Bitcoin is the most popular cryptocurrency on the planet, and as such it has become central to the industry, which spans many blockchains.
But Bitcoin as a transactable asset has its limits. Although it hosts the most valuable coin, the Bitcoin blockchain is slow to adopt new features, and executing smaller transactions is slow and often costly.
To solve these drawbacks and allow investors on different blockchains to use and leverage Bitcoin, the Threshold Network, backed by Threshold DAO, created the first “tokenized” version of Bitcoin, tBTC, which launched Tuesday on the Solana blockchain.
But what is a tokenized version of a cryptocurrency, and what are the advantages of tBTC that give it the potential to level up DeFi on Solana? Matt Luongo and Maclane Wilkison, two key architects of the tBTC protocol, are here to explain.
You can put native Bitcoin in a hardware wallet or in a software wallet, or send it to someone, Luongo told Fortune, but it’s limited in how it can be used by smart contracts, even with the Lightning Network, a layer-2 protocol built on top of the Bitcoin network to expedite smaller transactions.
When someone mints tBTC on Solana, they send Bitcoin to be “wrapped,” which involves a process of decentralized review. The crypto is held in custody in a wallet that is validated by 51 of 100 people operating “nodes” on the Threshold Network that review and agree the crypto you’ve sent is correct and authentic.
You can then mint the same number of Bitcoin that you wrapped, but in tBTC, which can be used on the Solana blockchain. The tBTC, therefore, serves as a receipt that allows you to prove you have a certain number of Bitcoin. If you want your Bitcoin back, simply trade for it with tBTC. After 51 of 100 validators sign off, you can claim your original Bitcoin.
“It’s not a single party going bankrupt and you can’t get your money, or a single party walking off—51 people have to have tried to actively be malicious to prevent you from getting your money back when you want it,” Luongo explained.
The original cryptocurrency, Bitcoin, remains the hardest to use, added Luongo, also CEO of Thesis, the venture studio behind the Threshold Network.
“Bitcoin by itself is not that useful—Lightning has been limited,” Luongo said. “Tools like Solana, and like some of these other layer-2s in the ecosystem, are alternatives to Lightning. They’re alternatives to scaling Bitcoin.”
If you want to take out a loan against your Bitcoin, you often have to turn to centralized lenders, like BlockFi, which filed for bankruptcy in November. This puts your crypto at risk. With tBTC, investors can take out loans against Bitcoin on the Solana blockchain while avoiding the limitations of the Bitcoin Network and the risk of using a centralized loan platform.
“What’s cool about tBTC is, we’re saying okay, if you have Bitcoin, you can go to Solana and you can get USD loans,” Luongo said. “You can start earning yield on your Bitcoin, and that’s something that a lot of holders just have not had access to at all.”
Wilkison, CEO of the crypto infrastructure company Nucypher, added that other uses range from loaning out Bitcoin to others to trading it on decentralized exchanges to using it as a liquidity token.
There are ways to tokenize Bitcoin that are more centralized. For instance, Wrapped Bitcoin, or wBTC, allows users to create a tokenized version of Bitcoin on the Ethereum network. Luongo pointed out that he believes wBTC is less safe than tBTC because it involves crypto being held by a single custodian instead of in a wallet controlled by a series of validators like with tBTC.
Apart from Solana, Threshold has launched tBTC on other blockchains—Ethereum, Arbitrum, Optimism, and Polygon. The current supply of tBTC is about $29 million across all blockchains, according to Dune, compared with $4.2 billion of wBTC.
Solana has been rebuilding its credibility after taking a hit last year because of associations with Sam Bankman-Fried’s FTX and Alameda Research, which declared bankruptcy in November. But Luongo said he believes on-chain DeFi is making a comeback.
“I think tBTC is going to be the beginning of a renaissance for DeFi on Solana,” he added.
Alameda had been a big source of Bitcoin liquidity for the Solana blockchain, but tBTC may be able to help fill that gap, according to Wilkison, who added: “One important piece is bringing back Bitcoin to Solana, but another is bringing it back in a way that’s not exposed to those types of centralized risks.”
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