Decentralized finance — better known as “DeFi” — has seen exponential growth in popularity over the past two years. Despite recent setbacks in the form of hacks and typos in smart contracts, DeFi is a sector of the crypto market that has become so important that Coinbase said the following about it:
DeFi, or decentralized finance, is an essential part of an open financial system. DeFi tools are censorship-resistant, unbiased, programmable, and available to anyone with a smartphone.
Thus far, DeFi has involved Ethereum, and Ethereum only. This meant that Bitcoin — largely regarded as the “reserve asset” of the cryptocurrency market — has been largely left out of the DeFi equation.
It’s an issue that many say is holding back DeFi’s growth, as the introduction of Bitcoin would increase a lot of functionality into smart contracts and would likely much on-chain finance much more appealing to a wider userbase.
tBTC Finally Launches
Earlier this month, Thesis — the development studio behind Bitcoin consumer app Fold — revealed that it had raised $7.7 million in a round led by Paradigm Capital, with other venture funds chipping in.
The funds were for Thesis’ new flagship project: tBTC, an open-source project led by Thesis and Summa working to create a decentralized representation of BTC on Ethereum.
While the project has been known for months, only yesterday, April 27th, did it go live.
Matt Luongo, the founder of Thesis, announced the news with the tweet below, which shows him deploying the smart contracts for Keep Network, an Ethereum layer that enables tBTC to operate. Luongo says it may take a few weeks for the project to come 100% online for public use.
— Matt Luongo (@mhluongo) April 27, 2020
Unlike the tokenized Bitcoin competitors to tBTC, which are relatively centralized as they require custodians to maintain the coins, tBTC allows any owner of BTC to deposit their coins into a designated secure address, then receive newly-minted tBTC in an Ethereum wallet of their choice.
Importantly, tBTC isn’t the first attempt to tokenize Bitcoin on Ethereum. But the competitors have recently been shown to have disadvantages.
For one, a hacker managed to utilize a compatibility error with imBTC, a China-focused representation of Bitcoin that is based on the ERC-777 standard, to hack DeFi protocol Lendf.me.
Also, Huobi Bitcoin — Huobi’s BTC token — was stolen during the attack, but then was subsequently returned by the hacker. It was a surprising move that many attributed to the fact that HBTC is only redeemable on the Huobi exchange, which is a centralization risk that in this case turned out well for Lendf.me victims.
Could Help Stabilize MakerDAO’s DAI Premium Problem
Although there is a myriad of use cases for tBTC, an initial use case for the Bitcoin token will be to be added to MakerDAO as a collateral option for the DAI stablecoin.
This is important because for the past six weeks since the March 12th market crash, DAI, which normally trades at $1.00, has had a consistent 1-4% peg to the dollar, with the premium at one point reaching upwards of 20%.
The integration of tBTC, which will need to be approved by holders of the MKR token in the coming weeks, will likely reduce some of the strain on DAI demand, thus dropping the premium.
It’s a move that has already garnered support from the MakerDAO community, which has whitelisted tBTC to be added as a DAI collateral option in the future.
Bitcoin Maximalists Aren’t a Fan of tBTC
Although Ethereum investors are over the moon about this move, not everybody is convinced of tBTC.
In response to the discussion about tokenized Bitcoin projects, Joe007 — a prominent cryptocurrency trader that has bagged dozens of millions of profits as per official Bitfinex data — lambasted the idea of allocating Bitcoin to Ethereum, calling DeFi a “Rube Goldberg machine where you never know which part fails or gets hacked next.”