Why does a Trustless Bitcoin in DeFi Matter?

A Brief Outline of the DeFi Scenario, Global Economy, and the Importance of a Truly Decentralized Bitcoin in Ethereum

While DeFi presents more and more innovations in the field of personal finance, more and more individuals adhere to the perspective of having greater financial freedom and, at the same time, of earning high incentive gains such as there was no parallel at any previous moment in history in such disposition.

Whereas in the past, people needed to turn to large institutions in order to generate liquidity to their capital, now each person can, in a way, become his own bank, generating liquidity to himself in several innovative ways that already exist in DeFi.

Where is Bitcoin in this conjuncture?

To compose the full picture, we must take into account the successive print of trillions of dollars that the United States Fed has been making for loan injection in an attempt to combat the economic crisis generated by the coronavirus pandemic, further increasing the liquidity of the speculative market and, at the same time, generating uncertainties around a possible increase in inflation like never before seen.

On top of this highly speculative scenario of great uncertainties and fears, Bitcoin is increasingly gaining prominence among large institutions and companies, especially in recent months for being seen as a store of value, often called “digital gold”, Bitcoin is being considered even being able to replace gold as the traditional store of value.

If, on the one hand, we can say that the DeFi boom certainly benefited from the high flow of money arising from the speculative market, which is evidently heated at the moment, on the other hand, the horizon ahead of the speculative market as a whole is foggy and uncertain due to the risks of developments that the economy may have due to the cascading effects of the global pandemic, making evident the gradual importance of Bitcoin as a store of value in this scenario of multiple narratives and high volatility.

Bitcoin in Ethereum Network: “In retrospect, it was inevitable”

Quickly borrowing this phrase from Elon Musk, and also risking to take the role of the Monday morning quarterback, we can, by taking into account all the points mentioned above, affirm that “In retrospect, it was inevitable”, because if the DeFi scenario certainly allows a myriad of new financial possibilities for institutions and people, it is evident that we want to take advantage of these benefits, but it is preferable for many people to do this while keeping themselves protected by the uncertainties imposed by the markets, under the exposure of the Bitcoin.

Many efforts to bring Bitcoin into the Ethereum network have been made by several different projects such as WBTC and RENvm, but so far none of these projects have brought Bitcoin to the Ethereum network in a fully decentralized way, being censorship-resistant, without a central custodian, and truly permissionless. In this mission that tBTC emerged to be the first solution to bring tBTC in Ethereum Network in a trustless and truly decentralized way using Keep Network infrastructure which is able to store and compute data hidden even from itself.

Why Decentralization Matters for Bitcoin in the Ethereum Network?

The dichotomous narratives around Bitcoin pile up and fight each other as the imbalance deepens between the bubbling speculative market scenario and the health of global economies, which are struggling to stand up to the covid pandemic crisis.

Although for some institutional investors, Bitcoin is becoming a solid investment option, given that it is increasingly being adopted by traditional payment institutions and exchanges, for other institutional and traditional investors like Ray Dalio and Jeremy Grantham have seen Bitcoin with skepticism, because if on the one hand the disruptive nature of the blockchain really brings intrinsic value, on the other hand, the transformations it brings with it in the real world will be indirectly or directly affecting the disposition of the current monetary standard, seen as a strategic point in the composition of world geopolitics while the US-China Cold War develops, making room for possible government interventions for its adoption or even its total ban.

The decentralized nature of Bitcoin already brings with it inherent qualities such as being censorship-resistant and permissionless, so any attempt to ban it would not be entirely successful. However, it is not possible to say the same for almost all solutions that bring Bitcoin to DeFi, with the exception of tBTC, as so far these bridges are not fully decentralized: Either by having custody of the BTCs centrally or the problem is in the protocol architecture itself, which provides the signer ability only to a few to keep the protocol functioning.

tBTC provides the only bridge so far that brings Bitcoin to the Ethereum network in a censorship-resistant protocol. The network is fully trustless, which uses a system of “signers” selected by a random beacon to safeguard the deposited BTC. TBTC can be converted to BTC, and vice versa, at any time, with no intermediary needed to sign off.

What Can We Expect of tBTC v2?

Since the tBTC v1 relies on a 200% outside collateral, it has struggled to scale without more ETH into the network, despite being on top of $300M TVL. The system works perfectly, but the economic constraints are a reality.

We’ve learned a lot since the launch of the tBTC mainnet in September. No staker has acted maliciously on-chain in the history of the network. In fact, many have acted altruistically, coordinating to recover funds when users have made mistakes. While we can’t rely on every participant acting honestly, we can introduce an assumption in v2 that’s common in other areas of cryptography — an honest majority assumption.

Based on that, If we assume, say, a 2/3 honest majority across all stakers, we can re-architect tBTC in the following way:

• Instead of 3-of-3 wallets, we move to 51-of-100
• Instead of a wallet per deposit, we generate a new wallet roughly every week.
• Instead of asking stakers to put down KEEP and ETH, we only ask them to stake KEEP.

Those actions will provide a way of greatly decrease the collateral ratio of the staking assets but it’s also not risk-free.

If we increase the number of stakers per wallet, or the required signing threshold, this probability plummets further. And while the risk is vanishingly small, it’s never 0 — an attacker could always buy a third of the active staking slots and eventually compromise the system.

To offset the small risk to the peg, we introduce an additional idea — a backstop. Coverage pools, first deployed against tBTC v1, are perfectly suited to ensure against fraud in tBTC v2. Now, we have a new, scaleable architecture.

Want to learn more and participate?

Community is everything for us, and we want to know your opinion about this proposal, read the original proposal here, and join our Discord to participate in the discussions!

• Your engagement in our governance forum is very important, as it is from there that we are outlining the future of our protocol, and you can make a difference in this process — Join the discussion.
• Keep Network team will share links in Discord about the vote snapshots soon — Don’t miss out.

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Did I Miss Something?

If I missed an important detail and you think it should be added here, just contact me (EvandroSaturnino#9833) directly through Discord on the Keep Network server!