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Token Daily Newsletter #47

 

The bridge between BTC and ETH

By Mohamed Fouda

Since tBTC's zkSync Torch and tBTC's partnership with Celo are making rounds on the internet today, here's our previous issue on the significance of tBTC, how it works, and what it likely means for the future of crypto: 

tBTC

Building a trustless, intermediary-less bridge between Bitcoin and Ethereum was regarded as a pipe dream for quite some time, That is, until tBTC finally launched on mainnet, making it possible to mint tBTC directly on the Ethereum blockchain in a trustless manner. You can read more about the mechanics of how this works, and its value to the ecosystem, in one of our previous newsletters.



The Coupling Effect

In physics, there's a phenomenon known as the coupling effect which can be observed when two systems start interacting closely with each other.

With the coupling effect, it's common to see new dynamics emerge that were not possible in either system before. In some instances, the coupling results in a complete transfer of energy, or value, from one system to the other. 

tBTC, as the first trust-minimized bridge between Bitcoin and Ethereum, could act as a coupling medium between the two large projects. Though it's impossible to predict exactly how this will play out, here are several directional bets:

How could tBTC affect Ethereum?

tBTC is not the first synthetic BTC on Ethereum, but it is the first to have strong decentralization guarantees. Anyone can contribute collateral to mint tBTC and anyone can become a signer to maintain and secure the bridge linking Bitcoin and Ethereum. The guarantees can potentially encourage more BTC hodlers to put their held BTC "to work" by minting tBTC and using it to generate yield in DeFi.

Previously, collateral used in DeFi was largely ETH because other ERC-20 tokens or centrally-issued stablecoins had a much smaller cap than ETH. This, in turn, instated a fundamental limit on the growth of DeFi because there were limits on the amount of collateral that could be used.

If tBTC succeeds in bringing significant BTC liquidity into DeFi,  DeFi could grow significantly since Bitcoin's market cap is 8x larger than Ethereum's at time of writing. The hope is that this activity would then be reflected in ETH's price. ETH price is one of the most important parameters for the network and DeFi security. 

Another benefit Ethereum could glean from tBTC is enforcement of its interoperability capabilities with other chains.

Risks
These benefits, however, don't come without risks. One of the possible long-term risks, albeit unlikely for reasons we discuss below, is that BTC might replace ETH as the main collateral for DeFi protocols. In this scenario, ETH could slowly start to lose value, and the Ethereum network would just become a sidechain for Bitcoin. 

This could eventually cause all value currently stored in ETH to flow back to BTC along with DeFi protocols that can operate either on BTC-dominated sidechains or on top of LN. This scenario is less likely because of both the crypto-economic design of tBTC and the role ETH plays in the security of the DeFi and the Ethereum network as a whole.

How could tBTC affect Bitcoin?

For the Bitcoin network, tBTC has an overall positive effect. BTC has so far demonstrated strong characteristics as a SoV and as a medium for large-value payments. However, BTC's properties as a financial asset, e.g. as collateral for loans, have largely depended on centralized entities acting as BTC banks. This doesn't necessarily align with Bitcoin's philosophy. tBTC could generally improve BTC capabilities as a financial asset by increasing BTC utility and, perhaps, value. 

The only major risk to Bitcoin would be if tBTC facilitated too much bitcoin to move to the Ethereum network. This would cost Bitcoin a significant portion of settlement fees that could eventually contribute to weakened network security. It is worth mentioning that this risk is not specific to tBTC but exists for every bitcoin off-chain scaling solution including the Lightning Network and sidechains. 

.....

It is still a bit too early to know exactly which of the discussed scenarios will play out or which forces will push the result in one direction or another. Nevertheless, the tBTC project is likely to play an important role in the crypto ecosystem.

We expect to see competing projects go a step further and try to build a two-way bridge between Bitcoin and Ethereum instead of the current tBTC one-way bridge.  
 

      
 

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Long Reads


⚡ Bitcoin active addresses (over a 200 day moving average) are at an all time high. This means that the 200-day rolling average of bitcoin addresses that move bitcoin to-and-from each other is the highest it’s been over the last decade. This is significant since there is only a fraction of press coverage on bitcoin today than there was in 2017. In spite of minimal mainstream attention, and with no sharp price rally to explain the momentum, these numbers are illustrative of healthy, substantive growth in bitcoin.
 



 

U.S. Patent No. 7110538 expired last week. The patent in question is a method for accelerating cryptographic operations on elliptic curves. This is important because it can be used in code that enables bitcoin transactions to be validated up to ~20% faster. Though the optimization was integrated in 2013, it had been disabled by default for 7 years due to the patent. This is only one of many data points that highlight the importance of initiatives like Square’s Crypto Open Patent Alliance which allows developers to focus on innovating software while avoiding unnecessary exposure to litigation.

🔹 Escaping the Dark Forest Samczsun describes the story of how he and a group of developers worked overnight to prevent the exploitation of a smart contract bug that would have cost almost $10M.  

📌 A Letter from the Mina Community to R3 Coda rebrands to Mina after a trademark violation lawsuit from R3. Our staking arm TD Labs is an active contributor to the project ecosystem, and we look forward to the project's mainnet launch before the end of the year. 

📌 BitMEX Executives Charged with Violation of The Bank Secrecy Act The charges leveraged against BitMEX have been a long time coming largely due to lack of KYC. Though the company did implement some verification in April this year, it was too little, too late. The indictment and the arrest of a BitMEX co-founder this morning marks an unprecedented action against one of the largest companies in the space. 

 

      

Disclosure: Volt Capital and/or its partners may have exposure to some of the cryptocurrencies mentioned in this newsletter.

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