Bitcoin on Cosmos
In our previous article, we explained different bridging architectures regarding their security. While we concluded that the Gravity Bridge with its’ multi-sig consisting of 158 validators is a secure, permissionless, and trustless bridge, it cannot send Bitcoin other than WBTC.
In this article, we will explore different ways of bridging BTC on Cosmos, some of which are innovative and exciting.
Wrapped Bitcoin is a 1:1 backed ERC-20 token, with the proof of reserve being on-chain, verifiable by its users with a glance on a dashboard or smart contract.
Founded in 2019 to bring more liquidity to Ethereum, WBTC today is a widely accepted version of BTC used in DeFi on Ethereum.
As you can see below, the price difference between BTC and WBTC has been seldom above 0.5%, making WBTC a good representation of BTC — at least for trading purposes.
As you can see below, WBTC is almost without any meaningful competition, having twice a high TVL with $5.05B, compared to the 2nd BTC bridge JustCryptos with $2.46B.
Now we know that many people are using WBTC, but how does the security of WBTC compare to native Bitcoin?
Bitcoin is trustless — without intermediaries, a decentralized set of nodes performing proof-of-work secures the network. While this is a valid statement for native Bitcoin, the ERC-20 representation relies on some trust assumptions. The reason for these assumptions lies in the fact that Bitcoin and Ethereum are not compatible with each other, so simply sending Ethereum to Bitcoin or vice versa would not work. To mint ERC-20 WBTC on Ethereum, native Bitcoin has to be sent to one of the many merchants in the system (e.g. Aave, 0x, AirSwap, Kyber, and many more), who then need to deposit the BTC with a custodian (BitGo).
When WBTC is burned, BTC is returned to the user from the custodian.
When new WBTC is minted, BTC is taken from the user and stored by the custodian.
As we can see the trust assumption…
…lies at the custodian who is responsible to hold the native Bitcoin on the custodian address. Generally, you can say, when more trust is involved, that the system at hand is more suspective to corruptive actions, as humans will always tend to be greedy. On the other hand, WBTC is trying to increase trust and transparency in the following ways:
- WBTC undergoes regular audits and publishes all on-chain transactions and verifications for the Bitcoin and Ethereum networks
- Users can independently verify how much BTC was sent to the WBTC address on the Bitcoin blockchain and then check if those transactions are matched with the creation of WBTC tokens on the Ethereum blockchain
- Protocol changes are not implemented by a centralized entity but by a DAO (Decentralized Autonomous Organisation) called WBTC DAO, which increases the barrier to implementing toxic changes.
What is the worst that can happen? The case of soBTC
While soBTC from the surface seems so similar to WBTC, it has been issued by one centralized party, FTX. It has been used to bring more Liquidity to the Solana Ecosystem (similar to how WBTC did to DeFi on Ethereum), which is also why it’s held by all major DeFi platforms.
Below you can see the effect of losing trust in a trusted asset looks like, the price fell from 1BTC to 0.058BTC during the events leading to FTX bankruptcy, which represents a loss of more than 90%.
As we know the WBTC on Ethereum is managed by a DAO, and not one centralized entity, meaning this worst case is not likely to repeat on WBTC, but there is no way to 100% exclude that option in a system where humans are making decisions and not protocols/smart contracts. While soBTC was completely controlled by FTX, there is also renBTC, which got investment by Alameda, causing FUD (Fear, uncertainty, and doubt) among investors and a short period of firstly renBTC and later WBTC losing their pegs.
Should I trust it?
Remember, in our previous article, we shared the different trust models of bridges. Coming back to WBTC, you would officially declare it a trusted bridge setup, as — even though it’s several centralized entities and not one — custodians are the trusted intermediaries, as assets could be stolen or they might not honor the one-to-one backing. We also talked about Gravity Bridge, how their multi-sig approach is applied relying on the whole validator set of the network, and thus, making it extremely costly to corrupt the bridge. This is a great example of an externally verified bridge.
This allows the network to operate in a trustless & permissionless manner and brings us to Nomic, which is operating a Bitcoin bridge with a similar model.
What is Nomic?
Nomic is a layer-1 blockchain that offers a decentralized, non-custodial Bitcoin bridge:
Nomic’s first product is the Bitcoin Bridge, bringing Bitcoin to Cosmos. The bridge creates a new asset, nBTC, which is IBC-enabled and fully backed by BTC. We have designed a unique, permissionless protocol which allows anyone to easily deposit BTC in exchange for nBTC, or withdraw nBTC in exchange for mainnet BTC.
Where is the Trust Assumption?
Let’s take a look at their technical design document on GitHub:
A sidechain based on our design exists as its own sovereign network, which we will refer to as the sidechain network. The validators of this network become the signatories of the network’s reserves, each with a known Bitcoin-compatible public key and an integer amount of “voting power”, representing their signatures’ weight in the consensus process and in their control of the reserves as governed by the Bitcoin network.
Now we see how their approach is similar to the Gravity Bridge Model, as both have a whole validator set guarding the bridged assets.
Further on their Reserve wallet:
A reserve of Bitcoin is maintained in a decentralized way through use of a special multisig contract. No individuals in the network are given custody of the Bitcoin in reserves, but instead the collective whole cooperates to hold or disburse funds. The validators of the sidechain network become signatories of the reserve, since their signatures are required to control the funds on the Bitcoin blockchain.
To disburse funds from the reserve, more than two-thirds of the signatory set must sign the Bitcoin transaction (weighted by voting power).
As you can see Nomic currently has an active set of 100 reliable validators (yes, Blockscape is one of them), which are protecting the reserve by being its watchmen overseeing and controlling the funds going out. All in all, the process of the Nomic Bitcoin bridge is way more trustless than WBTC, and — even though nothing bad has to happen with WBTC — the risk involved in using it is significantly lower.
The less you need to trust, the better. Seriously!
It should be our top priority to remove as many trust assumptions from the systems we use as we can. While this seems to be quite logical, the recent debacle of the centralized Exchange FTX going down shows us that many are still relying on trust assumptions — sometimes because we are too lazy and sometimes because we simply don’t know any better. Let’s take this as our task, educate, and onboard many new Users to systems with less to no trust assumptions and a high degree of self-custody!
Following this article, we will further report on Nomic and will show you how to participate in their testnet, how to become eligible for their airdrop, and how to stake. As a little bit of alpha: We are also cooking something up behind the scenes to reward our Nomic stakers, but more info will be revealed soon.
While this article was researched and written, we were able to see the real-life consequences that losing investors’ trust means for WBTC, as more details and connections between FTX and BitGo — one of the main WBTC custodians — arose. First, their CEO claimed they have no exposure to FTX.
Later, an article in Forbes made users suspicious, as other exchanges were on a similar trajectory (Denying exposure, admitting a bit of exposure, halting withdrawals).
Amid FTX Fallout, Crypto Custodian BitGo Looks To Raise Funds At A $1.2 Billion Valuation
Crypto custodian BitGo is in preliminary discussions to raise new funds at a $1.2 billion valuation, according to…
All of this, made investors lose confidence in the peg, incurring the highest price deviation from spot BTC since a long time.
This painfully demonstrates how it’s always better to have fewer trust assumptions, as even if WBTC is OK and the price goes back to the price of BTC, there might be some DeFi users who have been liquidated or taken other damages — simply because they needed to trust the institutions to be responsible custodians.
Here is a great thread by @SmallCapScience, summarizing the loss of trust: