🌉 Building Bridges — Issue No. 60

📰 News

This week, the teams at Summa and Keep announced their collaboration on a trust minimized Bitcoin-Ethereum bridge called tBTC. The project has been under development for nearly 10-months, and still has a ways to go before reaching mainnet. If successful, the bridge would allow anyone to trustlessly lock their Bitcoin and receive equivalent TBTC tokens on the Ethereum network. Similarly, holders of the ERC-20 token would be able to unlock BTC on the Bitcoin network by burning TBTC on Ethereum. Link.

As you may be aware, similar systems exist today. For example, the WBTC project allows users to do essentially the same thing: lock BTC to receive a WBTC token on Ethereum, and vice versa. The critical difference between WBTC and tBTC is the degree of counter-party risk. WBTC relies on a federation of privileged third parties which control multi-sig wallets on both sides of the network. When you lock Bitcoin to receive WBTC, you trust this group of entities to behave as promised. This makes the solution far less censorship resistant than that being proposed for tBTC. Link.

How, then, does tBTC aspire to achieve a trust-minimized bridge? Through a system its creators refer to as a "bonded, multi-federated peg." In this system, anyone can become a "signer" that participates in securing deposits on the Bitcoin network and minting TBTC on Ethereum. Each deposit requires a group of signers to participate, who are chosen randomly. The key is that signers are required to collateralize each deposit with ETH on the Ethereum network, and the bonded collateral can be seized by the smart contract system in the case of bad behavior. The collateral is then used to bring the ratio of TBTC to locked BTC back to 1:1, and to make depositors whole. Obviously, there's a lot more going on here that can't be covered in this newsletter. One example is a novel mechanism for using block difficulty levels to harden Bitcoin SPV proofs on the Ethereum network. The whitepaper for the project is long, but actually quite approachable. It's well worth a read, or at least a skim. Link.

Longtime readers of this newsletter will know I'm longterm bullish on both Bitcoin and Ethereum. More than that, in fact, I believe that Bitcoin and Ethereum are better together. Each project is making valid-but-different tradeoffs, and those tradeoffs complement each other well. A trust minimized bridge between the two networks is something I've long expected and hoped for. The tBTC project has a good chance of filling that need, and in so doing, moving us toward a future where the two networks flourish symbiotically.

Before we get too excited, let's also be skeptical and realistic. The project hasn't launched yet, and by all accounts, there's still quite a bit of work to get there. Even when it does launch, it will take some time to demonstrate that it's secure. Initial depositors and signers will be taking a substantial risk with their funds. For that reason, I'd expect initial adoption to be slow, as most users sit on the sidelines rather than be the first ones up the hill. Since the system is most useful when it has high liquidity, it could take quite some time to bootstrap. My suggestion is to keep expectations low for at least a couple of years. This isn't the kind of project that's likely to become ubiquitous overnight.

If and when we do arrive at that future, though, Bitcoin would be able to flow through the emerging decentralized finance (DeFi) ecosystem in a trustless and censorship resistant way. It would also be able to leverage scaling efforts on Ethereum, both at layer 1 and layer 2. These applications increase the usefulness of Bitcoin, and thus the demand for it, all without the Bitcoin network itself having to make any tradeoffs in terms of complexity or security. Meanwhile, the Ethereum ecosystem is more useful if BTC is available there, and increased usage of Ethereum (as a network) de facto increases demand for ETH (the asset).

There is a possibility, then, for a powerful, self-reinforcing synergy to develop between Bitcoin and Ethereum. Will things actually play out this way? Is tBTC the project that will enable it? Who knows! As usual, only time will tell. Stay tuned.

📊 Statistics

563. The number of Bitcoin available on the Ethereum network via WBTC. These are currently worth almost $6 Million. This number has been flat for the past 6 weeks, after more than doubling thanks to sharp increases in June and July. Link.