Maximillian Laumeister

Long Live Bitcoin (on Ethereum!)

Ethereum’s Bitcoin derivatives will replace Bitcoin itself, making the Bitcoin network obsolete.

golden bejeweled royal crown on an embroidered red pillow

I’ve got a confession to make - I’ve been drinking the Ethereum kool-aid. It’s tangy and refreshing. If you can think of an acronym, I’ve done it - MKR, CDPs, DAI, DEXes, DY/DX, ENS, IPFS/IPNS, BAT, ERC-20, ERC-721, they are all systems that I’ve touched at some point. I’ve bought, sold, lent, borrowed, traded, derived, registered, pointed, coded, and published on the Ethereum chain. I like to think I know the space pretty well.

Now let me say, the current Ethereum experience feels very raw, but not necessarily in a bad way. It just feels bare-metal. Ethereum feels like buying a table off of craigslist, or repairing an old tractor with a hand wrench. If you screw up, there’s no customer service. There’s no one there to say “we’re sorry for the inconvenience” and give you a gift card.

But the flipside is that when you interact with Ethereum, there’s no stopping you. You have complete control. Like driving a gearshift on a private racetrack, it’s just you and the road. You can truly be your own bank, instead of waiting in line at Wells Fargo while they sign you up for five checking accounts.

close-up of a formula 1 car racing fast on a racetrack

So after I’m done taking out a loan with my Ether (hypothetical cars and private racetracks don’t pay for themselves), I then buy some virtual cats, then send my friend some virtual game cards. Then I look back at my Bitcoin. There’s nothing wrong with it, but it just kind of… sits there.

cartoon of a person poking a stick at the bitcoin logo and saying 'cmon, do something.' does anybody read alt text?

Sometimes I visit blockchain.com and watch it do nothing. Sometimes I listen to the melodic chimes of the Bitcoin network on BitListen.com, a sonification app I wrote in 2013 and am now shamelessly plugging here. But that’s about the extent of it.

What if we could get Bitcoin to do verbs?

Enter WBTC

WBTC logo'

In January 2019, the WBTC token was launched on the Ethereum network. Every WBTC on Ethereum is backed by a BTC on the Bitcoin blockchain. Because WBTC is a standard Ethereum token, you can send it, buy it, sell it, borrow it and lend it without ever leaving the Ethereum ecosystem.

On top of unlocking all these new verbs when you tokenize BTC onto Ethereum, WBTC is also significantly cheaper than BTC to send to someone. It’s my opinion that WBTC would be the perfect way to store and use BTC, if it weren’t for WBTC’s dirty little secret: its counterparty trust issue. The secret is that there is a small yet critical difference between WBTC and BTC - WBTC’s sole value derives from the promise that their partner companies will give you back your real BTC when you ask nicely for it. Much like the dollar bill started out as an expectation that a bank would give you back your gold when you ask nicely for it. And we all know how that turned out.

While WBTC enables Bitcoin to hook into Ethereum to do useful work, it’s ultimately crippled by its reliance on this centralized group of companies to hold onto your real BTC for you.

In essence, WBTC is a glorified IOU for BTC. Works great until the IOU breaks. We can do better.

Enter tBTC

tBTC logo'

Announced last month, tBTC improves on WBTC by making those IOUs enforceable with financial penalties. tBTC defines a system where anybody can create these tBTC IOUs. But the trick is that to mint tBTC, each market-maker is required to self-insure by posting a bond in Ether that has value greater than the tBTC they are minting. That way, if an actor takes the BTC and runs, the tBTC system will confiscate that actor’s Ether bond and give it to the tBTC users to make them whole. This, plus some other neat tricks involving price feeds, multisigs, and auctions, means that as long as the tBTC smart contracts are functioning properly, there’s no risk of exit scams, thus no risk of tBTC losing its backing.

This is a massive improvement over WBTC. Because every tBTC token’s BTC backing is enforced by code, the system is always backed as long as it’s chugging along.

Read more about the differences between tBTC and WBTC.

To go even deeper and learn how tBTC aims to solve the Bitcoin-on-Ethereum problem once and for all, I highly recommend Wyre’s interview with the tBTC founders. It talks about how the tBTC founders’ research on secure computation led them to design tBTC.

And if you want a real challenge, try reading the tBTC spec!

Bitcoin is Dead. Long live Bitcoin!

Now, keeping in mind that Bitcoin is very close to being tokenized on Ethereum, here is my prediction for how Bitcoin will die, along with a timeline. In essence, I expect more and more Bitcoins to be tokenized on other chains over the years, eventually to the point that nobody actually uses the Bitcoin network proper.

The cat’s out of the bag, and Bitcoin tokenization is here to stay. The Bitcoin network will not die with a bang, but with a slow fade into its own financial derivatives.

When all BTC is finally tokenized, the Bitcoin network itself will become irrelevant. Just like with the US dollar, eventually everyone will collectively forget that their tBTC were ever backed by something.

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