Inside tBTC, the Bitcoin-backed ERC-20 token that could go live in March

tBTC – an Ethereum-based token backed by and pegged to Bitcoin – will likely see a v1 mainnet launch in March, according to project lead Matt Luongo. 

Venture production studio Thesis launched the Keep Network in 2016. Since then, Keep teamed up with cross-chain financial service provider Summa to form the Cross-Chain Working Group. The group has been working on a “trust-minimized” protocol called tBTC since 2018, according to a blog post, and tBTC will be the first major app launched on the Keep network.

“We’ve been quietly working on it for a long time,” Thesis CEO and Keep project lead, Matt Luongo, told The Block. According to him, version 1 of the project will finally come into fruition this year, with the mainnet launch scheduled to take place in March.

“We['ve entered] into audit, and we should know [the results] around March 2nd or 3rd,” he said. “We’re going to squeeze in the mainnet launch in March.”

tBTC is an ERC-20 token fully collateralized by bitcoin and redeemable at any time. Suppose a bitcoin holder is looking to use their bitcoin on Ethereum, they can deposit his bitcoin into a threshold signature contract created and controlled by a randomly selected group of “signers.”

The signing group will send a proof to the Ethereum chain showing that the deposit has been processed before a tBTC token is minted and sent to the bitcoin holder’s Ethereum wallet. 

Right now, Luongo said, the team’s focus is to further improve the system’s security and usability.

"There's a very vulnerable time at the beginning of the project where if there's a security issue, people are going to remember for a long time," he said "Since we’[ve headed] into a code freeze, it’s really about stamping out any issues we find and making sure that this is a resilient piece of software."

"Another problem is if someone’s a bitcoiner and never used something like MetaMask, how can we make that transition as seamless as possible," he continued. "V1 is not that smooth, but we’re trying to improve that experience as well."

Why tBTC?

Currently, there are a number of Ethereum-based tokens pegged to Bitcoin, including Wrapped Bitcoin (WBTC), ImToken’s imBTC, and Synthetix’ sBTC. But Luongo believes that these options will not appeal to bitcoiners who, first of all, want bitcoin.

"Bitcoiners want to be able to get back to the Bitcoin chain," he said. "For the asset to be considered valid and theirs, they have to be able to redeem trustlessly and a synthetic doesn’t do that."

Loi Luu, CEO of Kyber Network – one of the firms behind WBTC – agreed with Luongo's assessment that redemption is an important feature that will attract more users. 

"Having a clear path for redemption is definitely a good point to help adoption," he said. "That's something WBTC still lacks even until today."

Luu added that tBTC has a more complicated design that try to reduce the trust on centralized custody.

"I would say WBTC is a great initial attempt to bring Bitcoin liquidity to Ethereum," he said. "And the project is a great success if it (even slightly) inspires later projects like tBTC to improve on top of the initial design that WBTC and achieve better adoption."

According to Luongo, tBTC also makes better use of the side chain technology and offers a more robust security model than existing solutions like Blockstream’s Liquid network.

Similar to Bitcoin’s Proof-of-Authority, the Liquid network has a group of signers who make up the federation that moves the side chain forward. However, the entire Liquid economy depends on a single multisig and a single federation, which means that when users withdraw their assets, they simply have to trust one of the federation members.

Hybrid price feed model 

Another innovation that tBTC brings is a more decentralized price feed model. 

Right now, almost all DeFi platforms rely on price oracles – third-party data feeds sending off-chain information to the smart contract. It’s a centralized process and introduces risk to the blockchain since the smart contract cannot verify the accuracy of the data provided.

To tackle this challenge, the Keep team originally planned to implement a challenge system where a third-party can put out cross-channel orders for under-collateralized deposits and determine the price of bitcoin on the Ethereum chain. 

It is a decentralized alternative to price oracles and is more resilient to potential attacks, Luongo said. However, with the new system, it might take up to hours for some deposits to go through.

Therefore, the team opted for a hybrid model where the protocol will rely on MakerDAO’s price feed in normal circumstances but will fall back to the decentralized mechanism if there’s ever a doubt between the two systems. 

“Our new price feed model decouples depositing your bitcoin with getting your tBTC,” Luongo said. “In v1, we’re still using MakerDAO’s price feed. But in v2, we are using the hybrid model.”

tBTC lending

The demand for BTC-backed cash loans is on the rise. A number of crypto firms – Blockfi, Compound, Genesis Global Trading, Blockchain.com, etc. – have already jumped on the credit business. tBTC could offer yet another way for retail users to get crypto-backed loans. 

Luongo revealed that a few top DeFi lending platforms have already given the Keep team verbal approval for integration, which means that there will be loans and leverage for tBTC shortly after the DApp is released. 

The first step for tBTC is to work with platforms like Compound for users to earn tBTC-denominated yield right away, Luongo said. The next step on his agenda is making tBTC collateral so users can get USD loans against tBTC. Details of these partnerships will be announced along with tBTC’s launch. 

Low liquidity, however, might hinder the token’s market integration. As a point of reference, Compound only added WBTC to its lending protocol six months after the coin’s launch in Jan. 2019 because the company saw that “bitcoin was being wrapped very slowly.” In fact, Compound still does not accept WBTC as collateral. Compound CEO Robert Leshner previously told The Block that this is due to concerns over WBTC’s lack of liquidity. 

Thesis business and strategy development lead, Carolyn Reckhow, told The Block that “liquidity shouldn’t be an issue” for tBTC.

However, given that both tBTC’s and WBTC’s objectives are to closely represent the value of bitcoin in an Ethereum-tokenized form, it remains to be seen whether tBTC will garner enough liquidity to become a collateral option in the near future.

Indeed, Leshner said that final decisions regarding tBTC's adoption are not yet made because they cannot accurately assess tBTC's liquidity and security simply observing the token's testnet performance.

"Adding new assets in a production environment requires significant caution and diligence that a testnet can't offer," he said. "We're hopeful that tBTC can build liquidity and adoption, and prove its security rapidly."

Leshner further claimed that even if Compound added tBTC, the token will not immediately become a collateral option.

"Enabling an asset to be used as collateral is the last step in an asset's adoption - it requires significant liquidity, and proof that the asset does not have security risks," he said. "If tBTC is added to the Compound protocol, it initially will not be viable collateral."

Speaking from his experience with WBTC, Luu from Kyber Network agrees that it might take some time before the majority of lending protocols decide to support tBTC.

"There will always be skeptics, and definitely many projects will 'wait-and-see' before they decide to adopt or support tBTC," Luu said. 

Potential low yields constitute another concern for tBTC as it seeks market integration, since it might be difficult for an Ethereum-based token pegged to bitcoin to offer equivalent returns as bitcoin loans offered by existing lending platforms.

BlockFi, for example, has a two-tier structure that promises a 5.1% yield to people lending out less than 5 BTC and 3.2% for deposits exceeding 5 BTC. Meanwhile, historical WBTC rates on Compound have never gone above 2.5% APR and is currently at 0.59% APR. 

But Reckhow is optimistic about tBTC’s competitive edge in the crypto lending market. 

“tBTC plans to be competitive in the market, for much larger amounts of BTC as well as smaller amounts,” she said. “tBTC won't benefit from VC growth subsidies in the form of [higher] interest rates like some desks do, but we believe the safety and security of allowing lending Bitcoin while minimizing counterparty risk is going to be attractive to many holders.”

Targeting crypto nouveau riche

tBTC is a crypto-to-crypto product requiring knowledge of both Bitcoin and Ethereum. As a result, Luongo does not expect mainstream adoption for tBTC. Instead, he aims to first target high-end retail users already equipped with a certain level of crypto awareness. 

In addition, a few larger funds have expressed interest in the product, Luongo said, and they will be another target group for the team. 

“I think we can absolutely hit 3,000 bitcoin in 2020,” he added. “The next question will be if we can get to 100,000 bitcoin in year two.”

To kickstart the economy, the system will implement a small subsidy for the signers to ensure that signing fees remain low. 

“The initial incentive for signers is going to be pretty significant for the first six months,” he said. “I expect the signing fees to be low at launch, around 20 basis points. Eventually there’ll be market pressure and they’ll get adjusted depending on how much interest there is.” 

However, considering that WBTC yields are at 0.59% APR, tBTC would have to offer much higher yields for the 0.2% fee to be insignificant.

In addition, the team is issuing KEEP tokens to facilitate staking and signer selection. It also allows token holders to accrue the fees around signing for tBTC. But Luongo revealed that replacing ETH collateral with Keep tokens will be a prolonged process and will only begin six to twelve months after the mainnet launch. 

“Using a novel token as collateral just isn’t responsible,” he said. “Initially we want to use other kinds of collateral to ensure we’re building a robust system. Then maybe our token will end up having value later on.”