Illustration: Aïda Amer/Axios
The Threshold Network has announced plans for a new decentralized bitcoin bridge to Ethereum, allowing the original cryptocurrency to be used on the largest programmable blockchain.
Why it matters: As holders of the oldest and most valuable cryptocurrency, many bitcoin investors want to use it to earn yield in decentralized finance (DeFi), something they can’t do on the Bitcoin blockchain. But they also want to avoid the counterparty risk of trusting a single company to provide a bitcoin derivative that works on Ethereum.
- Trusted bridges, like Wormhole and the Ronin bridge for Axie Infinity, led to some of the worst losses in 2022.
Driving the news: Bitcoin can only be used in DeFi using some kind of derivative, copies of real bitcoin secured for that purpose on the original blockchain.
- One casualty of the FTX failure has been the Ren Protocol, one of the more trustless ways to bridge bitcoin to other blockchains.
- Before FTX fell, there were over 4,000 BTC on Ren. Now, there’s a little over 400.
Of note: Most of the bitcoin bridged to other blockchains takes the form of wrapped bitcoin (WBTC); 176,547 BTC ($4 billion) have been bridged using the fully trusted system created by the custody firm, BitGo.
What they’re saying: “Bitcoin is the most pristine digital asset, and if you want to make your bitcoin into a productive yield-bearing asset you shouldn’t have to send that to an opaque liquidity provider,” MacLane Wilkison, CEO of NuCypher, tells Axios in an interview.
- The Threshold protocol was created via a merger between open source protocols made by NuCypher and the Keep Network.
What we’re watching: Threshold has launched a new version of tBTC, its more decentralized approach to bridging bitcoin from the original blockchain to Ethereum (for now, with others to come).
- The new version protects users by breaking operations up into two parts: minters and guardians.
How it works: Guardians are stakers of Threshold’s token, T, who control a series of bitcoin wallets that can be used to mint tBTC on Ethereum.
- A user sends their bitcoin to a wallet and indicates what Ethereum address the tBTC should be minted to.
- If more than 51 of 100 guardians approve the mint, then it goes to the minters to mint the tBTC that corresponds to the actual bitcoin deposited.
- Minters are a small group of blue chip DAOs (decentralized autonomous organizations) on the Ethereum blockchain, including Curve DAO, Yearn.Finance, Aave, Synthetix, Connext, Alchemix and Euler.
- They maintain a three hour cooling off period between a mint and issuing tBTC. If nothing seems awry, they approve creating the tBTC.
The main threat minters are watching for are mints that don’t have matching bitcoin in the Threshold wallets.
- The system has been designed to prevent such a malicious mint, but they are using minters at first as a safeguard. Eventually, the plan is to retire this backstop.
What’s next: A bitcoin-backed stablecoin called thUSD.
Be smart: This new version is not trustless. It is trust minimized. By creating a large set of minters, it makes it very hard (but theoretically not impossible) to abuse minting powers.
Flashback: The original version of tBTC launched in 2020. While it hasn’t had major issues, it was held back by capital inefficiency.
- The market cap of tBTC has been in the low millions since mid-2022.
The bottom line: “With no viable alternatives in the market, there is no time to waste in meeting the urgent demand for a decentralized Bitcoin-to-Ethereum bridge,” Keep founder and Threshold contributor Matt Luongo said in a statement.