Decentralized finance (DeFi) has been providing users with tools to let them control their funds and truly become their own banks. However, the assets driving this revolution mainly exist on the blockchain, and historically, these networks have not been easy to communicate with each other. This creates real obstacles and liquidity problems for many applications that try to revolutionize finance. The new solution may pave the way for better “cross-chain composability”, which means that almost all users who hold decentralized assets can easily use it as collateral to participate in all Decentralized applications (DApps) in the network. One of the first assets many people pay attention to is Bitcoin, which is still the king (the most commonly used cryptocurrency).
Although many unique DeFi applications have been released or are being developed, all of these applications are actually running on a specific blockchain. For example, Ethereum and EOS are popular choices, but there are several others. Currently, Ethereum DApps need to use Ethereum or Ethereum tokens for transactions. EOS DApps must insist on using EOS and so on, because this is the only asset of network design. Although the early iterations of these services have achieved remarkable success, it is clear that if any asset can be seamlessly transferred to wherever it is needed, regardless of the native blockchain, everything will become smoother, especially For end users. This is also known as “interoperability”, and many people think that in the future all chains and DApps can easily transfer value between each other. At present, most protocols are effectively isolated, but if implemented properly, the value of all these networks can become “unrestricted.”
Usually, the solution to this problem is to create a protocol that can accurately and quickly transfer value between different blockchains. This is easier said than done, but there have been many studies that have put forward a trusted method to do this. Several different methods have been explored, including “atomic exchange”, “Wrapped Bitcoin” (WBTC) and “pToken”. Although the overall goal is to enable almost any chain to interact with any other chain, keep in mind that many people want to see Bitcoin become frictionless and able to migrate to other networks. If there are no obstacles preventing the most popular DApps from using bitcoin, then the huge bitcoin market value may bring miracles to the DeFi ecosystem. The solutions just mentioned all use different methods, and we will now introduce them one by one.
We will start with the aforementioned “atomic exchange”. This process involves using a specific type of smart contract (called a hash time lock contract, HTLC) to transfer value across the network. In this system, both parties (one in each blockchain) effectively agreed to make a predetermined transfer between the two networks, and the contract ensures that the transaction is not executed until both parties meet their conditions. The “timelock” element indicates that if the contract is not completed at a specific time, the contract is terminated. The entire protocol ensures the exact value of creating assets from one blockchain and deleting them from another, thereby “converting” one asset to another.
However, the current atomic exchange has some limitations. One is that the process is still quite technical, and most users are not easily accessible. However, the biggest problem may be that both blockchains must have the same hash algorithm and support HTLC. Although many popular tokens do share algorithms, such as Bitcoin’s SHA-256, it is still not universal. Considering that the goal is to integrate Bitcoin into the DeFi solution, this creates a problem. Neither Ethereum nor EOS (the most popular financial DApp platform) share this algorithm, so this feature is not allowed.
Another solution to avoid this limitation is called WBTC. WBTC is a token linked to Bitcoin, but exists on another network. In order to create this new asset, a specific number of tokens need to be sent to, and then the custodian mints an equivalent token through a smart contract for use in other networks. To reverse the process and redeem bitcoin, users must subsequently sign a “destroy” contract, which is basically the opposite of the casting process, in which the token is returned to the custodian, and bitcoin is sent back to the original user.
The disadvantage is that currently, Ethereum-based WBTC is the only major product available. The Tezos version has also been launched. In theory, other blockchains can also implement the same model, but these types of development may take some time. Ethereum does provide a variety of DApps, so this is a step in the right direction. This at least allows Bitcoin holders to participate in DeFi without having to directly sell Bitcoin to enter the new network, but there is still not enough versatility here to make the answer “one size fits all”. The most important thing is that the WBTC system is centralized. Many people believe that trusting third-party custodians violates the DeFi concept, so I hope to see a more trustless solution.
pTokens tries to find a way to frictionless liquidity. pToken was originally developed by Provable Things, hoping to further develop by making each blockchain compatible with each other. What makes this possible is called the “Trusted Execution Environment” (TEE), which is basically a server that interacts with the two blockchains you want to transfer between. TEE is actually the custodian of the WBTC system and can be set up so that it can handle the exchange between any two chains in a fully auditable manner. The pToken white paper writes:
Generally, TEE runs an operating system that takes up very little space. This operating system provides the smallest interface to the main operating system running on the device. This small footprint reduces the potential attack surface of TEE. Because of this, TEE can run applications with high security requirements, such as key management, biometric authentication, secure payment processing, and DRM.
So far, only the pBTC token has been implemented, but plans such as pLTC, pUSDT, pDAI, and pTRON are already under implementation. Usually, these tokens are designed for Ethereum and EOS, because they are the places where these tokens are most needed, but as time passes, this technology can be applied to almost any blockchain.
Equilibrium is a project that attempts to use pTokens to simplify DeFi. Its system allows users to provide encrypted collateral to cast EOSDT, which is a decentralized stable token that can be used to interact with any DApp provided by the platform. In its first iteration, only EOS was supported for mortgages, but recently, Bitcoin has also been integrated into the system. This means that anyone holding Bitcoin can easily transfer their value to EOSDT, participate in any DApp they choose, and can even exchange it back to Bitcoin at any time. This is the closest we have seen to frictionless fluidity, and many people claim that this fluidity is critical to the wider adoption of Defi. Equilibrium announced that by using Bitcoin, they have been able to increase the EOSDT issuance limit by $ 100 million. Considering that there are other projects that need to be mortgaged, this may only be the beginning of a larger liquidity pool.
With the function of pTokens, there is no limit in theory. As more and more assets are supported, users will find it easier to participate in the DeFi application. Hopefully this will encourage more interoperability, because any project that does not support cross-chain will start to look outdated. This should also continue to enhance the user experience, because more of the technology described here will happen behind the scenes and should be effective from the perspective of outsiders.
Although much work remains to be done, significant progress has been made. So far, Bitcoin is still the most popular asset in the entire DeFi field, and it is almost certain that being able to use Bitcoin itself is crucial for subsequent wider adoption. If these projects can continue to advance and further develop to the point that almost any asset can be seamlessly transferred across chains, then one of the biggest obstacles to making this space user-friendly will be eliminated. . From the current situation, the future looks very optimistic.
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