Need help understanding Bitcoin DeFi?
Need help understanding Bitcoin DeFi?
Need help understanding Bitcoin DeFi?
Need help understanding Bitcoin DeFi?
Need help understanding Bitcoin DeFi?

Exploring the Possibilities of Wrapped Bitcoin (xBTC) on Stacks

On February 11th, the Stacks Foundation held their weekly Crypto Internet Show on Twitter Spaces. The topic for the day? xBTC, or wrapped Bitcoin. Some of the brightest minds in Stacks, and crypto at large, came together to discuss why this new asset is needed and what some of the applications for that asset might be.

February 18, 2022
Exploring the Possibilities of Wrapped Bitcoin (xBTC) on Stacks

Kyle Ellicot, a partner and Managing Director for the Stacks Fund and Accelerator Program, moderated the conversation. Joining Kyle were several guests, including:

  • Muneeb Ali, Founder of Stacks & the CEO of Trust Machines (as well as Hiro’s Executive Chairman).
  • Mason Borda, Co-founder & CEO of Tokensoft
  • Chiente Hsu, Co-founder & CEO of ALEX
  • Brittany Laughlin, Executive Director of the Stacks Foundation
  • Patrick Stanley, Founder of Freehold & Contributor at CityCoins

You can listen to a recording of the entire conversation on YouTube or read an abridged transcript of the conversation below. This transcript has been edited for clarity and brevity.


Mason, give us a little bit of background as to what a Wrapped token is and why this is important to have around Bitcoin.


I will start with the first Wrapped token as an analogy. The first Wrapped token was Wrapped Ethereum, and when it came to using Ethereum in smart contracts, the problem was that you couldn't really account for Ethereum in the same way you did other ERC-20 tokens. And so there was a need for a smart contract that would basically hold Ethereum and then mint Wrapped Ethereum as an ERC-20, so it could go back and forth between DeFi apps.

Wrapped assets are super helpful for interoperability and are how you connect L1 tokens with DeFi. On the Stacks network, we're helping bridge Bitcoin into xBTC by wrapping it. And so now you have xBTC as a token on the Stacks network, and you can connect that xBTC to all the DeFi applications that people are building, whether they're doing loans, AMMs, and things like that.


Chiente, I'm coming to you next on this. Mason starts talking about DeFi ecosystems on Stacks. You're a part of that, you've been helping to co-lead DeFi with a few other projects. Talk to us about your view coming from the DeFi ecosystem on Stacks and what this means for you guys.


xBTC is crucial to provide direct exposure to Bitcoin on a decentralized exchange. And the first question many people would ask is, "Why do you need a Wrapped Bitcoin?" xBTC is needed because although Stacks relies on Bitcoin as a settlement layer, Bitcoin does not rely on Stacks. It is impossible to make a change to the state of Bitcoin from Stacks. As Muneeb taught me, you don't want to do that in the first place. Bitcoin is the ultimate sound money. You don’t want to change that, right?

So in order to use Bitcoin on Stacks, we require a wrapped solution to provide greater utility. And with Tokensoft, our tech partner, and Anchor, the custodian, the xBTC token is created, and it's kept one to one to BTC value. This is very, very important. Without xBTC, I don't think that DeFi, including apps like ALEX, have any purpose to be on Stacks.


I want to give a little bit of background context here. I think it's a very natural question that a lot of people ask. Look, if Stacks has smart contracts for Bitcoin, it's a programming layer, then why can't you just have Bitcoin directly in the programming layer? And the short answer to that is we would love to, but it's a very hard technical challenge that not just us, but a lot of other people have been working on for years and years and years. There isn’t any solution for that today.

So what else can people do? Recently we've seen two types of solutions. One solution is a custodian way of issuing a wrapped asset, which is what xBTC is, right? So the folks at Tokensoft, or Wrapped, which is basically their arm for doing this, have worked with reputable professional custodians to do this. And I think that model works.

The other model is you can put up some collateral. On the spectrum of things, you could argue that this is more decentralized, but I think that has drawbacks as well, right? Because when you're going through a custodian, you don't have to put up that much collateral. You can deposit one BTC, and you can mint one xBTC. Whereas, in the other model, sometimes you get into over collateralization issues.

I'm in the camp that all of these solutions make different trade offs, and there's a place for all of these solutions. In the end, what a normal user is looking for is they want to avoid the price risk of exiting Bitcoin. Right? That's what I care about. I don't want to exit BTC and enter some other asset. And that is a property you absolutely get with xBTC. 

I'm so glad to see this solution live because it opens up so many possibilities. And when other types of Bitcoin-derived assets become available, that will just give users even more options.


What are some additional opportunities you see from xBTC that could bring in the next wave of applications?


From my side, the mission for Stacks is really enabling Web 3 in Bitcoin. For example, let's say you're building an NFT marketplace and now you want to enable trading in BTC. Well, the next best thing is to just enable trading in xBTC, right? They’re the same price, and people can do trustless swaps between the two assets. So in that particular example, now you have a NFT marketplace where you can inject Bitcoin liquidity, which potentially could be a pretty large market, right?

When xBTC is in Stacks, it's completely programmable. You could basically write any computer program in Clarity language, and you can do so many things. That's the main difference between BTC on the main chain and xBTC on Stacks.


Patrick, I want to come to you around maybe your thoughts on how xBTC and some of those examples that Muneeb just provided could impact the future of something like City Coins, for instance.


The most basic thing that I believe xBTC should enable is just new price pairs on exchanges, creating more liquidity for people to have capital flight at the speed of light. If you are not liking what New York City is doing and you want to move to Miami, you might move there with your coins first. You might sell New York City and enter Miami. And I think xBTC helps make that easier on things like DEXs.


Mason, Will, Brittany, any additional thoughts from you three on how Wrapped BTC really opens up new opportunities for developers and future applications.

Will Binns:

For a long time, the killer app with Bitcoin has been holding Bitcoin. And as we look to really harvest the potential of what's possible with Bitcoin, opening it up to DeFi is the key piece. We've seen just how fast dApps have grown on the Ethereum network, but even still, you look at the top of CoinMarketCap and CoinGecko, and it’s Bitcoin. Stacks is the closest thing to us being able to unlock DeFi for Bitcoin.

So that's what's really exciting about xBTC. It's backed one to one with Bitcoin. So 21 million Bitcoins, 21 million xBTC. That's all there’ll ever be. And as we look to try to take this beyond, in say Arkadiko and ALEX, I think it's really exciting to look at how they can do new financial products that are denominated in Bitcoin. We all watch the news and whatnot and see all this craziness with inflation, so I think that there's a very interesting possibility of a different future here.


If you go back to the history of Bitcoin, in 2013, 2014, there was still a lot of innovation at the protocol layer, and then each of these innovations became their own new use case. And sometimes people would go on to build new applications on top of that new use case. The thing is the innovation tapered off at some point. And if you look at Bitcoin today, the main use case is still just payments.

What excites me the most about Stacks and xBTC is it's like opening Pandora's box. With an asset denominated Bitcoin, you can actually do anything. You can create AMMs, NFTs denominated in Bitcoin. You can take loans out on your Bitcoin. There was no decentralized way to take out loans on your Bitcoin until these solutions start to exist. And so I think that's what I'm really excited about is just the number of use cases that we're going to see that are now denominated in Bitcoin.


Brittany, any additional thoughts? I mean, Mason, he calls it out. We've got probably eight, nine new ideas of potential use cases just thrown around here. What opportunities are you seeing with this new rapid BTC coming to Stacks and opening up the world of applications and use cases?


I think we've seen there's a lot of folks who love Bitcoin and they just don't know what they can do with it. When they hear about, “oh, well, if you had Bitcoin, and you could use it in different applications, like DeFi and NFTs”, it clicks for them, and they say, "Oh, yeah, that would be really cool."

I think xBTC just makes it even easier to innovate, especially with all the integrations that already exist with Stacks. For builders listening who are like, "Okay, maybe I want to try something really cool with xBTC. I don't know exactly what it is yet," I think this is a great place to experiment with building a small prototype. I've seen in our community that sometimes if you just put an idea out, you can very quickly get a lot of feedback from smart people.

We've seen this with atomic swaps. Someone wrote up a little bit of code. They put the idea out there, and then now there are teams building on it. So if you're thinking about how to experiment with this, start small, get some feedback on the idea and then see if you can ship something. And for us at the Stacks Foundation, we're just constantly looking for ways to point resources back at people who are trying to experiment with these things.

I think over the next three months, we're going to see a lot of experiments and then probably in six months, this will just be as common as we think about anything else. We'll be like, "Oh, yeah, of course xBTC is really useful in these certain cases."

Listen to the full conversation on YouTube, and learn more about the speakers at:

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