With the recent successful Ethereum merge to Proof of Stake, the DeFi community is adjusting course and beginning a new chapter that introduces a clear path for Ethereum and Bitcoin to work together and for a sustainable BTC primitive to emerge on the Ethereum blockchain.
As we started designing what this ideal primitive could look like mid last year, we did so with aspirations of creating a protocol that:
- Can be the most decentralized BTC for DeFi with a path towards censorship resistance.
- Can support its own utility without external incentives and scales with its growth.
- Will be the best way to borrow Bitcoin anywhere.
Following several months of extensive market research, product modeling and technical development, we’ve created a concept that adheres to these key principals and envision an ecosystem where hundreds of protocols can easily build on top of it.
I’m excited to share our first introduction to eBTC and gather feedback from the community.
eBTC is a collateralized crypto asset soft pegged to the price of Bitcoin and built on the Ethereum network. It is backed exclusively by Liquid Staked ETH (LSD) and powered by immutable smart contracts with no counterparty reliance. It’s designed to be the most decentralized synthetic BTC in DeFi and offers the ability for anyone in the world to borrow BTC at no cost.
The State of Bitcoin in DeFi
We are at a unique crossroad where we’ve seen an accelerated demand for the use of BTC on Ethereum. 1% of the BTC supply currently tokenized and it makes up 14% of all Ethereum DeFi. 40% of that supply is used for borrowing, lending, and liquidity provisioning in four protocols: Uniswap, Maker, Aave and Compound.
Too much of the utility in DeFi is driven by unsustainable short-term incentives. These incentives are provided by entities who use those incentives to take advantage of other market participants.
Almost 95% of the BTC on Ethereum is wBTC, a custodial solution with censorship risks. The market lost confidence in centralized counterparties during the myriad of 2022 bankruptcies (Celsius, 3Arrows, FTX, Genesis etc.). Users now demand extreme transparency in the assets they hold and platforms they use.
This is where the opportunity for Bitcoin and Ethereum to work together arises in a way not possible before the merge to Proof of Stake.
eBTC is built on top of the Ethereum staking layer. It eliminates custodial risks, is self-sustaining, provides the highest level of transparency and contributes to the Ethereum network’s security. eBTC strengthens the foundation of DeFi as the only unstoppable synthetic BTC primitive while introducing a protocol that is the best place to borrow Bitcoin.
eBTC accomplishes this by being:
- Decentralized, composable and transparent
- Capital efficient with fee-less borrowing
- Self perpetuating - it supports its own utility
Decentralized, redeemable and transparent
eBTC represents a liquid staked ETH based collateralized debt position (CDP) powered by immutable smart contracts without the reliance on bridging native BTC to the Ethereum blockchain. This enables users at all times to determine the solvency of the asset they are borrowing/holding while removing counterparty trust.
This is a stark difference from synthetic assets that dominate DeFi today which have an inherent lack of trust without transparency. These values will no doubt become a minimum requirement for DeFi participants in the future.
Any protocol can be built on top of eBTC and leverage its fee-less borrowing functionality simply by integrating its smart contracts. That can be centralized traditional platforms, dapps, websites or anyone really. A complete permissionless experience that we hope will attract an enormous amount of integrations and cement eBTC smart contracts as a foundational lego piece in DeFi.
Beyond decentralization, censorship resistance is a massive goal for eBTC which unfortunately isn’t possible in its purest form today. Censorship resistance is only as strong as your weakest point of centralization which with the current state of Ethereum is in its oracles. Beyond that, without withdrawals of staked ETH enabled, there is naturally a lack of decentralization when dealing with LSD’s. Over time, we expect to see a clear path toward further decentralization for these assets and hope to be part of the solution. Until then we intend to limit centralization in eBTC’s design to the best of our ability while having a path towards censorship resistance.
Supports Its Own Utility & Growth
Ethereum’s transition to Proof of Stake enables anyone in the world to participate in securing the network while being rewarded in ETH for positive participation and reprimanded for negative actions in a sustainable way. This opens up a massive opportunity to leverage that staking layer to create new protocols or efficiencies in existing protocol designs that weren’t possible before.
eBTC aims to leverage the benefits of PoS to create a superior borrowing protocol and scalable utility for a BTC primitive in DeFi.
By over-collateralizing with a LSD, eBTC can leverage part of the yield from staked ETH to create utility and stability. This introduces a scalable way to grow the asset without the need for external incentives and enables it to continuously support itself as the collateralization amount increases.
Capital Efficient with fee-less borrowing
Borrowing BTC on-chain or off-chain is not efficient as it often comes with high minimum collateralization rates (130-150%) and high fees which grow as utilization of the borrowing facility increases. eBTC is able to offer an improvement in capital efficiency in three ways;
- Being a protocol based exclusively off of two very correlated assets (BTC and ETH).
- Unlocking the benefit of sustainable ETH staking yield to remove the need for the protocol to charge fees.
- Not being bound by inventory of BTC to lend to borrowers as new eBTC is minted when there is borrowing demand.
Unlike existing stablecoin based collateralized debt protocols, ETH and BTC are very correlated assets, which can give borrowers more confidence in holding longer term debt positions without fear of liquidation. As can be seen in this research, the volatility of ETH-BTC is much less extreme and closer to zero than the volatility for ETH-USDC. Compare the first chart of the 30 day volatility of ETH-USDC with the second one of the 30 day volatility of ETH-BTC:
Metrics such as the mean, min, max and standard deviation of said volatility are all more favorable in the case of ETH-BTC. All this holds true for the 60 minute volatility as well.
This capital efficiency also introduces a very competitive leverage tool for users to take advantage of or protocols to build on top of. At a protocol level it inherently offers the ability for users to go long ETH and short BTC. When coupled with looping at a smart contract level (auto sell the borrowed asset for more collateral multiple times) users are able to amplify the interest they earn on their ETH (larger LSD collateral position) while unlocking a leveraged long ETH/short BTC position.
eBTC is currently in development, closing in on V0 as we prepare for security audits. We’re actively working with Risk DAO to pressure test our mechanism design and conduct simulations using existing protocol parameters. eBTC is currently the core focus of active contributors at BadgerDAO.
As we further progress through the development process, we’ll continue to share updates and engage the community on any parameter decisions leading into launch.
Please share any thoughts, opinions and ideas around the protocol mechanics, market opportunities and eBTC as a whole.
Looking forward to the conversation