In the world of cryptocurrencies, Bitcoin is king. It holds more than 50% of the market capitalization of the industry and is widely regarded as the most robust and decentralized blockchain.

In the world of cryptocurrencies, Bitcoin is king.

However, despite Bitcoin’s dominance, there are limited options for Bitcoin holders to leverage Bitcoin’s liquidity in applications. The most common way to participate in Bitcoin DeFi today involves tokenizing BTC and moving that synthetic asset to another chain via a bridge.

Wrapped Bitcoin (WBTC) is the most popular tokenized Bitcoin. Today, 0.7% of Bitcoin is locked in DeFi through WBTC. While WBTC has seen promising product-market fit, it comes with trade-offs in terms of speed, cost and centralization, making it a less than perfect solution. sBTC is a new design for a programmable, 1:1 Bitcoin-backed asset, powered by Stacks, slated to launch in December 2024.

There is a massive opportunity for non-custodial wrapped Bitcoin to unlock BTC’s $1.5T+ of latent capital—even just tapping into 1% of that is a multi-billion-dollar opportunity. That’s the opportunity sBTC is focused on.

So how does sBTC compare to WBTC?

Note: sBTC will be rolled out in phases. Phase 1 of sBTC (launching December 16th) is maintained by 15 elected signers and will allow deposits. Withdrawals will follow in a later phase in February 2025, and a more decentralized sBTC design with an open, rotating signer set will follow after that. This blog mostly describes sBTC in its final phase, but we talk about the gradual decentralization of the phase transitions below in greater detail. You can learn more about the phases of sBTC’s rollout here.

Overview of sBTC vs WBTC‍

What Is WBTC?

WBTC is a digital token that represents Bitcoin on Ethereum and other EVM-compatible blockchains. It is the oldest and most popular tokenized Bitcoin used in DeFi.

WBTC is the oldest and most popular tokenized Bitcoin in DeFi.

As for how it works, WBTC is an ERC-20 token that is pegged 1:1 to Bitcoin, and for every WBTC in circulation, one BTC is held by BitGo and BiT Global, the central custodians for wrapped Bitcoin. To buy/sell WBTC, users go through a network of authorized merchants.

WBTC has brought greater liquidity to decentralized exchanges (DEXs) and financial apps in the Ethereum ecosystem, and it lets users interact with DeFi using their Bitcoin as collateral. Today, there are approximately 147,000 WBTC in circulation, or 0.7% of Bitcoin’s total supply.

What Is sBTC?

sBTC is an upcoming asset that represents Bitcoin on the Stacks network. This design for a trust-minimized, 1:1 Bitcoin-backed asset, is described in detail in the sBTC whitepaper, but at a high level, sBTC makes it possible for anyone to move BTC in and out of Bitcoin layers (and other Web3 ecosystems) in a secure and decentralized way.

sBTC is a new design for a decentralized, 1:1 Bitcoin-backed asset.

sBTC is distinct from WBTC in several ways.

• sBTC has no centralized custodian. Instead sBTC is maintained by smart contracts and an open, decentralized network of validators (called signers).
• All sBTC transactions settle on Bitcoin with 100% Bitcoin finality, meaning sBTC benefits from the full security budget of Bitcoin itself.
• sBTC is more cost efficient than WBTC because there are zero custodian fees associated with wrapping and unwrapping as well as low transaction fees for users to deposit and withdraw BTC.

sBTC is scheduled to begin its mainnet rollout in December 2024.

Protocol Design

The lack of a stateful smart contract system on Bitcoin requires a separate smart-contract-powered blockchain and a means to deposit/withdraw BTC from that second blockchain in order to use Bitcoin in DeFi and other apps. The deposit/withdrawal mechanism is often called a “peg” or a “bridge”, and it must fulfill two primitive functions:

• Deposit: A BTC holder deposits BTC on the Bitcoin chain for an equivalent amount of a tokenized bitcoin asset on the smart contract chain. This process is sometimes called a “peg-in” or “mint.”
• Withdrawal: A tokenized bitcoin asset holder destroys their synthetic asset on the smart contract chain, and receives the equivalent amount of BTC on the Bitcoin chain. This is sometimes called “peg-out” or “burn.”

WBTC and sBTC take two different design approaches to handle those operations.

WBTC: a Custodial Bitcoin Peg

The WBTC peg is maintained by the WBTC DAO and a network of approved merchants. These merchants are the only entities that can request WBTC to be minted/burned. Users purchase WBTC directly from merchants in this network. The merchant verifies the user’s identity, and once approved, the individual sends BTC to the merchant. The merchant in turn sends a corresponding amount of WBTC to the user.

All of the WBTC in circulation is backed 1:1 with BTC, and that BTC is held in custody by BitGo and BiT Global, the primary custodians for WBTC. These custodians are the only entities that can mint new WBTC, and they store deposited BTC assets in cold-storage, multisigs.

The proof of reserves that correspond to the deposited BTC is on-chain, so anyone can verify the 1:1 supply of minted WBTC tokens compared to the BTC stored by BitGo and BiT Global. When an individual wants to “peg-out” or withdraw their BTC, they must send WBTC to an approved merchant who will then “burn” (or destroy) the WBTC tokens and send back the equivalent amount of BTC. The burnt amount is deducted from the merchant’s WBTC on-chain balance, and the overall supply of WBTC is reduced, maintaining the 1:1 peg between BTC and WBTC.

It’s important to understand that WBTC is a custodial asset that is being deployed into non-custodial products. This means that a third party is holding the BTC that backs the WBTC, and the user doesn’t control the underlying asset. This increases counter party risk—the adage “not your keys, not your coins” exists for a reason.

It’s also worth noting that the recent custodial change that added BiT Global as a custodian alongside BitGo has been controversial because BiT Global has associations with Justin Sun, himself a controversial figure in the industry.

sBTC: a Decentralized Bitcoin Peg

Similar to WBTC, sBTC is backed 1:1 to Bitcoin. However, from there the designs diverge. In sBTC, a user deposits BTC to a threshold signature wallet controlled by an open, decentralized network of validators, also known as signers.

This open membership of signers is enabled by Proof of Transfer (PoX), a consensus mechanism unique to Stacks. Rather than having a single or static set of custodians, sBTC will be maintained by a public, open, permissionless network.

To be a signer in the Stacks network, signers must lock up a dynamic threshold of STX tokens in PoX and run a software node that processes sBTC deposits/withdrawals. In exchange for that work, validators earn BTC rewards generated by PoX, incentivizing their participation in the network.

Note: in phase 1 of sBTC’s launch, sBTC will be maintained by a set of 15 signers elected by the community. You can learn more about signer criteria and responsibilities here. The open, rotating set of signers will go live in a later release.

Each time BTC is sent to the sBTC multisig wallet (a deposit operation), an equal number of sBTC are sent to an address of the sender’s choosing. This process happens automatically through smart contracts, as opposed to a series of intermediaries (merchants, custodians). Signers process withdrawal requests (converting sBTC back into BTC) by destroying the requester’s sBTC and transferring BTC to the requester’s Bitcoin address, and thus maintaining the peg.

sBTC’s Connection to Bitcoin

sBTC has a uniquely close connection to Bitcoin, which brings its own value propositions to the bridge. In particular, sBTC can have a higher fidelity to Bitcoin’s state because of two properties:

• Clarity smart contracts have read access to Bitcoin.
• sBTC forks with Bitcoin.

For Ethereum-based tokenized Bitcoin like WBTC, oracles or intermediaries are needed in order to stay up to date in the event of a Bitcoin fork, and that fork or reorg could temporarily disrupt operations or create discrepancies between the price of Bitcoin and WBTC in what’s called “depegging”.

That can’t occur with sBTC. Stacks has a native Bitcoin oracle built into its blockchain, and the sBTC bridge will always fork alongside the Bitcoin chain. sBTC’s proximity to Bitcoin also means that sBTC is secured by 100% Bitcoin finality.

Fees

WBTC

For WBTC, merchants generally charge a flat fee to convert Bitcoin to WBTC and vice versa. This is known as the “wrapping/unwrapping” fee. Additionally, merchants might also require a minimum withdrawal amount. These fees vary by merchant and the total withdrawal amount. Since WBTC is an Ethereum token, any transactions will also include Ethereum gas fees to process the transaction.

sBTC

For sBTC, there is no fee to convert Bitcoin to sBTC and vice versa, which will make sBTC cheaper for users than WBTC. There is no minimum deposit/withdrawal amount for sBTC, but it’s worth noting that there will be a 1,000 BTC cap on sBTC’s initial launch (a cap that will increase over time).

Since sBTC is a Stacks token, any transaction will include typical STX transaction fees to process the transaction on-chain.

Security

WBTC

The security of the WBTC peg is dependent on its custodians BitGo and BiT Global, as well as the merchants and signers participating in the WBTC DAO. This introduces counterparty risk, which is inherent in any transaction that relies on centralized intermediaries. This risk includes participants losing their keys, intermediaries becoming inactive or engaging in malicious coordination, going bankrupt and more.

You can see evidence of this risk in WBTC today. For example, there was an issue where several original signers of the DAO multisig became inactive or lost control of their keys. And with the addition of BiT Global, we’ve seen community pushback at the risk of Justin Sun becoming involved with WBTC, and Coinbase just announced that they will be delisting WBTC in December 2024. Indeed the amount of WBTC bridged has declined by 5% since WBTC’s announcement.

Merchants can pose counterparty risk as well, as was the case when WBTC was trading at a slight discount because two of the largest merchants, Alameda Research and 3 Arrows Capital, filed for bankruptcy and were unable to process new or existing peg-requests. The WBTC peg has since recovered.

sBTC

sBTC is a huge leap forward in the security of Bitcoin pegs because it enables a decentralized design. With custodial peg-outs such as WBTC, there is the counterparty risk described above, concentrated between the custodians BitGo and BiT Global and authorized merchants.

There is no central custodian in the sBTC design. Instead a revolving set of signers maintain the peg and are economically incentivized to do so honestly through BTC rewards for their work.

Unlike other tokenized Bitcoin assets, sBTC is not reliant on a fixed federation or a federation of multisig hardware wallets for its peg-out, designs which post greater counterparty risk. Rather, it has economic security through an open-membership network of signatories, in a manner integrated with the Stacks consensus protocol.

It’s worth noting again that in the initial version of sBTC coming in December, sBTC will not have this permissionless, rotating set of signers. Instead, the sBTC peg will be maintained by a permissioned set of 15 elected signers, similar to how other tokenized Bitcoin assets exist today. As the sBTC protocol grows, more advanced features will get rolled out, including the gradual decentralization of the signer set.

Lastly, in terms of security, sBTC also offers 100% Bitcoin finality meaning that all sBTC transactions are recorded on the Bitcoin mainchain. This makes it very expensive/ difficult to attack or “reorg” sBTC transactions, which may not be true for other tokenized Bitcoin assets depending on what chain they use.

Traction & Use Cases

WBTC

Today WBTC is the most popular form of wrapped Bitcoin assets with over 145,000 minted WBTC (which translates to $13B). That WBTC is held by more than 104,000 addresses, and in fact, more than 50% of all wrapped Bitcoin is WBTC.

Today, you can access WBTC in many different ecosystems, and the network has an impressive roster of partners, including the aforementioned BitGo and BiT Global, as well as Sky (Maker), Uniswap, Loopring, and dozens more.

The primary use case for WBTC is lending and borrowing on DeFi platforms like Maker, Curve, Aave, among others. In addition to lending WBTC or borrowing against it, WBTC holders can also provide liquidity and yield farm with their WBTC to earn rewards and interest on their holdings. So where specifically is WBTC being used? Here’s a breakdown of some of the most popular destinations as of November 27th:

• Aave: 27.8%
• Compound: 7.7%
• Arbitrum: 7.1%
• Sky: 3.2%
• Polygon: 2.6%

Interestingly, given the lack of native Bitcoin bridges, WBTC is also very popular in Bitcoin layers.

sBTC

sBTC hasn’t launched yet, so there are fewer statistics we can point to for traction. However, partner interest in sBTC has been strong, which bodes well for a successful launch. Figment, Luganodes, Kiln, and more have been announced as part of the community-vetted signers for sBTC’s launch. And both the Solana and Aptos ecosystem have expressed interest in bridging sBTC to their networks.

sBTC holders can earn BTC rewards instead of other tokens or points.

As for use cases, the primary use cases for sBTC are similar to those of WBTC. Below are just some of the possibilities of what users will be able to do with sBTC:

• Trustless, Bitcoin-collateralized stablecoin loans
• On-chain, undercollateralized BTC lending
• Trustlessly deploy BTC to earn BTC yield
• BTC DAO treasuries
• sBTC stacking pools

While the actual activities available to holders are similar (lending, borrowing, yield farming), the two key differences are the ability to trustlessly borrow against your BTC and that holders can earn BTC rewards instead of tokens or points on the DeFi platform being used (this is possible because of Stacks’ unique consensus mechanism Proof of Transfer).

Given that Stacks has Bitcoin finality and sBTC is decentralized, we believe sBTC is well positioned to tap into Bitcoin’s potential and attract users who want to put their BTC to productive use without compromising on security.

Conclusion

The unique properties of Stacks, from Proof of Transfer to the Clarity programming language, make Stacks the ideal Bitcoin layer for smart contracts. The STX token is critical to this Bitcoin layer because it provides an economic incentive to enable an open network of miners and signers that maintain the sBTC peg.

All of these properties ensure that Stacks is aligned with the decentralized ethos of Bitcoin, where anyone can participate and actively contribute. Ready to learn more about sBTC?

Disclaimer：

1. This article is reprinted from [hiro]. All copyrights belong to the original author [Elena Giralt]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.