05 Apr 2023
sBTC: What You Need to Know
sBTC enables DeFi on Bitcoin in a trustless manner - read on to learn what this means for Stacks and Bitcoin.
There are a lot of terms and new concepts to learn as you become more active in the crypto space. Words like Stacks, Bitcoin, crypto, layers, web3, DeFi, etc make this all seem daunting to the newcomer. While it is true that crypto does have a steep learning curve, this is becoming less true over time.
When I first started in crypto back in 2017 the amount of users and sources of information were just not as plentiful. This is why I am so thrilled to not only have an ecosystem like Flagship at my disposal, but to be able to help contribute to more user adoption in this space! This is the stuff that dreams are made of.
That said, I digress. Today I want to introduce you to a new paradigm, essentially. In one of my previous articles, I laid the groundwork for this piece here. I chose the word paradigm because this truly is a game changer for Stacks and Bitcoin. Before we start, let's review some terms:
- Bitcoin - The king of crypto, the safest and most secure blockchain to this day. Digital money that is decentralized, meaning that it is not controlled by any government or company.
- Stacks - A blockchain that exists separately from Bitcoin, but is designed to work with Bitcoin. Stacks brings functionality to Bitcoin, that doesn’t exist on Bitcoin itself. This allows developers to build apps and services that use Bitcoin as their foundation.
- Layer - A separate blockchain network that operates parallel to the main blockchain, but offers additional benefits/functionality.
- DeFi - AKA Decentralized Finance, an alternative to the traditional financial system. DeFi allows anyone to access this worldwide marketplace regardless of background or financial status.
- Federated - Relying on a trusted entity/group to hold, in this case, Bitcoin in custody, aka centralized.
- Trustless - The ability to execute transactions or operate a system without use of a third party, aka decentralized.
So now, without further ado, let's get to it!
Bitcoin is great peer-to-peer money. Value can be transacted without relying on any middle man. In this way, Bitcoin is a digital currency. That said, you might be wondering why when we discuss DeFi, it is typically mentioned in the context of Ethereum. This is because Bitcoin does not have smart contract functionality, and this is where Stacks comes in.
Up until now using Bitcoin in a DeFi application has had to occur in a federated way. So while a product like wBTC (wrapped Bitcoin) can be found on the Ethereum blockchain, it is ultimately centralized. sBTC on the other hand is trustless, meaning it's decentralized. Seeing as though much of the value that Bitcoin brings to the table is its decentralization, clearly using Bitcoin in smart contract applications is preferable.
Using Bitcoin, decentralized, and in a smart contract application has been described as a “Holy Grail '' problem for builders in the past. Stacks has solved this problem, and it is known as sBTC. Stacks has accomplished this by creating a “peg in and peg out” system between the Bitcoin and Stacks layer. This is accomplished by means of an open membership and dynamic set of signatories in Stacks. Stackers are economically incentivized to use the POX (proof of transfer) consensus mechanism to move Bitcoin to and from Stacks without paying any fees or trusting any centralized actors.
Essentially, sBTC is created by a smart contract locking a certain amount of Bitcoin on the Bitcoin blockchain, and then on the Stacks blockchain a corresponding amount of sBTC is created. Stacks smart contracts can then use this sBTC in any application, and it can be converted back to Bitcoin at any time.
If you are reading this on the day of publication, Bitcoin has a market cap in excess of $540 billion USD, where Etheruem’s market cap is roughly half of that. At any given time, DeFi is worth approximately 20% of Ethereum’s total value (it’s worth considering how much of ETHs market value is determined by NFTs as well…but this is for another day). So imagine a modest 20% increase in Bitcoin’s value, and this is just the beginning of what sBTC represents for Bitcoin and Stacks.
DeFi on Bitcoin is coming, and sBTC makes this possible in a trustless manner. In addition to the functionality sBTC provides to Bitcoin, it also makes STX, the native token for Stacks, even more valuable and indispensable to the Bitcoin ecosystem.
While sBTC is a major value add for the Stacks ecosystem, we haven’t even gotten into the Nakamoto Upgrade yet, but this too is for another day.
Thank you so much for reading, I hope you enjoyed the article. Feel free to touch base with me in our Flagship Discord and Twitter. As your Stacks Captain here at Flagship I look forward to keeping you ahead of the curve in this rapidly moving space. More articles incoming, and you aren’t going to want to miss any of them! Until next time, Captain Jack signing off.
Disclaimer: Nothing on this site should be construed as a financial investment recommendation. It’s important to understand that investing is a high-risk activity. Investments expose money to potential loss.