Deconstructing sBTC, The Whitepaper: Part 1

The sBTC whitepaper presents a design of a trustless two-way peg for bitcoin

wbnns

• 5 min read

Bitcoin's killer app is itself – the speculative element of being able to buy and hold. It is a hedge against inflation, centralization, cronyism and corruption, and other related things we may find ourselves as a society mired in. It is also a vote against the above; it is an opt-out.

But there are no Bitcoin DEXs, and there are no decentralized secondary markets built on top of Bitcoin, allowing the tokenization of other real or virtual assets. There are no DAOs, no NFTs, and no lending and/or derivatives. There are no smart contracts. There is no defi. Bitcoin is only partially programmable. As the future rapidly unfolds, it will be easier for one to be their own bank if one also has access to the financial services a bank provides.

Being able to make Bitcoin fully programmable would unlock defi for all holders. It would be a pivotal moment in the cryptosphere, akin to discovering electricity in a dark age. Or something even more remarkable, like nuclear fission.

The sBTC paper proposes wrapping bitcoin 1:1 and pegged, meaning it will trend and trade following the same price trajectory as BTC.

It proposes that no one would be able to centralize the mechanism for controlling sBTC. It will also be permissionless and operated by a group with open membership. This group will benefit economically from doing so. This participation can be continued/discontinued at will.

An important caveat to note above is that the collateral backing wBTC on Ethereum, BTC, is entrusted to a single custodian (BitGo) – not wBTC itself. wBTC on Ethereum is freely circulating in both centralized and decentralized ways. One can purchase/redeem wBTC on Coinbase (centralized) or Sushi (decentralized), and many other places.

BitGo's job as the custodian is to ensure that the BTC doesn't get hacked/lost, which backs wBTC since it is also a two-way Bitcoin peg. If the collateral is lost, the pegged asset will lose its value. That value may only return to parity with the underlying asset if one or more third parties step in to rescue it and replace the lost funds.

But that aside, here are key phrases excerpted that will differentiate sBTC from wBTC:

  • trustless two-way peg
  • trustless writes
  • trustless peg
  • trustless peg mechanism
  • high performance and decentralized security

This section says that Bitcoin is like granite or a nearly impenetrable bedrock. To construct a thriving defi ecosystem on top of it, the ecosystem itself will need help to take root or foothold there. It will have to be in the strata on top of it.

The excerpt above is another way of saying Bitcoin is great, but what is needed to unlock defi may not be done anytime soon.

This excerpt also preempts the question, "Why do we need sBTC on Stacks? Why not just BTC?"

So the three things, according to the whitepaper, that an ideal Bitcoin layer needs to have are:

  • Smart contracts that are both easy to write and easy for a human to read/understand, connected to a decentralized, distributed ledger.
  • A trustless, programmatic, bidirectional, and secure connectivity to the Bitcoin blockchain.
  • Transactions on the layer 100% tied to what's happening on the Bitcoin blockchain.

The whitepaper goes on to explain why the status quo with its available options isn't sufficient.

Assertions:

  • Lightning's smart contracts are challenging to write, hard to read, and are not tied to an immutable ledger.
  • Liquid and RSK are federated with their own settlement layers. Stacks also did not have a trustless Bitcoin peg initially.
  • Ethereum L2s have desirable attributes that enable them to scale. However, these attributes are more critical for Bitcoin since the base layer is limited  – they're requirements to scale and add functionality.

The following section introduces the combination of sBTC and Stacks on top of Bitcoin as an ideal layer.

Fully-expressive smart contracts at the Bitcoin layer refer to the Clarity Smart Contract Language that enables them on Stacks.

This whitepaper section leads to a high-level overview of what makes sBTC unique.

In other words, sBTC:

  • Operation is decentralized and open; it is dynamic, which means that the signers will change. The signers will make money from performing this function.
  • Signers cannot be influenced or altered by external parties – for example, the Stacks Foundation, VCs, whales, sizeable projects on the network with clout, or others.
  • Signers get paid BTC for providing their services.
  • Has no off-chain, centralized oracle to mediate what is happening between the Bitcoin and Stacks blockchains, which could potentially be subject to outside influence by a centralized authority.
  • Will settle on the Bitcoin blockchain.
  • Would unlock defi for all bitcoin holders.

The above excerpt is saying that when not already built into a protocol (like in the case of Bitcoin), smart contract interactions are a prerequisite to what would allow for the construction of dapps.

In other words, Bitcoin (L1) <=> Stacks (L2) <=> Smart contracts <=> Dapps <=> DeFi.

Note the use of <=> to indicate that the flow is bidirectional.

And so, the end of the paragraph above concludes the introductory section of the whitepaper. It is also the end of Part 1 in this Deconstructing sBTC, The Whitepaper series. Stay tuned for Part 2, which will focus on analyzing the whitepaper's section on sBTC as a trustless, two-way bitcoin peg.

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