One aspect that has evolved with the progressive growth of the decentralized finance sector (DeFi) is the possibility of using bitcoin on other blockchains, such as Ethereum, and being able to manage them with tokens that simulate the related supply: we are talking about tokens such as wBTC, tBTC and pBTC.
The basic concept is very simple: you send your bitcoins to an address generated by a smart contract, which checks that the transaction is valid and generates tokens that represent the amount of the BTC locked.
There are several protocols that allow pegging bitcoins to tokens, mainly on the Ethereum blockchain and recently also on the EOS blockchain, thanks to pTokens.
Let’s start from the wBTC (Wrapped Bitcoin) protocol, the one that has the most bitcoins locked in it (over 2200 BTC), as it was the first to create a similar product thanks to the collaboration between Kyber Network, Republic Protocol and BitGo, generating a federated governance system.
These operators also represent the wBTC Custodians, i.e. those who guard the bitcoin reserves; whereas Merchants are the ones who create and destroy wBTC tokens and send the transaction to the Custodians to complete the process.
To use this system each user must be identified by a Merchant, through KYC (Know Your Customer) and only then access is obtained to interact with wBTC, which takes about 48 hours because it is all manual.
To address this centralization aspect of wBTC, the tBTC team has provided a different mechanism in which the depositor makes a deposit request to the smart contract; the depositor must also stake ETH (deposit bonds) to protect the system from spam. This deposit is returned at the end of the process.
At this point, a group of signers is created that generate a multisignature bitcoin address to which the depositor must send the bitcoins.
Note that the signers must have deposited bitcoin to participate in the system in order to discourage improper practices. Should these occur, the signer would lose their bitcoins placed as “collateral”, while as incentive signers receive a fee of 0.005 tBTC for each bitcoin created.
After proving the deposit by examining the transaction block, then the smart contract creates the new tBTC, retaining the 0.005 tBTC fee, for preventing DoS attacks. This amount will be returned when the deposit is closed, which will be locked for at least 6 months and for a maximum of 1 bitcoin.
The system is obviously still young and the recent bug on the platform shows that it is not easy to manage such a protocol. So, even if the transactions are faster than those of wBTC, it must be considered that this platform is more expensive.
The pTokens with their pBTC have implemented a different solution, as the system’s security is achieved through TEE (Trusted Execution Environment), i.e. immutable hardware that manage the keys.
These devices (a system called enclave) are managed by validators who work together in an MPC (Multi-Party Computation) operation to generate several keys in a completely decentralized way without the risk that a single attack compromises the whole system.
The pTokens do not exist only on Ethereum but also on other blockchains such as the EOS blockchain. The user stores their crypto in an address that is generated upon request.
This deposit transaction passes through the enclave (enclave that is disconnected from the network and therefore must be sent specifically so that it is not affected by network attacks), whose software checks the block and validates it in order to confirm the deposit. After identifying the total of assets to be created, the enclave starts the process of generating the corresponding tokenized asset through smart contracts. Finally, the transaction for the transfer of the tokenized asset to the user is propagated on the blockchain.
In this case, there is a higher speed compared to other systems and also has no costs for the end-user, unlike what we have seen with the other protocols, which is quite an advantage.
Moreover, in the case of the EOS blockchain, there is no fee to move the pBTC.