Bitcoin and Ethereum are separate and incompatible blockchains. An asset on one can't be sent to an asset on the other. This is a problem for people with Ethereum wallets, like Argent, who want exposure to Bitcoin. Fortunately, Ethereum has a solution: tokenized Bitcoin.
Tokenized Bitcoin allows Ethereum wallet owners to hold a token that represents an investment in Bitcoin. The value of this tokenized asset rises and falls with the value of Bitcoin.
This post covers the benefits of this approach, before outlining the different types of tokenized Bitcoin.
Why use Bitcoin on Ethereum?
There are a number of reasons why you may want tokenized Bitcoin on Ethereum instead of having a separate wallet for Bitcoin:
Take advantage of DeFi
The Ethereum blockchain is a platform for decentralized applications (Dapps). A rapidly growing area for Dapps is Decentralized finance, or DeFi, where people are building financial products that are radically different to what was possible before Ethereum, being more transparent, community-owned, cost efficient and automated.
Tokenized Bitcoin is a popular asset to use in the world of DeFi. At the time of writing, nearly 150,000 Bitcoin (worth $2.8 billion) are being used to hold, stake, borrow and lend across the world. For more live statistics on how this is being used, explore this live dashboard on Dune Analytics.
As you can see, Decentralized exchanges (DEXes) are one of the most popular applications in DeFi. The following chart shows the latest volume of tokenised Bitcoin traded on DEXes:
DEXes let you trade trustlessly; unlike traditional centralized exchanges (CEX) that you need to deposit into. To work properly, DEXes need a large supply of tokens available for trades - called 'liquidity'.
Some of a DEX's fees are used to pay whoever provides this liquidity (the liquidity provider) and this means you can make returns simply by depositing and keeping your assets into a liquidity pool. Rates can be higher than traditional investments but there are also risks associated.
By depositing tokenized Bitcoin in a liquidity pool (such as Uniswap, Curve, Balancer, etc.) you can therefore both hold Bitcoin, while generating returns for supplying liquidity to the protocol. This can be more profitable (and more risky) than just passively holding Bitcoin.
One other use of tokenized Bitcoin is for loans, which can also be provided trustlessly using the Ethereum network. Because these loans are anonymous, they require borrowers to supply more collateral than what they are borrowing to protect lenders. Popular DeFi lending platforms include Aave and Compound.
Transaction speed vs cost
It's usually much faster to send tokenized Bitcoin using the Ethereum network than through the Bitcoin network itself. The block time (transaction speed) of Ethereum is in the order of seconds compared to minutes for Bitcoin. Though it can also be more expensive, depending on network congestion.
However, recent advances in Ethereum towards ETH 2.0 will mean that one day sending and receiving tokenized bitcoin could be close to free.
No seed phrase
If you hold Bitcoin in a non-custodial wallet it's almost certain that you'd need a seed phrase. These are inherently risky and an awful user experience. Argent, on the other hand, is fully non-custodial yet never needs a seed phrase. You can therefore get exposure to Bitcoin without risking everything on a piece of paper.
In terms of risk, investing in tokenized Bitcoin on Ethereum could be considered inherently more risky than investing in either asset on their own chain - as you are relying on both networks.
Additionally, as all tokenized Bitcoin assets use smart contracts, there is also the possibility of a hack or bug in these contracts putting assets at risk. It's important to research whether the asset you hold (and the wallet you are holding it in) is custodial or non-custodial. If an asset is custodial, this means that a centralized entity controls them and could decide to withdraw at any time.
For synthetic assets (see below) there is also the risk that the price decouples from that of the asset it represents. In some countries the creation of synthetic assets without proper licenses may be against local trading laws.
It may be possible in the near future to insure your Ethereum-based assets using smart contract-based insurance, such as Nexus Mutual or Cover Protocol.
Bitcoin assets on Ethereum
One open-source tool that lets you track the amount of Bitcoin on Ethereum is btconethereum.com
The following live chart shows the top Bitcoin assets on Ethereum by supply:
There's a number of ways you can hold Bitcoin in your Ethereum wallet. All of the tokens below follow Ethereum's ERC-20 standard; meaning they can be sent and received, there is a fixed supply, and one token is the same as any other.
The majority of tokenized Bitcoin assets fall into the following categories:
Bitcoin-backed (fungible) assets
The appeal of Bitcoin-backed assets is that they are directly backed by a Bitcoin that exists on Bitcoin's blockchain. This gives users' confidence that they can redeem their token should they wish to - similar to how a gold certificate can be redeemed for physical gold.
It's important to understand that in some cases the bridge between Bitcoin and Ethereum may be controlled by a centralized party, meaning a degree of trust is required.
Here are some of the most popular fungible tokenized Bitcoin assets:
1. Wrapped Bitcoin (WBTC) - Custodial
Having launched in January 2019, this is the first and currently the most popular Bitcoin-backed asset on Ethereum. Wrapped Bitcoin (WBTC) is custodial, meaning that a custodian (in this case, BitGo) holds the equivalent amount of Bitcoins as there are Wrapped Bitcoins. When Bitcoin is provided to BitGo and a WBTC token is minted, it is called 'wrapping' - when the token is destroyed (burned) and the Bitcoin redeemed, this is called 'unwrapping'.
2. renBTC (Ren Foundation) - Currently custodial
Created by the Ren foundation, a renBTC can be exchanged for a Bitcoin using the renVM interface, that makes it fungible, not synthetic (like a price tracker would be). The renVM (ren Virtual Machine) is responsible for securing tokens between blockchains. In the current phase of renVM's development the network is considered custodial as the core developers have access to the BTC deposited. However the project aims to move towards full decentralization over time.
3. tBTC (Keep Network) - Non-custodial
tBTC, which launched properly in September 2020, enables BTC to be wrapped and issued on the Ethereum blockchain in a trustless manner, removing need for a centralized custodian to secure the underlying asset (like BitGo does for WBTC).
Synthetic (indexed) assets
Similar to an index tracker, synthetic BTC is not backed by Bitcoin itself, but instead tracks the price of Bitcoin.
1. Synthetic BTC (sBTC) - Non custodial
The first is Synthetic BTC (sBTC), created by Synthetix. Synthetix tokens are minted using an SNX collateralization rate of 750%. Put simply, if you wanted too mint 1 sBTC you would need to deposit enough SNX tokens to equal 7.5 BTC. The idea of this is to protect against high price fluctuations in the market.
2. ETH/BTC (UMA) - Non custodial
UMA's ETH/BTC is a 'priceless' synthetic token with tracks the ratio of ETH/BTC. Compared to Synthetix, which is collateralized with SNX, UMA ETH/BTC is collateralized with DAI - a decentralized stablecoin that aims to keep its value as close as possible to one dollar.
Ready to get started with Bitcoin on Ethereum?
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What is “DeFi”?
A simple guide to the latest revolution in finance
How do I start using DeFi?
DeFi is not a token, a company, or a stock to invest in. It's a whole new financial system.
What are the benefits of DeFi?
The traditional finance model that we are familiar with is build on centralised authorities (such as banks) to process transactions and act as intermediaries. With DeFi, there are no middlemen. It's finance for the people, by the people.