DeFi is coming to Bitcoin. Here's how it will work (Part III)
Summarizing the sBTC white paper, with a focus on risks and similar projects
For the past decade, technologists have been working to solve a "holy grail" problem in Bitcoin, often referred to as the Bitcoin peg-out problem.
Solving the Bitcoin peg-out problem in a fully decentralized manner will further unlock DeFi on Bitcoin.
sBTC aims to solve this problem.
This post is the third and final post in a series to help make the sBTC white paper more accessible. Read Part I here and Part II here.
Notes: This is a summary. Please refer to the official white paper for the most detailed representation. This is not financial advice.
Part I and Part II of the white paper summary covered the opportunity of Bitcoin Layers, sBTC basics, and sBTC design details.
This post covers sBTC risk assumptions and an overview of other Bitcoin derivatives.
Let’s start with the risks.
sBTC is not BTC
BTC is in a class of its own, especially from a security perspective. As such, sBTC users should know that there are risks when moving Bitcoin from the base layer to another Bitcoin layer.
Here are the top 3 risks of sBTC.
1). 71% of Stackers could collude to steal from the Bitcoin L1 Wallet
To reiterate from Part II:
The main safety assumption in the design of sBTC is that the economically rational option for stackers is to always fulfill the peg, given they stand to lose a lot more money than they can make by acting maliciously.
sBTC’s main risk is that this safety assumption fails and a super majority of Stackers (71%) steal from the Bitcoin wallet on Bitcoin’s Layer 1.
This is possible but unlikely (the design details are covered at length in Part II). In theory, Stackers could steal from the Bitcoin wallet if they:
Forfeit their STX capital
Forfeit their BTC rewards from Stacking
Coordinate 71% of Stackers to steal from the BTC wallet
In addition to the economic incentive to fulfill the peg (and not steal BTC), the decentralization of the Stacks network helps with this security risk — it would be difficult to convince hundreds (and in the future more) independent entities to act against their economic self-interest.
2). Bitcoin L1 Miners 51% attack
In theory, Bitcoin L1 miners could censor stacking operations (block specific Stacks transactions) with a 51% attack and steal BTC from the Bitcoin wallet.
To do this, Bitcoin miners would have to:
51% attack the Bitcoin L1 for months
Purchase a large % of STX liquid supply
This is unlikely because a 51% attack on the Bitcoin L1 has never been successfully attacked for days (let alone months).
3). sBTC is written in Clarity language
Clarity is more expressive than Bitcoin script, so sBTC contract code is more complex than Bitcoin script contacts.
Clarity is secure but relatively less secure than Bitcoin.
Comparing sBTC to federated derivatives
As noted in Part I, there are already existing Bitcoin derivatives in the market. The core difference between sBTC and other derivatives is the decentralization enabled by Stacks.
sBTC has an open membership set of signatories, rather than a federated membership. An open membership means any individual or entity can participate in the network, without permission.
In contrast, in a federated derivative model, derivate BTC users rely on a federation (or group) of members to maintain the peg. The federated members maintain the peg based on reputational risk rather than economic risk.
In the Stacks model, the open membership set of signatories are economically incentivized (they make more money maintaining the peg) rather than only reputationally incentivized.
Without Stacks (or a similar Bitcoin layer), only a federated model is possible.
The STX Token is Necessary
The Bitcoin community is often critical of introducing new tokens other than Bitcoin (and often for good reason!).
However, the STX token creates the opportunity for a decentralized, economically incentivized Bitcoin peg rather than a trusted, federated model.
As the white paper states, “We believe that decentralized and trustless systems are far superior in the long-term over federated designs…”
Comparing sBTC to similar projects
The white paper compares sBTC to other Bitcoin derivative projects. In summary, sBTC is different than other Bitcoin derivatives due to the following attributes (along with many others):
Open membership peg-outs via Stacks (rather than federated, trusted peg-outs)
Bitcoin finality (rather than Ethereum or another chain finality)
Peg-out requests that happen on the Bitcoin L1 (rather than Ethereum)
150 Bitcoin Block or 24-hour peg-out time (rather than months)
Two-way peg (rather than a one-way peg)
No need to modify the Bitcoin L1 (sBTC is built on Stacks)
sBTC unlocks hundreds of billions of latent Bitcoin capital
There are hundreds of billions of dollars of latent Bitcoin capital. In addition, the Ethereum ecosystem did the hard work of proving that there is demand for DeFi.
In the current state, Bitcoin holders cannot move their BTC in and out of smart contracts running on Bitcoin layers in a fully decentralized manner. Without smart contracts, DeFi on Bitcoin is not possible.
sBTC aims to solve this. sBTC is a 1:1 Bitcoin-backed asset on the Stacks Bitcoin L2.
But unlike other 1:1 Bitcoin-backed assets with trusted, federated parties, sBTC, “has economic security through an open-membership and dynamic set of signatories.” In addition, sBTC users do not pay fees when moving BTC in and out of the base layer.
sBTC works to bring us closer to an ideal Bitcoin layer — a layer that will enable smart contracts on Bitcoin and unlock Bitcoin DeFi.