Analyzing the Driving Factors and Technical Mechanisms of Bitcoin Pegged Token

【Huobi Focal Point】From 3000 to 150,000 in 6 months:
Analyzing the Driving Factors and Technical Mechanisms of Bitcoin Pegged Token

Summary: In the past 6 months, the number of Bitcoin pegged token on Ethereum has rapidly increased by nearly 50 times, from 3000 to 150,000 today. As of November 24th, the TVL of BTC on Ethereum were valued at $2.7 billion, accounting for almost one-fifth of the total lock-up volume of DeFi.
This growth rate is unprecedented, and it is also the largest-scale cross-chain in the history of blockchain. So what is it that drives these BTCs to flood into the Ethereum network? Through the analysis of the data on chain, we can find that about 40% of the Bitcoin pegged token flow into the head DEXs, while 30% of the Bitcoin pegged token flow into the head lending Dapps, and the rest are
mainly distributed in some CEX, second-tier DeFi applications, some personal and institutional addresses. In other words, the main driving factor is the liquidity “mining” rewards provided by DEX,
followed by on-chain lending. At the same time, a large amount of loan funds will continue to be invested in liquidity mining. Of course, objectively, such a migration has also brought about the performance improvement of BTC, and raised the ceiling of asset scale in DeFi industry.
At present, Bitcoin pegged token include WBTC, renBTC, HBTC, sBTC, tBTC, oBTC, imBTC, pBTC, etc. in the order of total amounts. Among them, with the exception of a small amount of sBTC,which is generated through asset over-collateralization, the remaining 98% of pegged coins have adopted the “custodial + mapping” method to complete the cross-chain. Different custodial mechanisms have their own advantages and disadvantages, mainly lie on the degree of dependence on centralized institutions. These pegged coins mainly use the following two methods to ensure the safety of underlying assets:1) credit endorsement and 2) technical method. Up to now, no security incidents has occurred on these Bitcoin pegged token,, and the total volume has exceeded 100,000, thus effectively increasing the confidence of miners in such technologies. However, this does not guarantee the security of these pegged coins. “Black swan” risks such as hacker theft, internal theft, and private key damage are always there. Every custodian needs to prepare ahead for these potential risks.. On the whole, although the liquidity mining rewards continue to decline, these Bitcoin pegged token still show no tendency to leave with the slowing growth speed. In the long run, these custodial mechanisms still have room for further improvement in terms of security and degree of distribution. As long as they are safe, we believe we can see a higher order of BTCs enter the Ethereum network.


【Huobi Research Institute】Yuan Yuming, Ma Tianyuan, Zhao Wenqi

Contact the Authors:

Huobi Research Institute: [email protected]

Part 1 Why we need BTC to cross-chain to Ethereum

In 2020, the BTC on Ethereum chain has achieved substantial growth. Especially in the past 6
months, the number of Bitcoin pegged token on Ethereum has increased from 3000 to 150,000,with
a rapid growth of nearly 50 times. As of November 24, the TVL of BTC on Ethereum were valued
at $2.7 billion, accounting for almost one-fifth of the overall TVL of DeFi. The growth rate in this
year is unprecedented.
From the perspective of the development trajectory, the earliest WBTC came out at the end of
2018, but until the end of December 2019, the number of Bitcoin pegged token in the industry was
only about 1,000. However, since the beginning of 2020, the number of Bitcoin pegged token in the
network has rapidly increased from 1,000 to 11,000 at the end of June. Subsequently, it has rapidly
increased from 11,000 to 150,000 today. From these data, we can see the strong demand for BTC to
enter the Ethereum chain.
So, why should BTC cross-chain to Ethereum? What is the current status of BTC cross-chain
Ethereum? What are the technical principles and mechanisms behind the completion of cross-chain
BTC by various means? This report aims at addressing these issues.

1.1 Why are these BTCs called “Bitcoin pegged token”
The ERC-20 standard, as the currently most common standard for blockchain Token creation,
is a famous specification for creating tokens through Ethereum. Most of the BTCs in Ethereum,
such as WBTC, HBTC, etc, are built on ERC-20 standard (a few are based on the ERC-777 standard).
They use different algorithm technologies to map BTC 1:1 to obtain features that can only be
obtained with ERC-20 Token, such as being used in DeFi. Essentially, this is a process of swapping
real coins for “mapping tokens”. As the redemption channel is very smooth, their prices can be
anchored roughly 1:1 with BTC. Therefore, these Tokens are usually referred to as “Bitcoin pegged

1.2 Why do BTC needs to cross-chain to Ethereum
In the past six months, the total amount of Bitcoin pegged token has rapidly increased by
nearly 50 times, which has attracted great attention in the industry. So why is there such large
demand for wrapped tokens? The answer is not complicated: BTC holders hope to improve the
efficiency of asset utilization, such as (1) participating in liquidity mining to obtain income; (2)
borrowing funds as collateral. Of course, objectively, these Bitcoin pegged token also improve the
performance and programmability of BTC transfers, and raise the asset ceiling of the entire DeFi
sector. There is also a small amount of demand from these two aspects.
(1) Improve the efficiency of asset utilization for BTC holders
From the perspective of users, different cryptocurrency participants have different holding
preferences. In the current market environment, BTC has an industry position that cannot be ignored
while the ecology of the Ethereum network is much richer with more innovative applications,
especially in the field of DeFi.
Unlike the PoS blockchain, BTC itself does not have a natural “interest-earning” method. With
the rise of liquidity mining, many DeFi projects provide incentives for the entry of ERC-20 funds
themselves. For example, DEX will reward liquidity providers, and lending Dapps will reward both
borrowers and lenders with token rewards.
Users want to earn interest, and the Ethereum ecosystem needs more assets, leading to mutual
benefits and a win-win situation. Thus, a large amount of BTCs have entered the Ethereum DeFi
ecosystem in the form of Bitcoin pegged token. According to the data on the chain at the beginning
of November, more than 40% of Bitcoin pegged token were put into loan applications, releasing a
large amount of funds (stable coins and other tokens); in addition, more than 30% of Bitcoin pegged
token were directly invested in DEX’s liquidity mining (yield-farming), which provides BTC holders with a considerable annualized return (APY) of 10-30%.
(2) BTC can obtain better performance and programmable features as a result
From the user’s point of view, the Bitcoin pegged token have better performance and fee rates.
Compared with the BTC network, the Ethereum network has a slight advantage in terms of
performance and fee rates, and the ERC-20 version of BTC is essentially a token based on the
Ethereum network. At present, the TPS of the BTC is only 7 while the TPS of Ethereum has
increased to about 15. At the same time, the block generation speed of Ethereum is faster, and the
level of certainty of the arrival time is higher. Therefore, on the one hand, BTC migrated to Ethereum
is cheaper to transfer and faster to confirm, on the other hand, it also helps to solve the congestion
for the BTC main chain.
In addition, the BTC- pegged coins are essentially tokens on the Ethereum chain, which makes
them programmable. They will allow developers to write smart contracts based on BTC assets. This
programmability also allows the Bitcoin pegged token to be freely combined with various
innovative applications of DeFi.
(3) Raising the asset ceiling of DeFi
Not only users need Bitcoin pegged token, DeFi applications also do. Most DeFi applications are clustered on the Ethereum network, but there is an asset ceiling on Ethereum. The total market
value of assets on Ethereum, represented by ETH, is limited and will gradually restrict the development of DeFi.
The DeFi sector is very small compared with the entire cryptocurrency market. As of November 23, the total market value of digital currencies was nearly $600 billion. Among them, the market value of BTC is $340 billion, accounting for 2/3 of the total market value. To a certain extent, if the TVL of various DeFi on the Ethereum wants to grow sustainably, BTC must be included.
Otherwise, relatively few ETH and ERC-20 assets will hinder the development of DeFi.
With the help of ERC-20 version of BTC, users can experience better liquidity. These Bitcoin
pegged token have brought greater liquidity to the Ethereum ecosystem and greatly raised the asset ceiling of DeFi.
Then, how fast are these BTCs entering Ethereum network? Where have they gone? What about redemption? We will conduct an analysis on these issues in part 2.

Part 2 The Current Status of BTCs on Ethereum

2.1 The distribution and overall growth of various types of Bitcoin pegged token
According to the statistics on the chain, as shown in Table 2-1 and Figure 2-1, the current
mainstream Bitcoin pegged token in the order of total amounts include: WBTC (about 2.1 billion ,
renBTC (about 300 million ), HBTC (About 100 million ), sBTC (about 30 million ), tBTC (about
24 million), oBTC (about 16 million), imBTC (about 14 million ) and pBTC (about 2.5 million ).
Among them, WBTC accounts for more than 80%.

As we can see from Figure 2-2, BTCs on Ethereum have started to grow rapidly in the past 6 months, and the curve was relatively steep. As WBTC occupies an absolute dominant share, it is also strongly consistent with the overall curve. However, with the decline in the popularity of liquidity mining in recent months, the growth has slowed slightly recently, with the overall rising trend.

2.2 The destinations of Bitcoin pegged token
WBTC and renBTC currently account for the largest proportion of the total amount of Bitcoin
pegged token, which is more than 90% of the entire sector. Therefore, the destination of these two
pegged coins can represent the destination of the overall Bitcoin pegged token. So what did these
Bitcoin pegged token do after arriving the Ethereum network?
We selected two time points for statistics on their distribution: November 5th and November
24th, respectively before and after Uniswap stopped liquidity mining rewards.
First, on November 5th, the main destinations of WBTC and renBTC were shown in Table 2
2 and Table 2-3:

We can infer from the table that both WBTC and renBTC mainly find their destinations the top
DeFi applications. Maybe these apps don’t have the highest APY. However, due to comprehensive
factors such as brand credibility, the majority of liquid funds are absorbed by these top DeFi
In terms of classification, the main destinations of Bitcoin pegged token are mainstream DEX
supporting liquidity mining, such as Uniswap and Curve, which account for about 40%; and the
mainstream loan platforms, such as Compound and MakerDAO, which account for about 30%. Of
course, there are still some unmarked contract addresses, which may be personal accounts or some
new DeFi addresses that need more added information.
During the writing of this report, Uniswap liquidity mining rewards ceased on November 18th.
Uniswap LP Pool was once the largest destination of WBTC. After the termination of mining, what
has happened to the overall Bitcoin pegged token’ distributions? Let’s take a look at the data on
November 24, as shown in Table 2-4 and Table 2-5:

Overall, the proportion of WBTC and renBTC in the mainstream DEX has dropped to 25%,
while the proportion in mainstream loan applications has risen to 40%. The main reason is that after
Uniswap shut down, a large amount of WBTC withdrew from Uniswap, and the WBTC still
providing liquidity in Uniswap has dropped by 80%. Table 2-4 shows that 6,681 WBTC suspected
of personal addresses were withdrawn from Uniswap. In addition, AAVE and Sushiswap were also
destinations these WBTC mainly inflew after Uniswap shut down.
Thus we can infer that among the two main destinations of Bitcoin pegged token, the liquidity
mining incentive provided by DEX was once the main goal. As DEX reduces production or stops
liquidity incentives, the proportion of Bitcoin pegged token in DEX has declined. However, a large
number of Bitcoin pegged token did not redeem and return to the Bitcoin network. Instead, they
entered into other Ethereum loan applications, and users borrowed a large number of other Tokens,
such as stable coins, through mortgage Bitcoin pegged token.

2.3 The minting and burning of Bitcoin pegged token
As of early November 2020, the minting and burning of WBTC and renBTC are shown in
Table 2-6.

We can see that WBTC is rarely burned, while renBTC is burned very frequently. As shown in
Table 2-7 and Figure 2-3, the largest amount of renBTC burned was equivalent to 1003.3 BTC,
followed by 601.97, both of which occurred on September 18, 2020. In terms of the quantity
range, the largest number of transactions is between 0.1 and 1, which is 1733 times; followed by 1
to 10, which is 930 times. In contrast, the total number of burning of WBTC is only 23, and 4 of
them account for 98.47% of the total burning.

Why does renBTC burn more than WBTC? The reason is that the two operating mechanisms
are different. WBTC adopts the merchant model, and each redemption is actually exchanged with
the merchant responsible for the acceptance, in exchange for the position held by the acceptor,
without the need for real burning. However, renBTC does not have an merchant design, so every
redemption needs to be burned on the chain, which brings a difference in the number of burning
between the two.
As for the operating mechanisms of various Bitcoin pegged token, we will analyze them in
detail in the following part.

Part 3 Detailed Explanations of Bitcoin Pegged Toke
n Models
The reason for the existence of Bitcoin pegged token is to allow BTC, which cannot appear
directly on various non-BTC blockchains due to incompatibility of the technical system, to appear
in the form of “stand-in”. At present, all schemes for generating Bitcoin pegged token are
endorsed by equivalent or overcollateralized assets.Among them, 98% of the Bitcoin pegged token
are generated in the way of “custodial + mapping”.
According to different types of collaterals, there are mainly two types of perspectives:
mortgage BTC to generate Bitcoin pegged token, and mortgage other blockchain assets to
generate Bitcoin pegged token.
The former method will not expand the total number of BTC and Bitcoin pegged token in
circulation, and as it is a real BTC mortgage, there will not be frequent clearing and settlement
process due to “insolvency”.
However, because it is a real BTC mortgage and Bitcoin pegged token are released on
another chain, it will inevitably involve the design of the cross-chain model. The difference in
cross-chain mechanism design is one of the core points of the differences between each Bitcoin
pegged token model. For example, WBTC realizes manual cross-chain through the interaction
between custodians and merchants, while renBTC realizes cross-chain through RenVM. But in
essence, these mechanisms all escrow BTC to a certain group or groups.
The clearing and settlement mechanism of the latter method will be more complicated, but as
the collateral can be assets on the same chain, cross-chain can usually be avoided. For example,
the sBTC generation process takes place on Ethereum. This type of mechanism uses smart
contracts as a tool, so it does not require any custodian. However, the disadvantage is that the asset
utilization efficiency is low and there is risks that it cannot be liquidated.
Regardless of the former or the latter method, they are all based on different mortgages
systems, as shown in Figure 3-1 and Table 3-1. For example, WBTC is secured by a centralized
custodian of BTC, renBTC is secured by a decentralized network of mortgaged BTC (which has
not been fully implemented yet), and sBTC is SNX mortgaged by contract control.

Furthermore, to understand the operating logic of each Bitcoin pegged token solution, it is
essential to understand the following two issues.

  1. How to mint and burn Bitcoin pegged token?
    This problem is broken down into three minor problems:
    1) Who is responsible for minting and burning?
    2) Who is responsible for the custody of the mortgage?
    3) How to exchange cross-chain information?
  2. How to solve the problem of fund security in the life cycle of Bitcoin pegged token’ minting, circulation, and burning?
    The following table provides a brief comparison of several types of Bitcoin pegged token that
    will be introduced in the following part. We will conduct a detailed analysis of each Bitcoin
    pegged token and discuss the aforementioned issues.

3.1 WBTC
WBTC (Wrapped Bitcoin) was launched in January 2019. The custodian is BitGo, a well known digital asset custodian. It is the earliest ERC-20 token based on the Ethereum network that is linked to BTC 1:1 and accounts for the largest share of all types of Bitcoin pegged token. The circulation has exceeded 120,000, and its issuance rules have been referred to by many latecomers.
The WBTC system is a trust-based alliance governance model, and its core is a two-tier distribution structure. Figure 3-2 shows the two-tier distribution structure of WBTC, which involves three roles: custodian, merchant and customer. Under this structure, the interaction between the custodian and the merchant is responsible for minting and burning WBTC; the interaction between the merchant and the user is responsible for placing and withdrawing WBTC to the secondary market; Users will not leapfrog directly to interact with the custodian.
As shown in Figure 3-2, we will discuss the advantages and disadvantages of this model by
introducing the minting and burning process of WBTC and the rights and responsibilities of various
roles in it.

3.1.1 Minting, burning, distribution and recycling: two-tier distribution
1)Minting and burning

Both the minting and burning of WBTC occur between the custodian and merchants, and transactions will occur simultaneously on BTC and Ethereum. The core point of the minting is to
lock BTC on the BTC chain and release the equivalent WBTC on the Ethereum chain. The minting
process of WBTC is as follows:

● Transfer BTC: First, on the BTC chain, the merchant will send a certain amount of BTC to the
● Apply for minting: Then, on the Ethereum chain, the merchant will initiate a request for
minting to the WBTC smart contract. The parameters of the request will include the transaction
ID of the transfer on the BTC chain;
● Minting: After seeing the request to apply for minting, according to the transaction ID of the
BTC transfer, the custodian can confirm that the transaction has been completed. And then it
will send a confirmation request for minting to the contract. Confirming the minting request
will trigger the minting operation in the contract, and the contract will automatically mint
WBTC and put it into the merchant’s Ethereum address.

Burning is the opposite process to minting. The difference is that during the minting process,
it is the custodian who finally confirms that the minting action is initiated, while during the burning
process, it is the merchant who confirms that the burning is initiated. The specific process is as

● Create a burning transaction: The merchant creates a request to burn WBTC through a contract
on the Ethereum chain, and burn a specified amount of WBTC;
● Transfer BTC: After the burning operation is completed, the custodian will transfer the
equivalent amount of BTC to the merchant on the BTC chain;
● Transaction confirmation: After completing the transfer, the custodian will initiate a transaction
on the Ethereum chain to confirm that the burning operation has been completed.
It is worth noticng that the process of coin minting and burning is not fully automated and
usually takes from several hours to tens of hours (usually within 48 hours).

2) Distribution and recycling
The distribution and recycling of WBTC occur between merchants and users. After the
merchant completes the minting process, it holds WBTC tokens. In the WBTC model, there is no
restriction on the form of BTC-WBTC exchange between merchants and users. In theory, merchants
can complete each transaction with users by implementing cross-chain communication again. But
generally, as centralized institutions, merchants will complete non-chain exchange transactions in
exchanges or wallet applications in their systems.

3.1.2 Role rights and duties: alliance governance based on trust
In the WBTC model, there are mainly four categories of roles, namely custodian, merchants,
users, and DAO members. Three types of roles have been mentioned in the previous paragraphs,
let’s talk about them one by one below.

The name of the custodian has clearly revealed its core role in the WBTC model——
responsible for custody of the pledged assets used to generate Bitcoin pegged token.
In addition, the custodian is also the actual executor of the coinage (the mint function is triggered by the custodian’s contract call). However, in the WBTC model, the power of the custodian is also restricted by three levels to prevent it from abusing its right of coinage or transferring custodial assets without authorization: 1. The custodian cannot mint coins on its own, and the merchant must first initiate a coin minting request, and then the custodian performs minting based on this request; 2. The BTC in the custodial address of the custodian can only be transferred to the address on the merchant chain in the white list, and cannot be transferred at will; 3.The addition or deletion of merchants is determined by the DAO and is not directly controlled by the custodian.
Currently, in the WBTC system, BitGo is the only custodian.

The merchant is a transit role in the WBTC model. Tokens that are successfully minted and to
be-burned will both be stored on the merchant’s address, and the distribution and recycling to users will also be performed by the merchant. The actual burning operation is also performed by the merchant.
In addition, as the merchant can operate in a centralized manner, they can avoid cross-chain
transactions every time a user requests or returns a coin, and complete the process off-chain, which
improves the efficiency significantly. The user escrows BTC to these institutions in exchange for
WBTC, returns WBTC and exchanges it back for BTC. This is also the reason why we discovered
in Chapter 2 that there are very few burning of WBTC on the chain.
Merchants actually use their own positions to redeem and exchange with users. In theory, users
do not need to trust any merchant, but only need to trust the ultimate custodian BitGo.

3)Users and DAO
Users are the ultimate demand side of WBTC, but they do not directly participate in the process
of coin minting and burning. However, in the rule of WBTC, it is clearly required that users
participating in (indirect) minting and burning must pass KYC and AML.
WBTC manages the access and role permissions of custodians and merchants in the form of
DAO. Custodians and merchants can be DAO members. Currently, according to the information
published on the WBTC official website, there are 17 DAO members, including the sole custodian
BitGo, some merchants such as Ren, Loopring, Maker, etc., and some pure DAO members such as
Compound, Blockfolio, etc., which are relatively scattered.

3.1.3 Advantages and disadvantages of the model
In the WBTC mode, the biggest advantage lies in its two-tier distribution structure. This
structure can bring about two main benefits: the first one is to solve relatively time-consuming and
complex operations on the first layer, such as batch minting, burning and trust management issues.
Therefore, user-oriented rapid distribution and recycling can be realized on the second layer, which
greatly improves users’ experience; The second main advantage lies in the mechanism. Since
merchants use their own positions to help users exchange, it impossible to act maliciously. Therefore, the nature of the merchant that actually distributes and recycles to users is no longer important. This allows service providers that already have a large user base in the ecosystem to become merchants in the WBTC system and accelerate the expansion of WBTC. At present, WBTC has the highest coinage among Bitcoin pegged token, which is highly relevant to its design model.
But this model also has its potential security risks. Although the mechanism design has very
good constraints on merchants’ evil, the overall trust is still based on the trust of a few institutions,
such as the only custodian BitGo.

3.2 renBTC
Based on the ERC-20, renBTC is Bitcoin pegged token issured by Ren Protocol , with a
circulation of about 20,000. Together with WBTC, they jointly occupy more than 95% of the Bitcoin
pegged token market.
Compared with WBTC, the model of renBTC is flatter, and the coin minting and burning
mechanisms are more trustless as well. Its core idea is to rely on a BFT-type RenVM to realize coin
minting, custody and burning, and to use the distributed signature notary mechanism to realize
cross-chain. The user or DApp can directly interact with the Darknode in RenVM (ie, the node in
the network), generate renBTC with a 1:1 mortgage and release it to the target network.

3.2.1 Minting and burning
Minting in RenVM mode is fully automated, so the process can not only be initiated manually
by users, but also can be internalized into the logic of the DApp. The main processes are as follows:

● Transfer BTC: The user or DApp transfers BTC to the escrow address of RenVM and informs
RenVM (steps 1 and 2 in Figure 3-3). It is worth noticing that in the future, the private key of
the custodial address of RenVM will be generated by Darknode in the network based on multi
party security calculations. Unless more than 1/3 of the nodes in the network cooperate with
each other, this private key will not be controlled by any node; However, due to limited
technological progress, according to its official disclosure, its hosting work is still done by
“Greycore” instead of Darknode. Greycore is the Ren team.
● Generate coin signature: After RenVM confirms that the transfer has been completed, it will
generate a coin signature to the user or DApp based on the private key mentioned in the previous step (steps 3 and 4 in Figure 3-3);
● Minting: After the user or DApp obtains the signature, the signature can be used to complete
the minting (step 5 in Figure 3-3). This process can also be triggered in the DApp, saving users
the cost of self-operation.

The burning process is relatively simple, as shown in Figure 3-4. The user or DApp will burn
renBTC and provide its BTC address, then RenVM will automatically release the BTC to this
address after the transaction is confirmed.

In addition to the classic “burn” process mentioned above, RenVM also supports minting
renBTC on another chain (such as Polkadot) after burning. The process is equivalent to a
combination of the burning and minting process. The user or DApp burns BTC on Ethereum and
provides an address on the Polkadot network. RenVM will generate a coin signature after
monitoring the transaction. The user or DApp can use the coin signature to mint renBTC on the
Polkadot network. But this function has not yet been put into practical use.

3.2.2 Darknode escrow mechanism
The Darknode in the RenVM network is the core of the entire system. Minting, burning and
custody will all be processed by Darknode. There are three main ways to prevent Darknode from
doing evil. The first aspect is pledging. Each Darknode needs to pledge 100,000 REN, and the node
will be fined and confiscated part of the pledged tokens if it does evil. The second aspect is the
technology of privacy computing. Multi-party secure computing technology ensures that Darknodes
in the network can cooperate to generate private keys, but each node cannot obtain the entire private
key individually (unless more than 1/3 of the nodes act maliciously). The third aspect is sharding.
Darknodes in each shard will use MPC to cooperate to generate private keys, but the Darknode in each shard will be reassigned to different shards randomly every day to reduce the possibility of
Therefore, in this mode, the pledged BTC can achieve trustless custody. However, this is the
state after all the capabilities of RenVM are realized. At present, RenVM is still in the Sub-Zero
stage according to the official stage. In this stage, the network is maintained by RenVM’s own
development team (ie Greycore), so at this stage, RenVM is still a very centralized structure.

3.2.3 Advantages and disadvantages of the model
One of the biggest features of RenVM’s design model is that it is bridged through a network to
realize cross-chain asset transfer, and this process can be automated, which enables it to be directly
embedded in smart contracts, and can be better integrated Into the DeFi ecosystem. This is also one
of the important reasons why renBTC can become the second largest anchor BTC.
Its second major feature is trustlessness, but it was also mentioned in the previous article that
the current RenVM has not yet achieved this capability. It is still in a very centralized mode, and
there is a certain financial security risk.

3.3 sBTC
sBTC is a cryptocurrency synthetic asset (Synths) generated on Ethereum through the
decentralized synthetic asset issuance protocol Synthetix. Its value is supported by the network
token SNX. Users must first pass a DApp Mintr that interacts with the Synthetix protocol to over
collateralize SNX to mint sUSD stablecoins, and then trade the newly minted sUSD on the
Synthetix.Exchange platform in exchange for sBTC. The whole process does not involve cross
chain, nor does it entrust a third-party custodian. Below we will introduce the issuance and exit
process of sBTC and the advantages and disadvantages of this model.

3.3.1 Issuance and exit process

1) sBTC Issuance
Specifically, the sBTC issuance process has the following steps:
● Initiate a request to mortgage SNX: The smart contract in Mintr checks whether the
user can be mortgaged. The mortgage rate must comply with the over-collateralization rate specified by the community governance mechanism. The purpose of this is to reduce the value
fluctuation of SNX due to insufficient consensus risk;
● Debts Registering: After the mortgage is confirmed, the system will add the “debt”
owed by the user to the debt register, and continuously update the cumulative debt increment
ratio, and track the debt percentage of each mortgagor;
● Minting: After the debt is allocated, the sUSD smart contract updates the total supply
and distributes the newly minted sUSD to the user’s wallet.

In this way, users can use the minted sUSD to buy in exchange for the synthetic asset sBTC.
The essence is the process of burning the original synthetic assets and generating new synthetic
● Burn the original sUSD: including reducing the sUSD to be exchanged in the user’s
wallet address and updating the total supply of sUSD in the system;
● Exchange sBTC: Determine the amount of sBTC that can be exchanged according
to the exchange rate automatically pushed on the chain by the oracle, during which transaction
fees will be charged; ·
● Transaction completion: The goal is to issue sBTC smart contracts, and the sBTC
balance in the user’s wallet and the total supply of sBTC in the system are updated.

2) Exit process
When the mortgagor wants to withdraw from the system to unlock the mortgaged SNX, he
must first repay the remaining debt recorded in the debt register. The specific process is as follows:
· Confirm debt: Confirm the balance of debt owed by the mortgagor through the Synthetix smart
· Burn arrears: Burn sUSD, set the mortgagor’s SNX balance to be transferable, and delete it from
the debt register.
The biggest difference between sBTC and other Bitcoin pegged token is that instead of
collateralizing BTC to generate Bitcoin pegged token, it generates synthetic assets by collateralizing
its platform tokens, so there will be no process of handling cross-chain transactions. In addition, the collateral does not directly generate sBTC, but first generates the transaction medium sUSD in the
Synthetix system, and then exchange sBTC from sUSD.

3.3.2 Advantages and disadvantages of the model
In this mode, sBTC transactions are mainly executed based on smart contracts, and do not
involve transaction books and counterparties. The real-time price information of assets is tracked
through oracles to allocate exchange rates, and the free conversion of synthetic assets is realized
without slippage problems. In addition, the Synthetix protocol also provides incentives to SNX
pledgers, including transaction rewards and token issuance rewards. The former usually charges a
transaction fee at a rate of 0.3% for each transaction completed on Synthetix.Exchange, and then
deposits it in the fee pool and distributes it to the SNX mortgagor proportionally every week; the
latter uses the Synthetix protocol’s own inflation policy to generate new SNX. Similarly, the SNX
mortgage rate will be distributed to mortgagers whose SNX mortgage rate is not less than the target threshold every week.
However, the debt calculated in the Synthetix system will fluctuate as the exchange rate
changes in the system. This means that even if the user does not do anything after lending sBTC, as
long as the BTC rises, the user’s debt will increase, and more sUSD needs to be returned when
returning; not only that, even if the user only lent sUSD, if As the asset prices of other users increase
and the overall debt of the system increases (for example, other users exchange sUSD for sBTC,
and the increase in sBTC price results in an increase in overall system debt), the user also needs to
return more sUSD.
In addition, fluctuations in the value of the native token SNX as collateral will also have a
negative impact on the system. When the price of SNX drops sharply, users may choose not to
replenish the collateral to repay the debt, resulting in insufficient collateral for the system, which
will affect the entire system. This is why Synthetix has set a super-high multiple (750%) mortgage
asset rule. At the same time, as a collateralized asset, the market value of SNX will also restrict the
upper limit of synthetic assets. In addition, this model also faces problems such as oracle risks,
imperfect clearing and settlement mechanisms, and cumbersome debt calculation methods, which
need to be improved and perfected in the follow-up development.

3.4 Other Bitcoin Pegged Token
3.4.1 HBTC

HBTC is an anchored coin under the ERC-20 standard launched by Huobi on Ethereum in
February 2020. The asset is 1:1 anchored to BTC, and Huobi is responsible for minting, burning
and custody. As of now (October 2020), the number of HBTC issued in the contract address has
exceeded 6000, which are active in applications such as Uniswap, Curve, Balancer, Nest, etc.
Users can complete two-way exchange business through HuobiGlobal or HBTC official
website. Deposit BTC assets into Huobi Global, choose to raise HBTC assets when withdrawing,
or deposit BTC on HBTC official website to quickly exchange for HBTC assets. In the same way,
the process of converting to BTC is to deposit HBTC assets into Huobi Global, and choose to
withdraw BTC assets or deposit HBTC on HBTC official website in exchange for BTC assets.

3.4.2 tBTC
tBTC is an anchored coin based on ERC-20 jointly issued on Ethereum by Keep Network,
Cross-Chain Group and Summa. The issuance time is May 2020. The issuance of tBTC has
exceeded 900 in the past six months.
tBTC uses the t-ECDSA elliptic curve signature algorithm to sign transactions, and the
operating mechanism is open and transparent; in addition, the biggest feature of tBTC is
trustlessness, as it uses the “signer group” system. When a user wants to mint a new tBTC, the
system selects three signers from the “group” through random beacons, and creates an address for
the user on the BTC network to lock the BTC participating in the exchange. When the three signers
agree on action and the BTC is successfully locked, the new tBTC will be minted at a ratio of 1:1
with BTC. In order to ensure the stable operation of this decentralized system, the signer must over
collateralize the value of Ethereum 1.5 times the BTC deposited by the user. Once any signer acts
maliciously, the mortgage will be confiscated by the system and returned to the stolen user .
But at the same time, in order to maximize trustlessness, tBTC sacrificed its scalability. For
example, only 1 BTC is allowed for a single exchange, and there is a lock-up period of up to six
months after the exchange is completed, which is very unfriendly to users; at the same time,
signatories require 150% over-collateralization, which also sets a high funding threshold for
signatories, leading to the invisible ceiling of this model; in addition, the technical bottleneck is also
one of the important factors restricting its development. The Keep protocol that tBTC relies on is
progressing slowly and has not been verified. Within two days of the mainnet’s launch, a major
security breach occurred and the project was temporarily suspended. If the technical bottleneck can
be broken in the future, the project still has great development potential.

3.4.3 oBTC
oBTC is a relatively new anchored coin based on ERC-20. 1:1 pegged with BTC, oBTC is
issued by BoringDAO based on ERC-20. The main network has be launched on November 12, 2020.
At present, the number of coins has reached 800. It hopes to build a decentralized asset bridge that
connects different blockchains and expand its compatibility in the form of DAO.
The minting process of oBTC is relatively simple. Users send BTC to a multi-signature escrow
address controlled by institutions and communities, and provide their own Ethereum address to the
escrow address through the op_return function of BTC. When the custodian receives the funds and
reaches a consensus on the network, it will mint the equivalent oBTC on Ethereum and send these
anchored tokens to the user’s ETH address. During the period, 0.2% of the total asset value will be
charged as a minting fee, but a 0.4% BOR subsidy can be obtained through minting. During the
whole process, the user provides his own ETH address and the BTC to be exchanged, and only one
transfer operation is required. Because op_return is a native function of BTC, no centralized server
is needed in the whole process.
Its operating mode is based on “tunnel”, that is, it creates a DAO for each blockchain asset to
mint and redeem between blockchain assets and ERC-20 tokens. Any community user can create a
new tunnel by staking, but there can only be one tunnel for each cryptocurrency. In this article, we
will mainly focus on the BTC tunnel.
In terms of fund security, BoringDAO adopts a three-layer pledge mechanism. In other words,
each oBTC has approximately 200% of the collateral, 100% of which is composed of the original
blockchain assets, which is BTC; About 100% of the second layer is mortgaged by the tunnel
contract layer for other assets such as BOR. The third layer also has some on-chain insurance. In
this way, even if a black swan event occurs, the community can compensate users through contract
level liquidation and insurance.

3.4.4 imBTC
imBTC is an Ethereum ERC-777 token issued, custodial and accepted by Tokenlon under
imToken. It went online in October 2019 and has a total circulation of more than 900. Its custody
address is open and transparent, and users can track all the minting and burning of imBTC through
the information on the chain, ensuring 1:1 anchoring with BTC.
The anchored coin of imBTC is generated through “lock-up exchange”. Every time a user locks
a BTC in a Tokenlon account, they can subscribe for the same amount of imBTC, or they can use
DApp to call a smart contract to burn imBTC. At the same time, in order to compensate for the
liquidity loss caused by BTC pledged in the Tokenlon safe cold wallet, users can receive subsidies
for transaction fees and redemption fees. In addition, different from other Bitcoin pegged token
tokens, imToken is based on ERC-777 instead of ERC-20 protocol. ERC-777 is an upgraded version
of ERC-20 protocol, which can help simplify the transaction process and avoid false issuance. It
can be seen that Tokenlon hopes to choose a better protocol to bring a better user experience.
With the user base of imToken, it stands to reason that imBTC has an inherent advantage.
However, it has been a year since the launch, and the development trend is not as hot as expected.
The reason may be related to the reentry attack vulnerability in the ERC-777 token and
Uniswap/ contract combination. Attackers have repeatedly called the method function
named tokensToSend to steal the ETH/imBTC trading pair on the platform.

3.4.5 pBTC
pBTC is a BTC anchored coin issued by pTokens on Ethereum based on TEE technology in
March 2020, which is also 1:1 with BTC. The centralization of pBTC is relatively weak, and it plans
to change to the DAO model in the future. The current number of issued on Ethereum is about 200.
With pTokens, users can mint pBTC through trusted computing. Users only need to deposit a
certain amount of BTC in the corresponding pToken smart contract and provide the receiving
address, and the transaction will be carried out in a set of trusted execution environments (TEE).
After verification by the enclave program, the corresponding amount of pBTC will be minted and
transferred to the address provided by the user. The whole process is transparent and visible, and no intermediate fees are charged.

3.5 potential risks
At present, these Bitcoin pegged token are at the Bitcoin layer, and there has never been a
security incident of asset loss or theft. However, there was an accident at the Ethereum layer. As
imBTC is based on ERC-777, some factors caused it to be stolen from the liquidity pool by hackers
on and Uniswap. However, the BTC assets of its Bitcoin layer are still safe.
As the technology of the Bitcoin layer is relatively robust and there is no complicated contract
logic, the probability of risk is relatively low. In addition, the current total amount of BTC anchor
coins has exceeded fifteen, which has effectively increased the confidence of minters in such
Of course, no security incident has occurred so far does not mean that these pegged coins are absolutely safe. “Black Swan” risks such as hacker theft, internal theft, and private key damage are
always present. How to better deal with these potential risks, every custodian needs to plan ahead.

Part 4 Summary
In just half a year, 150,000 BTC completed the cross-chain in different ways. Subject to the
technical characteristics of BTC itself, it is almost impossible for BTC to have non-custodial
solutions. Therefore, more than 98% of BTC currently use the “custodial + mapping” scheme.
Considering that these methods are currently operating smoothly without any security incident,
and DeFi continues to provide yield-farming rewards, the willingness of minters is of high level,
and the overall development momentum is still upward. At the same time, objectively, cross-chain
not only brings smart contract functions and performance improvements to BTC, but also
increases the total asset ceiling of the Ethereum blockchain. Therefore, we believe that more BTC will enter the Ethereum network in the future, and the number may increase by an order of


[1] WBTC official website:
[2] renVM official document:
[3] HBTC official website:
[4] Synthetix official document:
[5] Keep Network official document:
[6] BoringDAO Whitepaper: https://boringdao-prod.oss
[7] pBTC official website:

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