An overview of the four generations of wrapped-BTC tokens that have all competed for a piece of this trillion-dollar market

Author：Haibo Jiang


Veteran investors like Warren Buffet have generally frowned upon Bitcoin because of its inability to generate positive cash flow. In one sense, this is true because Bitcoin holders are unable to directly access most DeFi platforms and, therefore, are unable to participate in liquidity mining. So, despite Bitcoins leading position in terms of market capitalization and deep liquidity, the inability to port this market value into the various financial applications available will surely limit the growth of DeFi, overall.

Wrapped-Bitcoins, which are a linked cross-chain asset, solves this problem by allowing the value of Bitcoin to be ported to other public chains, thereby allowing Bitcoin holders to access DeFi applications and turning Bitcoin into an ‘interest-bearing asset’.

Tokenized Bitcoins on the bitcoin sidechains will eventually be consigned to history

In the early days, people tried to find the best way to bring bitcoins into other chains so as to allow for faster transfers. Two notable solutions were smartBTC (SBTC) and LBTC, which were built on the Rootstock (RSK) platform and Liquid Network, respectively, and which were pegged equally in both directions, which meant that pegged BTC on the corresponding side-chain could only be minted by locking an equal amount of BTC on the main chain. These two types of ‘sidechain bitcoins’ represented the first generation of tokenized bitcoins; however, with the development of DeFi on the Ethereum network, these Bitcoin sidechains were no longer able to keep up.

The original vision for Ethereum was to be a sort of universal computer and, with this in mind, it created smart contracts, which in turn attracted a lot of developers and communities, who all had a hand in fostering a lot of innovation in the process. Once the Ethereum network was well-established, many started to wonder how to bring the value of BTC into the Ethereum world and unlock all of that value. In just the past year, the number of tokenized bitcoins minted on the Ethereum network has increased 85 times from 2,477 to 226,046. Despite this growth, the total BTC adopted currently in use on the Ethereum accounts for only 1% of the total circulating supply of actual BTC.

Centralized issuance relies on the custodians which are vulnerable to a single point of failure

Following the huge market crash on March 12 of last year, MakerDAO added WBTC as a collateral option and offer a wider variety of options for DAI collateral. Since then, various other mainstream DeFi applications have also integrated WBTC. As illustrated in the image above, the top two most popular tokenized bitcoins are WBTC and HBTC, both of which are centralized and represent the second generation of tokenized bitcoins.

Many platforms use WBTC, such as BitGo, Kyber Network, and Ren, not to mention all of the custodians, merchants, exchanges, and DAO members. However, despite describing itself as a community-led project with an open and transparent custody address, the fact remains that WBTC is fundamentally organized in a centralized way since the native bitcoin assets are entirely held by BitGo, which is a centralized institution.

Following our investigation into the process of minting and burning WBTC, PANews ascertained that it is the custodians and merchants that play the dominant roles in the conversion of WBTC. The process begins with the merchants initiating the minting of WBTC and ensure that they have WBTC available funds when users request tokens from them. This full process can be described as follows: the merchant sends a minting request to the contract, and then transfers the BTC to the custodian’s account; the custodian then sends a request to the contract to mint WBTC; the WRAPPED TOKEN smart contract then sends the WBTC to the merchant.

Users can swap their BTC to WBTC directly from merchants, who provide swap services and charge a certain commission. The role of merchants in this process is equivalent to that of intermediaries in traditional finance. To receive WBTC, a user needs to first submit a request, after which the merchant performs the required KYC/AML procedures, and then the user and merchant execute their swap, with BTC from the user transferring to the merchant, and WBTC from the merchant transferring to the user.

Burning is the action of redeeming WBTC for Bitcoin, and only merchant addresses can do this. The amount to be ‘burned’ is deducted from the merchant’s WBTC balance (on-chain) and the supply of WBTC is then reduced accordingly. If a user wants to swap WBTC back to BTC, they can either sell it on the secondary market or redeem it from the merchant.

Obviously, the custodian, which is BitGo, plays a very important role in the whole process. BitGo is considered one of the most secure cryptocurrency custodians out there and people have generally placed their trust in it, but the fact remains that, as a centralized platform, the high risk of the single point of failure for the system cannot be ignored. In fact, in August of 2016, BitGo was involved in a security incident. At that time, Bitfinex had used software provided by BitGo to create a multi-sig system by which to authorize transactions. But, a weakness was found in the installation on Bitfinex servers and hackers eventually walked away with 120,000 BTC.

Two other well-known tokenized bitcoins are HBTC and imBTC, both of which are centralized. HBTC was launched by Huobi exchange and turned out to be the most easy-to-use type of tokenized bitcoin. To generate HBTC, users need only deposit BTC onto the Huobi exchange and then select the ERC20 version of the token when withdrawing the token. Similarly, redemptions can be executed directly through the exchange. However, this process also relies heavily on a centralized custodian, i.e the Huobi exchange, and thus presents risks if the exchange were to fail or be hacked.

imBTC is also issued and regulated by an exchange, Tokenlon, which is a decentralized exchange. When users purchase imBTC on Tokenlon, the smart contract deducts a 0.3% transaction fee, which is then distributed to all imBTC holders. This represents an innovation in tokenized bitcoins. However, just last year, hackers were able to gain access and drained the Uniswap ETH-imBTC liquidity pool and stole Lendf.Me assets.

Evidently, there’s still a long way to go for tokenized bitcoins that are issued and organized via the centralized model. Not only do they require a highly trusted custodian, but also require much more improvement on the technical side.

Decentralized solution for tokenized bitcoins is now the leading trend but optimization still required

The release of renBTC based on the REN Protocol marked another evolution in tokenized

bitcoins and the beginning of the third generation as it marks the first method to use a decentralized locking and minting of BTC on the Ethereum network. Users deposit native BTC onto the RenBridge gateway, and then the RenVM, Ren’s virtual machine, mints renBTC using smart contracts deployed on the Ethereum network. In addition to users pledging bitcoin at a rate of 1:1, nodes are required to deposit collateral in order to mint renBTC. These nodes on the Ren Protocol are called Darknodes, and each node must deposit 100,000 REN tokens, with the total value of all deposits to be no less than three times the values of the BTC.

While the market cap of REN in circulation is currently only $837, even if all REN were deposited, the system could only mint a maximum total of 5,211 renBTC based on the current price of BTC. Plus, given the high volatility of the price of REN, it is difficult to maintain the massive amount of REN to uphold the required ratio of 3:1. On 18th April , 2021, the price of REN on Binance slumped from 1.1 USD to 0.015 USD, a crash of over 98%, which meant that the value of the node’s collateral was close to zero relative to the issued renBTC.

Looking at tBTC, ETH holders need to deposit ETH as collateral in order to become validators, which is the pivotal role for tBTC by providing decentralized services for assets cross-chain. 3 validators are randomly selected for each mint, and those validators must deposit ETH of 1.5 times the value of the BTC minted. When originally launched, a bug was found on the tBTC platform that caused At the beginning of tBTC’s operation, there was a bug that prevented deposits from being redeemed. Recent news reports indicate that tBTC v2 will soon go live and will introduce a 100 signer mechanism to replace the previous 3-of-3 mechanism, and shifting the collateral from ETH to NU or KEEP, and reducing the minting costs for some users by integrating some L2 protocols.

Under both renBTC and tBTC, users are required to pledge native BTC at a rate of 1:1 rate in order to receive the corresponding tokenized bitcoins, plus the node or validator also needs to over-collateralize in order to guarantee the security of the whole network. Nodes receive small commissions from users as their revenue, but the amounts received are far lower than the profits that could otherwise be earned from many of the current mainstream decentralized lending protocols. According to publicly available information, nodes on the tBTC network earn a yield of only 1.25%.

The synthetic asset, sBTC, in Synthetix is another method of issuing tokenized bitcoins without the lead of a centralized institution. 1,512 sBTC have been minted so far, ranking the fifth place in all tokenized bitcoins.

Assets are much less utilized in the process of minting sBTC. Users need to overcollateralize SNX to mint the synthetic asset, sUSD, which means the value of SNX deposited should be at least 5 times that of minted sUSD. Then, sUSD will be converted to sBTC in All debts in the Synthetix system are converged into a debt pool, and shared by all the users who have deposits based on the debt share.

If you look at how different DeFi protocols can be stacked together, Curve, for example, uses synthetic assets from Synthetix as a bridge to exchange different types of assets. Take the process of converting DAI (stablecoin) to WBTC (tokenized bitcoin) as an example. DAI is first converted to sUSD on Curve, and then sUSD can be traded for sBTC with Synthetix, and finally, sBTC is swapped to WBTC on Curve. This process works well because of the low slippage in trading similar assets on Curve and because of the unlimited liquidity on

However, it is worth looking at where exactly the liquidity for exchanging stablecoins for BTC assets comes from. For example, if you provide ETH-DAI liquidity on Uniswap when the market sees a price rally of ETH, this asset will be gradually exchanged for DAI as investors continue to purchase it, while the ETH holders suffer impermanent loss. Back to the example above, it is that provides the cross-asset liquidity. Once the exchange is completed, sBTC debt in the debt pool rises. If the price of BTC goes up, all users who minted sUSD will suffer additional losses, resulting in uncertainty.

DeCus：A cross-chain custody system with high capital efficiency

Complete trust in centralized institutions is essential to the adoption of those tokenized bitcoins issued by centralized institutions. Therefore, we believe that the trend going forward will be decentralized solutions that do not require KYC procedures and that adhere to the open spirit of the blockchain. But, of course, this will all rely on the development of the core technology required for this.

Under the scenarios discussed above, minting decentralized tokenized bitcoins requires the users to pledge native BTC at a rate of 1:1 rate, while nodes or validators, who are required to over-collateralize, represent the biggest obstacle to the scalability of these types of decentralized tokenized bitcoins. Plus, the assets deposited as collateral are then subject to higher volatility than BTC, and therefore represent a significant inherent systemic risk.

DeCus has implemented a self-regulating custodian network based on a much more capital-efficient model. The underlying method is based on an SCI paper from Dr. Guang Yang, Director of Research at Conflux, wherein the Keeper is the core of the custodian network and is responsible for the custody of native bitcoin assets, and providing collateral to secure the system and running nodes. Smart contracts deployed on the Ethereum network mint the corresponding tokenized bitcoins and those tokenized bitcoins are called eBTC. A user wishing to mint eBTC first submits a request to the smart contract and is then given a multi-sig BTC address of a designated group of keepers. Once BTC is deposited to that multi-sig address and proof of deposit has been provided, the corresponding amount of eBTC is then sent to the user’s ETH address. With improved collateralization rates and interoperability, eBTC will lead tokenized bitcoins into the fourth generation.

According to the overlapping grouping model proposed by DeCus, the security and stability of the custodian network outperform the non-overlapping grouping model under the same circumstances, and the following example demonstrates why. Suppose there are six custodians partitioned in two 2-of-3 multi-sig groups each of three custodians, and two Keepers A and C are corrupted, in the traditional non-overlapping grouping model, these 6 Keepers will be divided into two groups ABC and DEF. In group ABC, two Keepers are corrupted, which means the bad actor is able to get full control of this group, which means he can remove the BTC under custody by this group, and the loss will be half of the total BTC. But, under the overlapping grouping model, 6 Keepers are assigned to 20 groups, among which the BTC can be controlled by 4 corrupted Keepers groups, including ABC, ACD, ACE and ACF, so the affected BTC assets would only account for one-fifth of the total BTC. The same 1/3 bad actor could only have access to 4/20 or /5 of all groups and the assets under custody. In other words, the new scheme is able to securely keep 5 BTC with total collateral of 3 BTC against 1/3 adversary, since the profit that could be gained from launching an attack would not exceed the bad actor’s own collateral.

Therefore, using the next-generation algorithms of DeCus, Keepers are able to become decentralized custodians with a lower collateralization rate, while still ensuring the security of the assets under custody, thus increasing the utilization of these assets. The more Keepers there are, the lower the collateralization rate required. As the number of Keepers grows, the collateralization rate will continue to decrease at a certain speed, with capital efficiency reaching 5–15 times that of past similar tokenized bitcoin projects.

Also, as the validators of renBTC and tBTC use REN and ETH as collaterals, respectively, when the price of the collateral falls, the cost of launching an attack also falls. As mentioned above, when the price of REN plunged, the value of the collateral provided by the validators went to almost zero relative to the minted renBTC, which makes the entire network less stable and secure. In contrast, users and Keepers under the DeCus system both directly use bitcoin assets as collateral, which means the ratio of collateral to minted eBTC remains constant, and is not affected by market fluctuations, and can also be liquidated.

Many of the core members in DeCus are PHDs from top universities, and have more than 3 years of experience in blockchain development. Several reputable investment institutions, blockchain projects, and KOLs have already established collaborations with DeCus, including FBG Capital, SevenX Ventures, Parallel Ventures, Conflux, dForce, DODO, Puzzle Ventures, YBB Foundation, MR. MR. BLOCK, 7Star.Capital,, IMO Ventures, Kernel Ventures, Hotbit, etc.

While first launched on the Ethereum network, DeCus also plans to extend the system to other public chains such as Conflux, Nervos and Near, so as to allow cross-chain interoperability.

The market cap of BTC has already reached one trillion dollars, and no other crypto assets even coming close, which means that the choice of collateral for tokenized bitcoins will determine the true scalability of a tokenized bitcoin project. For the Ren Protocol, even if all REN tokens available were used as collateral, the system could only mint a maximum of 5,211 renBTC, which means the scalability is extremely poor. Under the DeCus system WBTC, HBTC, and eBTC can all be used as collateral and, thereby, achieve nearly limitless scalability, and has the potential to equal the liquidity of all native BTC, bringing all of that liquidity over to the Ethereum network.

The current value locked in various DeFi protocols on the Ethereum network has exceeded $100 billion, and tokenized bitcoins have emerged as a key player in the DeFi ecosystem. But, ever since the first generation of tokenized bitcoins, the goal was always to work towards more decentralization and higher capital utilization. Now with the arrival of DeCus and eBTC, tokenized bitcoins will likely see an optimal solution and we will start to see much more of the trillion-dollar BTC market being accessed.

(This reprint has been authorized.)
