Bitcoin is going ethereum after a number of projects teamed up to turn the oldest decentralized crypto into an ERC20 eth token.
“This effort will be both led and governed by the community from the start through a Decentralized Autonomous Organization (DAO) comprised of reputable projects in the blockchain space.
DAO members will publicly audit the WBTC tokens to make sure that the balances in the custodian wallet match the balances in the smart contract,” Loi Luu of KyberNetwork says.
The way this works is fairly simple. You give your bitcoin to an authorized merchant after going through AML/KYC, the merchant gives your bitcoin to a custodian and gives you a Wrapped Bitcoin (WBTC) in return.
The custodian in this case will be BitGo according to Igor Khmel, founder of Bankex, who says:
“BitGo is the primary custodian in charge of holding a reserve of bitcoins to back all minted WBTC tokens in circulation on the ethereum blockchain.”
There’s thus a great degree of trust with this being a fairly centralized approach, but one advantage over fiat pegs in this case is that it can be fully transparent.
Everyone can see what amount is held in the bitcoin address, just as everyone can see what amount is held in the smart contract.
So there would be no question of whether it is fully backed, but there would probably be other questions. Such as what happens if the bitcoin’s are stolen?
BitGo can carry insurance, but that becomes a bit expensive for sums over $250,000. With the biggest question being what happens if they don’t give you back the bitcoin.
“Contractually” they have to, and it is probable only arbitragers would bother to go through the reverse process of turning a WBTC into a BTC, but there’s counterparty risk.
KyberNetwork will bootstrap the token, stating they “will provide initial liquidity for WBTC tokens through our reserve, so that it can be exchanged like any other supported ERC20 token on our protocol.”
Meaning that buying a bitcoin on a decentralized exchange can now soon be very easy. So instead of holding a BTC, you can hold a WBTC, with Kyber and other merchants handling the peg.
You can then use that WBTC on dapps and other tokens, with decentralized exchanges (dex) perhaps getting WBTC trading pairs so that traders can play the ratio on dexes.
Meaning that there probably are some uses, but another way this could have been done is to copy DAI’s smart contracts and peg it to BTC rather than USD.
That might have been more interesting and perhaps more fun, avoiding a potential concentration of coins into modern banks by placing them into another modern bank of sorts, a smart contract.
That decentralized approach may have had other interesting implications as well, perhaps even tax beneficial implications, while avoiding potential complications.
This is the latest in a trend of sorts however towards stablecoins, with it now expanding beyond the dollar to crypto pegs.
Most of it is running on ethereum, where you can now have gold, dollars, and soon bitcoin as well as the many tokens.