Ethereum as layer 2 solution for Bitcoin
Updated: Jul 9, 2021
Bitcoin’s third halving happened a few days back. Bitcoin block mining reward got reduced from 12.5 BTC to 6.25 BTC. Bitcoin’s transaction fees are already high and with the inflation reduction, the mining fee to process the transactions may go higher only. Many layer 2 Bitcoin scaling projects are coming up nowadays to solve Bitcoin’s transaction speed & transaction fee issue. Lightning network is such a layer 2 technology for Bitcoin to scale up the blockchain’s capability by the use of micropayments. By taking the transactions away from the mainchain, lightning network targets to decongest the Bitcoin network and provide instant transactions with nominal fees. But there have been issues with lightning network as it is vulnerable to hacking. Lightning network didn’t find much use also after raising initial expectation.
WBTC – the bridge
Vitalik Buterin many times said about the need for a bridge between the two biggest blockchains – Bitcoin & Ethereum. This bridge is basically the mechanism to migrate currency from one blockchain to another. It helps to create liquidity and manages fund on both chains. Any person having fund in one chain can easily convert his fund to another chain asset. And obviously this bridge should be trustless and no third party should be involved. Vitalik's concept of the bridge is a bit different but we've got WBTC and it can act as a bridge. WBTC is wrapped BTC in the Ethereum blockchain. It is ERC20 token and backed by Bitcoin. WBTC is generating a lot of buzz nowadays. It is developed by Republican Protocol, Kyber network and crypto custodian BitGo. They have formed a decentralized autonomous organization (DAO) to ensure chain audits so that 1 WBTC is backed by 1 BTC always. WBTC can have various applications like collecting money from ICO in WBTC, indirect access of dapps to Bitcoin, cross-chain interactions etc. But WBTC has found a big usage in DeFi now.
BTC in DeFi
On 3rd May of 2020, WBTC was approved as collateral by MakerDao. Now you can generate DAI by depositing WBTC. It is the 4th collateral after ETH, BAT, USDC to be approved by MakerDao governance. Currently WBTC stability fee is approximate 1%. MakerDao has a flexible system and any crypto asset can be used by collateral if the governance system approves it. MakerDao command more than 35% market in DeFi and inclusion of WBTC virtually unleashes Bitcoin into DeFi properly.
Source- WBTC & Total BTC in DeFi
If you look at the above chart, total BTC including WBTC in DeFi has increased 100% since the inclusion of WBTC in MakerDAO as collateral. Currently 2.3K WBTC is locked in DeFi whereas total BTC locked in DeFi is 3.2K. Locked WBTC percentage of total locked BTC is staggering 72%. Presently total $844.9 million is locked in DeFi. Bitcoin contributes only 3.5-3.7% of the value. It also shows the future scope of the most liquid crypto asset.
Private Bitcoin transactions
Wait! Some more hot things. AZTEC Protocol is a private transaction protocol for ERC20 tokens in Ethereum. Bitcoin can become private in Ethereum with the help of this. Bitcoin transaction in Ethereum blockchain can be truly non-traceable. How will you feel to own your very private Bitcoin?
Ethereum has surely propelled the big brother’s huge entry into DeFi. The data is evidence of this. Bitcoin’s high store of value and liquidity can be a game-changer in DeFi. Now, it has the support of Ethereum dapp eco-system. The combination of Bitcoin and Ethereum can provide massive reward to the world by kick-starting a plethora of new financial applications. The two biggest blockchains can complement each other to overcome own weakness. Bitcoin can provide liquidity to Etherem and Ethereum can provide scalability to Bitcoin to develop a new financial system. It’s like saying, "have my back” to each other.