liquidity and over-collaterized deposits for safety. This is, when a tBTC is created by a signer, the counterparty who creates the token on the Ethereum network, a Bitcoin must be commited in the bitcoin blockchain as well.
Proof is exchanged between the depositer and signer and the BTC is exchanged for tBTC. Essentially, tBTC allows for Bitcoin to be locked in the bitcoin blockchain, in a decentralized way, and for the depositer to receive tBTC as a reward in the Ethereum blockchain.
However, as mentioned in the beginning of the paragraph, the system isn’t immune to flaws. At least not yet.
First, the protocol relies on a single signer. If the value of deposits ever exceeds the value of the collateral the signer has put down, there’s nothing stopping the signer from walking with the BTC. In addition, the signer can be coerced to censor particular withdrawals, removing any hope of censorship-resistance.
Second, the protocol relies on a single hot wallet. As the market cap of PBTC conceivably grows, the risk of hacking exponentially increases.
Finally, the protocol does nothing to localize failure. If there’s an issue with a single deposit or withdrawal, it could impact the entire PeggedBitcoin supply, blocking all further deposits and withdrawals.
- Ivan On Tech Academy,
- Ivan On Tech ETH 2.0 code review,
- Build a blockchain in SECONDS,
- Functional programming in blockchain,
- ETH 2.0 discussion,
- Ethereum projects analysis,
- Role of consensus algorithms,
- Ethereum Plasma.
- tBTC paper.
This article is not financial advisement. Change