Research Disclaimer

Crypto.com Research and Insights disclaimer for research reports

Executive Summary

• Tokenised BTC refers to a tokenised representation of Bitcoin, allowing BTC to be used on other blockchains other than the Bitcoin network. These tokens are tightly pegged to Bitcoin’s value, letting users access and use Bitcoin within different blockchain ecosystems.
• Although WBTC currently dominates the tokenised BTC market with a 60% share of total supply on Ethereum, increased scrutiny over custodial risks following BitGo’s custodial changes has resulted in market share loss to new entrants like CDCBTC and 21BTC. 
• Types of tokenised BTC can be classified into centralised and decentralised models:
  • The centralised tokenised BTC involves one or more trusted centralised entities to maintain the token’s value by holding BTC funds in a vault and issuing the tokenised representation in return. 
  • The decentralised tokenised BTC can be further divided into BTC-backed and synthetic models, which does not require the centralised custodians to manage the minting and redemption.
• Different types of tokenised BTC solutions offer various benefits and trade-offs:
  • Centralised tokenised BTC provides advantages like high accessibility and enhanced liquidity, but poses risks due to the custodian risk and transparency of fund reserve. 
  • Decentralised tokenisation solutions with BTC as the backed asset benefit from a decentralised and trustless model, although they may be exposed to collusion risk of the signers’ network.
  • The synthetic solution offers high transparency via community-driven governance. However, the relatively complicated implementation and drawbacks like high collateralisation ratio and dependence on oracles makes it less accepted.
• New entrants like Crypto.com’s CDCBTC and 21Shares’ 21BTC may capture market share by offering greater transparency and security compared to existing solutions.
  

1.  Introduction

Bitcoin (BTC) is by far the largest cryptocurrency by market capitalisation and remains the most liquid cryptocurrency. Currently, BTC’s dominance rate, or its share in the total market capitalisation, stands at around 60%. 

Despite Bitcoin’s dominance, its original position as a peer-to-peer payment system with limited programmability has historically restricted its utility in decentralised finance (DeFi) applications, and thus limiting its use cases, leading to growing need for tokenised BTC.

Tokenised BTC refers to a tokenised representation of Bitcoin (BTC), allowing BTC to be used on other blockchains other than the Bitcoin network. These tokens are tightly pegged to Bitcoin’s value, letting users access and use Bitcoin within different blockchain ecosystems. In a way, tokenised BTC works similarly to how a stablecoin pegs to a fiat currency, such as the US dollar, at a 1:1 ratio. 

Major benefits of tokenised BTC include:

• Programmability: Tokenised BTC allows BTC to be used on smart contract platforms like Ethereum, boosting liquidity and usability across various decentralised applications (dapps).
• Accessibility: Tokenised BTCs are tradeable on exchanges, in which liquidity is provided. Additionally, many blockchains feature bridges that enable users to convert their BTC or tokenised BTC into the network’s equivalent digital token, and vice versa.

1.1 Market of BTC Derivatives

The tokenised BTC solutions have experienced rapid supply growth since the launch of the first solution in January 2019, primarily driven by increased activity on Ethereum, reaching an all-time high (ATH) in April 2022. Currently, the total supply of major tokenised BTC solutions on Ethereum is around 235,800, with WBTC holding a 60% share.

In addition to tokenised BTC solutions, Bitcoin can be used on other blockchains via Layer-2 (L2) solutions, which allow developers to build on Bitcoin without modifying its core protocol. They also improve transaction speeds and reduce fees, and some L2 solutions have also introduced smart contract capabilities, expanding Bitcoin’s potential use cases.

1.2 WBTC and Its Issues

Launched in January 2019, WBTC is the first tokenised BTC token and currently dominates the tokenised BTC market with around 82.6% share in terms of market capitalisation. However, growing concerns about its management and custody have led many investors to seek better alternatives. WBTC suffers the following issues:

• Lack of Operational Transparency: Critics have pointed out that WBTC’s reliance on BitGo as a custodian introduces risks related to transparency and accountability. Although BitGo has assured users that the Bitcoin backing WBTC will not be rehypothecated or lent out, the community remains wary of the centralised nature of custody.
• Transition to Multi-Jurisdictional Custody: WBTC transitioned from a US-based custody model to a multi-jurisdiction setup involving the US, Singapore, and Hong Kong. In addition, the custody of WBTC is now managed by a joint venture between BitGo and BiT Global, which is associated with Justin Sun, the founder of TRON.
• Concerns Over Influence: The involvement of Justin Sun has sparked scepticism within the crypto community, as many fear that his influence could lead to potential misuse of WBTC.

Platforms like Sky (formerly MakerDAO) proceeded to eliminate WBTC as collateral following WBTC’s custody change, and other major crypto exchanges halted market trading of WBTC in November, sparking backlash from the crypto community.

2. Types of Tokenised BTC 

Generally, the tokenisation mechanisms can be classified into centralised and decentralised models (see the table below). 

2.1 Centralised Tokenised BTC 

Centralised tokenised BTC utilises the centralised tokenisation technique, which involves one or more trusted organisations/custodians to maintain the value of the tokenised BTC by holding BTC funds in a vault and creating the tokenised representation in return. These third-party custodians are responsible for providing the Proof of Reserves (PoR), which verifies that the locked assets are securely stored and not utilised in any other applications. 

This allows users to utilise their Bitcoin in various applications on other blockchains while relying on the centralised entities for security and management. Take Crypto.com’s CDCBTC, for example. The processes of minting and burning are illustrated below:

• Minting (the process of creating new tokenised BTC): When users withdraw their BTC to the supported chains, Crypto.com will mint the corresponding amount of CDCBTC, which users will receive in their destination wallet for DeFi use.
• Burning (the action of redeeming Bitcoin for CDCBTC): Upon depositing CDCBTC back to Crypto.com, CDCBTC will automatically unwrap to BTC, making the funds available for trading or use in other products.

21BTC is another of the latest alternatives of WBTC. Since its launch on Solana (May) and Ethereum (September), 21BTC has seen rapid growth, with a total supply of 113.42 BTC, and assets under management (AUM) reaching $9.81 million.

See below for the detailed comparison of major centralised tokenised BTC tokens:

2.2 Decentralised Tokenised BTC

The decentralised tokenised BTC can be further divided into BTC-backed and synthetic models, which do not require the original asset to be locked in a trusted vault. 

2.2.1 BTC-Backed Tokenisation

Under this approach, the tokenised BTC is managed by smart contracts, which handle the processes of minting, burning, and maintaining the asset’s collateral without the need for trusted intermediaries. Typical examples of decentralised tokenised bitcoins include renBTC (shut down in December 2022) and tBTC, which replaces the centralised custodian of a group of nodes on the Threshold Network; its workflow is summarised below:

Deposit

• A periodically and randomly selected group of 100 node operators are chosen as ‘signers’. These signers create 51-of-100 threshold-ECDSA-backed wallets to hold frozen Bitcoin assets to maintain account balances.
  
• Depositors send Bitcoin to the most recently created wallet, which contains hashed information about the depositor’s Ethereum address.
  
• The depositor reveals their BTC deposit to the Ethereum chain. The bridge then checks the Bitcoin network to make sure the funds line up.
  
• If everything checks out, the threshold wallet sweeps funds and updates the Ethereum-side account balances.

Redemption

• A user with an account balance provides a Bitcoin address.
  
• The system deducts the corresponding amount from their account balance and transfers the equivalent Bitcoin from the redeeming wallet to the user.
   
• The maximum redemption amount is limited by the size of the largest wallet; any redemption exceeding this limit will need to be divided into multiple transactions.

Signers in tBTC use ETH as collateral, and the collateralisation ratio is 150%, meaning that for every 1 of the user’s BTC the signer keeps, the signer should have 1.5 BTC in the ETH equivalent locked.

The model of renBTC was akin to that of tBTC, where validators stake the native token, REN, to participate in the protocol. However, Ren ultimately remained reliant on a team-controlled group of signers, which led to the decline of its core assets when its parent company became embroiled in the FTX fallout.

2.2.2 Synthetic Tokenisation

Synthetic tokenisation does not require the lockup of the original asset (namely BTC) in a trusted vault or a smart contract to mint a Bitcoin-pegged synthetic token. 

Instead, synthetic assets are collateralised by the other tokens, similar to stablecoins or other platform tokens. A synthetic token cannot be redeemed for the token mimicked (e.g., BTC); instead, only the backing collateral can be redeemed. This approach enables users to lock up their Bitcoin in a smart contract in exchange for a synthetic asset of equivalent value.

One example is Synthetix’s sBTC, a synthetic asset developed on the Synthetix platform. Launched in February 2019, it is a synthetic tokenised BTC on Ethereum, and is minted based on the value of the native SNX token, which serves as the main collateral for the synthetic assets (Synths) on Synthetix. All Synths are backed by a collateralisation ratio set by governance. SNX stakers take on debt when they mint Synths and must burn Synths to exit the system. However, Synthetix halted the exchange of synthetic currencies other than sUSD (i.e., sBTC) on Ethereum in April 2024. 

3. Benefits and Challenges 

While tokenised BTC tokens have gained greater popularity since their debut, facilitating cross-chain communication by allowing Bitcoin to be used on different blockchain networks, they also come with inherent risks. We delve into the respective pros and cons of each type of tokenised BTC below.

4. Conclusion

Though WBTC currently leads in liquidity, it is under increasing scrutiny regarding centralised risks and has seen net supply declines for four consecutive months since August. The demand for tokenised BTC solutions that can effectively balance liquidity and security has become more crucial than ever. 

Although the decentralised BTC tokenisation solutions have demonstrated transparent and verifiable ways of token issuing, the pitfalls — including the complicated implementation and other risks — limit their acceptance. New centralised tokenised alternatives like CDCBTC and 21BTC may capture market share by offering enhanced transparency and security, as well as wider acceptance.

For example, 21BTC saw its total supply increase to 113.42 between its debut in May through November. Moreover, CDCBTC has demonstrated a higher level of security and transparency by securing its BTC reserves with a custody solution that complies with Service Organisation Control (SOC) 2 Type II standards, offering Proof of Reserves (PoR) on the roadmap. All of the above enhancements make CDCBTC more competitive than WBTC and other alternatives to maintain the BTC peg and secure users’ funds.

Read the full report: Tokenised BTC

Interested to know more? Access exclusive reports by signing up as a Private member, joining our Crypto.com Exchange VIP Programme, or collecting a Loaded Lions NFT.

Authors

Crypto.com Research and Insights team

Get the latest market, DeFi & NFT updates delivered to your inbox:

Be the first to hear about new insights: