Read mBTC in 3 minutes: Bitcoin’s cross-chain decentralized solution

History of Bitcoin cross-chain

When it comes to the concept of Bitcoin cross-chain, everyone may not be familiar with it. But when it comes to wBTC, everyone is definitely familiar with it. wBTC is a way to cross-chain Bitcoin to Ethereum. So why do you have to use wBTC on Ethereum instead of using the good $BTC? The main reason is that the Bitcoin network does not support smart contracts. $BTC can only be used for transfer payment in the Bitcoin network and lacks various applications in networks such as Ethereum. At the same time, compared to various Altercoins in the Ethereum network, $BTC is considered "digital gold" and has a broader consensus, and users are more willing to use $BTC to participate in various applications.

In response to such demand, Bitgo launched wBTC in 2019, whose full name is Wrapped BTC. wBTC’s solution is to lock the user’s $BTC on the Bitcoin network and issue an equal amount of wBTC on the Ethereum network to prove the user’s assets on the Bitcoin network. At the same time, users can also return wBTC at any time to redeem $BTC on the Bitcoin network.

Specifically, the process of issuing and redeeming wBTC will involve users, acceptors, and custodians. Users are users of wBTC. The custodian is responsible for keeping $BTC in the Bitcoin network when users use wBTC, and Bitgo is currently the only custodian. The acceptor, as a bridge between users and custodians, is responsible for selling and recycling wBTC to users. Becoming a wBTC acceptor requires approval from Bitgo. Well-known acceptors include CoinList, imToken, etc.

This system looks simple but is very clever. First of all, after the user's $BTC is deposited to the custodian through the acceptor, wBTC will be issued to the user through the smart contract on Ethereum, which not only avoids the problem of double spending, but also ensures the scarcity of $BTC, thereby establishing the value of wBTC. value. Secondly, the acceptor is responsible for the customer's KYC and wBTC issuance, while charging the customer a handling fee, and can obtain more customer sources through wBTC. As a custodian, Bitgo is not only left with the work of KYC and qualification review, but also has access to custodian channels, which can be said to serve multiple purposes with one stone. But the most deadly problem also appears here. As the issuer of wBTC and the only $BTC custodian, Bitgo also holds the right to decide on the application of acceptors, which brings a centralization risk that cannot be ignored.

Merlin Protocol's mBTC Solution

In response to the centralization risks faced by wBTC, Merlin Protocol issued mBTC and proposed a decentralized Bitcoin cross-chain solution, hoping to solve the centralization problems encountered by wBTC through decentralized cross-chain channel service providers.

Specifically, mBTC is similar to wBTC, and is essentially a certificate issued on other networks to prove that users hold $BTC on the Bitcoin network. However, on the basis of wBTC, the mBTC system combines the acceptor and the custodian into one. While providing the issuance and redemption of mBTC, it is also responsible for keeping the $BTC pledged by users on the Bitcoin network. These service providers are in the mBTC system. It is called "cross-chain channel service provider" in China. In addition, the participation threshold of cross-chain channel service providers is also different from that of wBTC's acceptors. No license is required to become a cross-chain channel service provider of mBTC, thus avoiding the centralization risk of a single access license.

When users need to purchase new mBTC, they can apply to any cross-chain channel service provider and pledge their $BTC on the Bitcoin network. After the cross-chain channel service provider receives the user's $BTC, it issues an equal amount of mBTC and sends it to the Ethereum address designated by the user. Similarly, when redeeming, users only need to perform the reverse operation. This design not only saves the communication cost between the acceptor and the custodian in the wBTC system, but also solves a series of centralization problems caused by a single custodian.

Then some people will ask, this is just to disperse the trust risk from a single custodian to multiple cross-chain channel service providers. In essence, users still have to bear the default risk of the fund custodian. mBTC also took this issue into consideration when designing and proposed an excess margin mechanism similar to the lending agreement. Specifically, the cross-chain channel service provider needs to pledge a part of the security deposit on the Ethereum network through the mBTC smart contract. Currently, $ETH, $USDT and $USDC are supported. Based on the amount of the deposit, the service provider will receive an mBTC issuance quota of 2/3 of the deposit value. And with the use of mBTC quota, the deposit and the change of $BTC price, the service provider needs to keep the value of the deposit at more than 105% of the issued mBTC value. Otherwise, the service provider's mortgage assets on Ethereum will be liquidated and used to compensate for the losses of mBTC users. In order to obtain margin and real-time price of $BTC, oracles are introduced in the mBTC system. To this end, Merlin Protocol has also joined the Chainlink BUILD program.

In order to encourage more cross-chain channel service providers to join the mBTC system, when users redeem mBTC, service providers can receive a 1.5% handling fee. By introducing economic incentives, the mBTC system is interconnected and realizes decentralized Bitcoin cross-chain. At the same time, mBTC redefines the production relationship of Bitcoin cross-chain business. mBTC is not a simple cross-chain tool, but a decentralized system. There is no need for anyone to maintain it, and each participating role can spontaneously maintain the operation of the mBTC system.

It is worth mentioning that with the development of Ethereum Layer-2, the demand for Bitcoin cross-chain on Layer-2 is also growing. mBTC also plans to gradually launch cross-chain functions based on the Bitcoin network to Layer-2 in the future. .

Write at the end

In fact, after the release of wBTC in 2019, it just caught up with the upsurge of a series of applications such as DeFi. The circulation of wBTC has continued to rise, and currently accounts for 94% of cross-chain bitcoins on Ethereum. Although competitors such as hBTC and imBTC have emerged after wBTC, these solutions still have not gotten rid of the operation mode of centralized custody in essence, and have not shaken the dominance of wBTC. Let us wait and see whether mBTC’s decentralized solution can break through the siege.