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In the world of cryptocurrencies, Bitcoin is king. It holds more than 50% of the market capitalization of the industry and is widely regarded as the most robust and decentralized blockchain.
In the world of cryptocurrencies, Bitcoin is king.
However, despite Bitcoin’s dominance, there are limited options for Bitcoin holders to leverage Bitcoin’s liquidity in DeFi applications. The most common options today involve tokenizing BTC and moving that synthetic asset to another chain.
Wrapped Bitcoin (WBTC) is the most popular tokenized Bitcoin. Today, nearly 1% of Bitcoin is locked in DeFi through WBTC. While WBTC has seen promising product-market fit, it comes with trade-offs in terms of speed, cost and security, making it a less than perfect solution. sBTC is a proposed design for a decentralized, 1:1 Bitcoin-backed asset, powered by Stacks, slated to launch in early 2024.
There is a massive opportunity for non-custodial wrapped Bitcoin to unlock BTC’s $500B+ of latent capital. Even just tapping into 1% of that is a multi-billion-dollar opportunity. That’s the opportunity sBTC aims to tap into.
So how does sBTC compare to WBTC?
Overview of sBTC vs WBTC
What Is WBTC?
WBTC is a digital token that represents Bitcoin on Ethereum and other EVM-compatible blockchains. It is the oldest and most popular tokenized Bitcoin used in DeFi.
WBTC is the oldest and most popular tokenized Bitcoin in DeFi.
As for how it works, WBTC is an ERC-20 token that is pegged 1:1 to Bitcoin, meaning for every WBTC in circulation, one BTC is held by BitGo, the central custodian for wrapped Bitcoin.
WBTC has brought greater liquidity to decentralized exchanges (DEXs) and financial apps in the Ethereum ecosystem, and it lets users interact with DeFi using their Bitcoin as collateral. Today, there are approximately 163,000 WBTC in circulation, nearly 1% of Bitcoin’s total supply.
What Is sBTC?
sBTC is an upcoming asset that represents Bitcoin on the Stacks network. This proposed design for a decentralized, 1:1 Bitcoin-backed asset, is described in detail in the sBTC whitepaper. sBTC makes it possible for anyone to move BTC in and out of Bitcoin layers in a secure and decentralized way.
sBTC is a new design for a decentralized, 1:1 Bitcoin-backed asset.
sBTC is distinct from WBTC in several ways.
- It has no centralized custodian since the Bitcoin peg is maintained by smart contracts and an open, decentralized network of validators (also called signers).
- It is more cost efficient since there are zero custodian fees and low transaction fees for users to deposit and withdraw BTC. These additional processing fees are common in other trusted peg solutions like WBTC.
- Lastly, all sBTC transactions settle on Bitcoin, with 100% Bitcoin finality. This means that sBTC benefits from the full security budget of Bitcoin itself.
Protocol Design
The lack of a stateful smart contract system on Bitcoin requires a separate smart-contract-powered blockchain and a means to deposit/withdraw BTC from that second blockchain in order to use Bitcoin in DeFi and other apps. At a high level, this deposit/withdrawal function must facilitate 2 primitive operations, often called a “peg”:
- Deposit: A BTC holder deposits BTC on the Bitcoin chain for an equivalent amount of a tokenized bitcoin asset on the smart contract chain. This process is sometimes called “peg-in” or “mint.”
- Withdrawal: A tokenized bitcoin asset holder destroys their asset on the smart contract chain, and receives the equivalent amount of BTC on the Bitcoin chain. This is sometimes called “peg-out” or “burn.”
WBTC and sBTC take two different design approaches to handle those operations.
WBTC: a Custodial Bitcoin Peg
The WBTC peg is maintained by the WBTC DAO and a network of approved merchants. New WBTC is minted when a user requests tokens from an approved merchant. The merchant verifies the user’s identity, and once approved, the individual sends BTC to the merchant. The merchant in turn sends a corresponding amount of WBTC to the user.
The user’s deposited BTC is held in custody by BitGo, the primary custodian for WBTC. BitGo holds all of the deposited BTC in a multi-sig wallet, and BitGo is the only entity that can mint new WBTC. The proof of reserves that correspond to the deposited BTC is on-chain, so anyone can verify the 1:1 supply of minted WBTC tokens compared to the BTC stored by BitGo.
When an individual wants to “peg-out” or withdraw their BTC, they must send WBTC to an approved merchant who will then “burn” (or destroy) the WBTC tokens and send back the equivalent amount of BTC. The burnt amount is deducted from the merchant’s WBTC on-chain balance, and the overall supply of WBTC is reduced, maintaining the 1:1 peg between BTC and WBTC.
It’s important to understand that WBTC is a custodial asset that is being deployed into non-custodial products.
sBTC: a Decentralized Bitcoin Peg
Similar to WBTC, sBTC is backed 1:1 to Bitcoin. However, from there the designs diverge. In sBTC, a user deposits BTC to a threshold signature wallet controlled by an open, decentralized network of validators, also known as signers. To be a validator in the Stacks network, signers must lock up a dynamic threshold of STX tokens in Stacks’ consensus mechanism Proof of Transfer (PoX) and run a software node that processes sBTC deposits/withdrawals. In exchange for that work, validators earn BTC rewards generated by PoX.
This close connection to the Bitcoin main chain is a key aspect of the sBTC design. sBTC can have a higher fidelity to Bitcoin’s state because Clarity smart contracts have read access to Bitcoin and sBTC forks with Bitcoin. For Ethereum-based tokenized Bitcoin, oracles or intermediaries are needed in order to stay up to date in the event of a Bitcoin fork, and that fork or reorg could temporarily disrupt operations or create discrepancies between the price of Bitcoin and the tokenized asset on Ethereum.
sBTC’s proximity to Bitcoin comes with two additional benefits. 1) Operations occur on the Bitcoin main chain, providing censorship resistance. 2) The design is secure with automatic settlement and with 100% Bitcoin finality.
Each time BTC is sent to the sBTC multisig wallet (a deposit operation), an equal number of sBTC are sent to an address of the sender’s choosing. This process happens automatically through smart contracts, as opposed to a series of intermediaries (merchants, custodians). Validators process withdrawal requests (converting sBTC back into BTC) by destroying the requester’s sBTC and transferring BTC to the requester’s Bitcoin address, and thus maintaining the peg.
The open membership of the sBTC peg is enabled by PoX, an onchain mechanism unique to Stacks. Rather than having a single custodian, sBTC is maintained by a public network that anyone can join.
Fees
WBTC
For WBTC, merchants generally charge a flat fee to convert Bitcoin to WBTC and vice versa. This is known as the “wrapping/unwrapping” fee. Additionally, merchants might also require a minimum withdrawal amount. These fees vary by merchant and the total withdrawal amount. Since WBTC is an Ethereum token, any transactions will also include gas fees to process the transaction.
sBTC
For sBTC, there is no fee to convert Bitcoin to sBTC and vice versa, though like WBTC, there will be minimum deposit/withdrawal amounts. Since sBTC is a Stacks token, any transaction will include typical transaction fees to process the transaction on-chain. Stacks transaction fees are typically much lower than Ethereum gas fees and on average are well below $0.01.
Security
WBTC
The security of the WBTC peg is dependent on BitGo, the trusted custodian, as well as the merchants and signers participating in the WBTC DAO. This introduces counterparty risk, which is inherent in any transaction that relies on centralized intermediaries. This risk includes participants losing their keys, intermediaries becoming inactive or engaging in malicious coordination, going bankrupt and more.
This risk is playing out to some extent today. According to Victor Tran, co-founder of Kyber Protocol and founding member of the WBTC DAO, the current WBTC DAO multisig needed an update because several original signers had become inactive or lost control of their keys.
Merchants can pose counterparty risk as well, as was the case when WBTC was trading at a slight discount because two of the largest merchants, Alameda Research and 3 Arrows Capital, filed for bankruptcy and were unable to process new or existing peg-requests. The WBTC peg has since recovered.
sBTC
sBTC is a huge leap forward in the security of Bitcoin pegs because it enables a decentralized design. With custodial peg-outs such as WBTC, there is the counterparty risk described above, which can lead to situations where multisig keys are lost or there is malicious coordination between the intermediaries.
Unlike other tokenized Bitcoin assets, sBTC is not reliant on a fixed federation or a federation of multisig hardware wallets for its peg-out, designs which have significant flaws. Rather, it has economic security through an open-membership network of signatories, in a manner integrated with the Stacks consensus protocol.
There is no central custodian in this design. Instead a revolving set of signers maintain the peg and are economically incentivized to do so honestly through BTC rewards for their work.
In the event that this public network goes offline, sBTC’s design has a recovery mode, in which a fraction of PoX mining payouts are redirected to peg-out requests, such that eventually, all outstanding peg-out requests will be fulfilled. This design ensures that all sBTC can be redeemed so long as the Stacks blockchain and PoX are online.
sBTC also offers 100% Bitcoin finality meaning that all sBTC transactions are recorded on the Bitcoin mainchain. This makes it very expensive/ difficult to attack or “reorg” sBTC transactions, which may not be true for other tokenized Bitcoin assets depending on what chain they use.
Use Cases
WBTC
The primary use case for WBTC is lending and borrowing on DeFi platforms like Maker, Curve, Aave, among others. In addition to lending WBTC or borrowing against it, WBTC holders can also provide liquidity and yield farm with their WBTC to earn rewards and interest on their holdings. So where specifically is WBTC being used? Here’s a breakdown as of November 16th:
- Compound: ~16.2%
- Aave: ~15.5%
- Arbitrum: ~6.5%
- Polygon: ~3.7%
- Maker: ~2.7%
sBTC
The primary use cases for sBTC are similar to those of WBTC. Below are just some of the possibilities of what users will be able to do with sBTC:
- Trustless, Bitcoin-collateralized stablecoin loans
- On-chain, undercollateralized BTC lending
- Trustlessly deploy BTC to earn BTC yield
- BTC DAO treasuries
- sBTC stacking pools
While the actual activities available to holders are similar (lending, borrowing, yield farming), the two key differences are the ability to trustlessly borrow against your BTC and that holders can earn BTC rewards instead of the token of the DeFi platform being used (this is possible because of Stacks’ unique consensus mechanism Proof of Transfer).
Conclusion
The unique properties of Stacks, from Proof of Transfer to the Clarity programming language, make Stacks the ideal Bitcoin layer for smart contracts. The STX token is critical to this Bitcoin layer because it provides an economic incentive to enable an open network of miners and signers that maintain the sBTC peg.
All of these properties ensure that Stacks is aligned with the decentralized ethos of Bitcoin, where anyone can participate and actively contribute. Ready to learn more about sBTC?
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