Wrapped Bitcoin in DeFi: Evaluating wBTC, cbBTC and tBTC

Bitcoin (BTC) is the largest cryptocurrency by market capitalization and an emerging store of value asset. However, its limited programmability has historically restricted its utility in decentralized finance (DeFi) applications. Wrapped Bitcoin tokens help address this limitation and facilitate the transfer of Bitcoin’s value to platforms that are faster and more expressive. 

However, recent developments have cast a shadow on the reliability of bridged Bitcoin (BTC) tokens. The node infrastructure of renBTC, once a popular BTC bridge, was undermined by its financial dependence on Alameda Research and the project shut down in 2022. WBTC, the largest bridged BTC token, faces scrutiny due to its centralized custodianship, which has been compounded by the recent involvement of Justin Sun in the project. 

These concerns have sparked interest in how bridged Bitcoin protocols operate. To that effect, Cointelegraph Research has undertaken a comparative analysis of four prominent Bitcoin bridging solutions—wBTC, renBTC, cbBTC and tBTC. The article provides readers with an in-depth dive into the respective architectures, market performance, recent developments and future prospects.

Exploring the spectrum of Bitcoin wrapping solutions

Bitcoin wrapping solutions exist on a spectrum of decentralization. Each approach on this spectrum presents its own set of trade-offs between security, decentralization and efficiency. 

On one end of the spectrum are fully custodial tokens, such as cbBTC, which rely on a single entity for issuance and custody. While this streamlines their technical implementation, such projects have a single point of failure and are vulnerable to censorship and regulation. Simple federations of keyholders are the most common way to reduce this centralization.

Some federated bridges require all keyholders to sign transactions, while others only need a majority of holders. WBTC, for example, operates with a two-of-three multisignature model managed by the BitGo consortium. Despite this added layer of decentralization, WBTC is still considered rather centralized due to the small number of custodians and their close relationship. 

The Liquid Federation, on the other hand, has a more distributed trust model in which a large number of trusted, independent companies collectively manage Bitcoin reserves and sign transactions. It operates on an 11-of-15 multisignature scheme. 

More advanced bridging models typically achieve decentralization through more sophisticated key-sharing schemes that rely on additional cryptography. One such example is tBTC v2. Unlike federations that rely on a set of authorized, trusted entities,  tBTC v2 uses a staking system. However, at present, it still remains permissioned due to the limitations of currently available cryptography. Our full analysis shines light on some of the technical and trust trade-offs involved in these solutions. 

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This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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