Defining the environment
DeFi is transforming, with synthetic assets (synths) taking the Web3 space by storm. Synths are tokenized derivatives, meaning they are an artificial representation of a particular coin, which you don’t own, but would like to trade.
- By buying and selling synthetic assets, you can gain access to the price exposure without physically holding any of the underlying tokens.
Evolution is the answer to everything, and the crypto-verse is no exception.
Wrapped Bitcoin (wBTC) is the most established tokenized derivative of Bitcoin. It’s been around since 2019 and has proved to be helpful to investors and traders alike. Yet, what the space is missing is a trustless and censorship-resistant contender. Enter THOR.BTC a project in the works by THORChain developers, and one could safely say that the evolution of synthetic bitcoin is upon us.
- In this article, we compare and contrast THOR.BTC against wBTC.
Let’s first start by understanding wBTC, followed by the main showdown!
Understanding wBTC
What is wBTC?
wBTC is an ERC-20 digital asset backed by bitcoin (BTC) in a 1:1 fashion. It is market capitalization's most significant synthetic bitcoin token, followed by Huobi bitcoin (hBTC).
Why was wBTC created?
Back in 2019, DeFi transactions occurred primarily on Ethereum. If you had a lot of bitcoin, you could not participate in the Ethereum decentralized economy. wBTC sprung up as the solution to this problem by enabling native bitcoin holders to lock up their coins in return for these synthetic tokens.
How does it work?
Let’s go through it:
1) When a user wishes to exchange BTC for wBTC, they will be required to send their bitcoin to a merchant.
2) The merchant will initiate a wBTC mint request and send the BTC from the user to the custodian, for example, BitGo.
3) The custodian will then mint the corresponding wBTC.
4) The wBTC will then be transferred to the user via the merchant.
When a user wishes to redeem their BTC with wBTC, the merchant will communicate with the custodian to arrange the transfer of the user’s wBTC to the custodian. The wBTC is burned, and the BTC is transferred to the user via the merchant.
Pretty cool mechanics, right?
THOR.BTC vs. wBTC
Now that we understand wBTC, let’s look at THOR’s five main reasons.BTC stands out, as presented in the table below.
1) Centralized vs. Decentralized
One of the main weaknesses of wBTC is the reliance on several central parties who conduct the manual exchange process, as outlined above.
Trust is bestowed on these third-party custodians to safeguard the keys that control the native layer one assets. Theoretically, this could lead to manipulation or human error on the part of the custodian.
On the other hand, THOR.BTC is a derived asset that a central issuer does not control. Instead, it is operated algorithmically on-chain via the decentralized and anonymous nodes. It’s also worth noting that THOR.BTC is fully backed by THORChain’s Liquidity Pools and is always redeemable for the native layer one asset.
The mechanics of how THOR.BTC operation can take some time to wrap your head around (no pun intended); however, the steep learning curve is worth it. In a previous article, we explained that in the future, THOR.BTC will be exported to other ecosystems in Cosmos, enabled by the upcoming IBC integration. There’s a possibility that THORChain will become the biggest exporter of synthetic bitcoin in the crypto space.
2) Founders
- THOR.BTC is under development by THORChain core developers, many of whom are anonymous.
There is a lower chance of regulation risk.
- wBTC is maintained by an informal group called the wBTC DAO that now consists of over 30 members in addition to its original trio of creators (BitGo, Ren, and Kyber).
There is a higher chance of regulation risk.
The crux of the matter is, as a user, whether you want to opt into a trustless and decentralized solution (THOR.BTC) or a system where you have to place faith in institutions to act in your best interest (wBTC).
3) Market capitalisation
- At its peak, wBTC had a market capitalization of more than $15 billion; it currently stands under $9 billion.
- At the time of writing, wBTC represented circa 1.5% of native bitcoin’s market cap of $580 billion.
1.5% is significant — there is a demand for composable bitcoin that can be leveraged in DeFi. You combine the fact that THORChain is the only native layer of one cross-chain decentralized exchange (DEX) and the increasing volume of education on how THOR.BTC works; you’ll find an inevitable value rotation from wBTC into THOR.BTC.
While THORChain is the first, it hopes there are many to come. It does not want a monopoly.
4) Transaction speed
- THORChain transactions take circa 5 seconds.
- wBTC requires 20 network confirmations which equate to around 5 minutes.
To operate efficiently in DeFi, whether you’re borrowing, lending, or trading, a user needs to confirm a transaction in seconds, not minutes. The winner, in this case, is THOR.BTC.
5) Transaction cost
- THORChain transactions are incredibly cheap at circa $0.02 RUNE.
- wBTC is an ERC20 token that is processed on the Ethereum blockchain. Therefore, the cost will depend on the congestion of the Ethereum chain, which can be dozens or even hundreds of dollars.
Again, THOR.BTC comes out on top.
Conclusion
wBTC has served its purpose for a few years. THOR.BTC is emerging as an alternative with specific characteristics that individuals in Web3 want: decentralization, trustlessness, and permissionlessness.
Besides the philosophical ideas, THOR.BTC will enable a more efficient and cheaper way of operating in DeFi. Change has come knocking on wBTC’s front door, and evolution is inevitable.
And that’s a wrap, folks.
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