Since the concept of decentralized finance first took off in the crypto industry back in 2020, the vast majority of protocols are based on Ethereum. Bitcoin is nowhere to be seen.
The blockchain that underpins the world’s most valuable cryptocurrency doesn’t support smart contracts, which makes it all but impossible to use native BTC in DeFi. Wrapped versions of Bitcoin, such as WBTC, have emerged to try and change that, but concerns around centralization have prevented its wider adoption. That’s why there’s a lot of excitement about Flare Network’s FAssets protocol, which provides a mechanism for users to bridge Bitcoin to other networks in a non-custodial way.
With FAssets, Flare has made it possible to bridge Bitcoin to multiple blockchains, including the Flare Network and Ethereum, where it has much greater utility. Users will no longer have to risk depositing their BTC with a custodian to mint a wrapped Bitcoin asset. Instead, they can leverage the security of the Flare Network to obtain FBTC and put their Bitcoin holdings to work.
The Limitations Of Bitcoin
As the world’s original cryptocurrency, Bitcoin is not just the most valuable, but also seen as the world’s most secure and decentralized digital asset. Its creator, Satoshi Nakamoto, put a lot of effort into making sure of this, sacrificing its speed and programmability to do so.
The underlying script that powers Bitcoin was intentionally made simple so as to ensure its security and minimize its attack surface. Because it’s based on such a simple scripting language, Bitcoin cannot support smart contracts. It was primarily designed as a currency, for use in peer-to-peer transactions only, to ensure it can’t be compromised in any way.
The scalability of Bitcoin is limited by its comparably slow block time of about 10 minutes, which is the primary reason for its notoriously slow transaction speeds. This was intentional, and is seen as critical for ensuring Bitcoin’s security and decentralization.
These design choices mean that Bitcoin has few applications aside from payments. Instead, it has become seen as a kind of “store of value” or digital gold, and that has resulted in a lot of idle capital being locked up in user’s wallets, with no easy way to leverage it in investments.
Bridging Bitcoin
The way to use Bitcoin in DeFi is to “bridge” it to a network that does support smart contracts, and the most popular mechanism for doing this is WBTC.
Wrapped Bitcoin or WBTC is a clever solution to Bitcoin’s lack of smart contract compatibility. It’s an ERC-20 token that lives on Ethereum, and it’s backed on a 1:1 basis for real BTC.
The WBTC asset was created by BitGo, Kyber and Ren and first minted in January 2019, becoming the first token to make Bitcoin compatible with Ethereum. By depositing BTC to mint WBTC, users can engage with Ethereum’s extensive DeFi ecosystem.
Bitcoin users aren’t limited to WBTC. Other options include Binance’s BTCB, Coinbase’s cbBTC and Merlin Chain’s mBTC, which provide a way to bring BTC to networks such as the BNB Smart Chain, Base and Merlin Chain.
With a market capitalization of around $10.2 billion as of October 2024, it’s clear that WBTC has emerged as a popular solution for those looking to get more utility out of their Bitcoin holdings. Yet it still represents just a fraction of native Bitcoin’s $1.3 trillion market cap, meaning that the vast majority of BTC holdings remain an idle asset.
One reason for this is the need for trust when minting WBTC. In an attempt to try and make the Wrapped Bitcoin protocol more decentralized, BitGo handed over control to a decentralized autonomous organization or DAO, called the WBTC DAO. It consists of 16 stakeholders, which collaborate on matters of governance. Moreover, the wider WBTC ecosystem has more than 40 participants, including the DAO members, various merchants, wallets and exchange platforms.
However, this doesn’t mask the fact that minting WBTC still requires trust. It’s minted by a custodian, BitGo, which holds all of the native BTC in a secure wallet. BitGo works with a number of merchants, such as CoinList, who send BTC to the custodian and receive WBTC on a 1:1 basis in return.
DeFi users can then buy WBTC from these merchants, who will insist on conducting KYC checks to verify their identities, further eroding one of the core principles of Bitcoin, that of anonymity.
Cutting Out The Custodians
FAssets, on the other hand, eliminates the need for custodians, paving the way for users to mint wrapped BTC in an entirely trustless way by relying on the security of the Flare Network.
FAssets is aimed at digital tokens that do not have built-in smart contract functionalities, such as BTC, XRP and DOGE, and makes it possible to use them within Flare’s secure smart contract environment and used in DeFi or moved to other blockchain networks.
The big difference between FBTC and other wrapped Bitcoin assets is that the bridging process is completely trustless. FAssets eliminates the need to deposit any crypto with a centralized custodian, paving the way for BTC and other non-smart contract tokens to be used in the broader DeFi ecosystem. Bitcoin users can take advantage of FAssets protocol to engage in decentralized lending, borrowing, yield farming, margin trading and various other use cases, vastly expanding its utility.
There are four main participants in the FAssets protocol, and each of them plays a crucial part in ensuring that everything works in a fluid and secure way.
First is the Minter/Redeemer. The Minter is the user who wants to create a FAsset using their native BTC, XRP or DOGE tokens. When exchanging their FAssets back into the native token, the user is instead known as the Redeemer.
The second participant is the Agent, who assists the Minters and Redeemers in their request to create or return their FAssets. The Agents are required to lock up the collateral necessary to mint FAssets. A key aspect of the system is that it requires each FAsset minted to be overcollateralized, with a minimum of 200%, so that the protocol always has enough reserves to compensate users. So to mint 1 FBTC, a deposit of 2 BTC is required.
Third is the Liquidator, who is tasked with ensuring that Agents always have sufficient collateral locked up in the protocol to support the FAssets they have minted. Should an Agent’s collateral value become too low, it’s the Liquidator’s job to restore equilibrium by redeeming FAssets.
The final role is that of the Challenger, who is tasked with looking out for Agents that try to abuse the protocol. If they spot any misuse, they can provide proof to the protocol and earn a reward, with the Agent being punished by losing their collateral.
Flare Network’s State Connector and Flare Time Series Oracle protocols serve as the backbone of FAssets. The State Connector helps to verify that required actions have been performed on a different network, while the FTSO delivers the decentralized price feeds for each of the assets involved.
Why Are FAssets Better?
The FAssets protocol provides significant advantages over WBTC’s custodian model, with the major one being that the process is fully decentralized. Each FAsset that’s minted is secured by the network’s native token, FLR, or ETH or stablecoins, which makes the protocol much less susceptible to fraud and theft. In contrast, WBTC relies on the Ethereum network, the WBTC consortium and, most crucially, BitGo itself.
The FAssets can then be transferred to various other blockchains, meaning they are more interoperable than WBTC, which can only be used on ERC-20 chains. FAssets are also more scalable, as the protocol can be used to mint a large variety of different assets, including FBTC.
Besides these fundamental benefits, users have greater incentive to use FAssets, as they can earn additional rewards in the shape of FLR tokens. The simple act of holding FAssets entitles users to receive regular payouts of FLR tokens from Flare Network’s cross-chain incentives pool.
Those FLR tokens are also eligible for monthly airdrops, and they can also be delegated to secure the FTSO, or staked as collateral for FAssets, so users can earn even more rewards from the underlying assets, such as BTC, XRP or DOGE. The system has been designed in such a way that, as demand for FAssets increases, more FLR will be required as collateral. As such, demand for FLR itself will also increase, helping to boost its value.
WBTC, in contrast, provides none of these additional benefits. Users simply receive WBTC, and the onus is entirely on them to utilize it in DeFi to obtain rewards.
A Brighter Future For Bitcoin
The open beta of FAssets launched on June 4, 2024 and saw a lot of interest, with more than 39 million TestXRP minted on Flare Network by 32,000 participants.
As the FAssets protocol gears up for its mainnet launch, the prospect of being able to mint FBTC in an entirely trustless way holds a lot of promise. Bitcoin currently accounts for more than 58% of the entire value locked in the crypto ecosystem, yet the vast majority of BTC in circulation remains idle, sitting in user’s wallets for a rainy day.
Once FAssets goes live, it will provide a way for Bitcoin users to participate in the DeFi ecosystem in an entirely trustless manner, giving them access to greater utility without sacrificing decentralization or control.
