An Intro to tBTC for NuCypherinos

An Intro to tBTC for NuCypherinos

Perhaps the most overlooked aspect of NuCypher's collaboration with Keep is the upcoming launch of tBTC v2.

Bitcoin and DeFi

In crypto, BTC is the king. With a network value of >$1 trillion, BTC is the OG cryptoasset and currently has the most mainstream credibility and institutional interest, largely driven by its successful "digital gold" narrative.

BTC is digital gold with a network value >$1 trillion.

But there's a blossoming of creativity and experimentation happening in other networks, most notably in Ethereum's DeFi ecosystem. Automated market makers (AMMs), flash loans, algorithmic stablecoins, crypto-collateralized stablecoins, liquid staking, insurance protocols, yield aggregators: the pace and scope of financial innovation is stunning, as reflected in the rapid growth in total value locked (TVL).

The growth in DeFi TVL is stunning.

It's logical to think that BTC would be the highest quality collateral available for DeFi. As a censorship-resistant, permissionless digital gold it should play a premier role. And that's true to an extent; currently, there's ~200K BTC on Ethereum in various forms.

Total BTC on Ethereum.

However, the most common "BTC on ETH" method is to custody BTC with a centralized provider who then issues a tokenized version of that BTC on Ethereum (e.g. wBTC). This accounts for nearly all of the BTC on Ethereum today.

But this approach is antithetical to the ethos of the space. Centralized wrapped BTC is permissioned, subject to seizure/censorship, and available only to a select few. If there was a secure, permissionless option, how much larger could the TVL of BTC on Ethereum become?

Enter tBTC.

tBTC, Decentralized BTC on Ethereum

tBTC is a permissionless and secure BTC peg that brings digital gold to DeFi. It is the only decentralized option on the market today.

tBTC replaces the centralized custodian model with a decentralized signer set. Through threshold cryptography and cryptoeconomic incentives, tBTC enables permissionless minting of BTC on Ethereum.

To prove the basic viability of this approach, v1 of tBTC launched last year on the Keep network. It consisted of 3-of-3 signer sets, required signers to significantly overcollateralize with ETH (150% of the BTC value), and imposed high minting costs on users. It is successfully running today with ~1,200 BTC in circulation. However, it will be v2 of tBTC that delivers truly scalable digital gold to DeFi.

tBTC v2

v2 addresses the scaling limitation of v1 (small signer sets, ETH collateralization complexity and opportunity cost, and high minting costs).

It replaces the 3-of-3 signer sets with signer sets of at least 100 independent nodes. It eliminates the requirement for signers to post collateral in ETH in favor of staking only NU or KEEP. And, partly through L2 integrations, it dramatically reduces minting costs for users.

In short, v2 makes tBTC a viable competitor to wBTC on an economic basis, but entirely permissionless and decentralized.

v2's security primarily relies on an honest majority assumption (e.g. 51 signers in a 100 signer set). In the (statistically unlikely) event enough signers in a set collude, there's an additional insurance backstop provided by coverage pools.

Coverage pools consist of cryptoassets (e.g. NU and KEEP) that are deposited by tokenholders to insure against fraud while earning yield. As explained by the Keep team in this post, the dual approach is highly scalable. Assuming each wallet receives roughly the same amount of deposits, a coverage pool holding 0.45619% of the total market cap of tBTC can cover the risk to user funds over an entire year.

Of course, dramatically scaling the signer sets requires dramatically scaling the number of stakers from v1 to v2.

Enter NuCypher.

Codename KEaNU Collaboration

Various teams have been exploring the viability of building decentralized asset bridges similar to tBTC on top of the NuCypher network. Given the shared interest and technical capabilities, the benefits of a collaboration between NuCypher and Keep are compelling, especially when one considers the unique capability of the NuCypher network to deliver thousands of staking nodes as signers for the launch of tBTC v2--exactly what the new v2 design needs.

When v2 launches on the shared NuCypher/Keep network, there will be thousands of signers operated by NU and KEEP stakers. Additionally, NU holders will be able to provide liquidity to the coverage pools as an additional way to earn yield.

If v2 is successful in challenging wBTC's dominance and delivering truly permissionless digital gold to DeFi, NU and KEEP stakers will become a key linchpin for DeFi and enjoy a meaningful new fee revenue stream.

How can you help?

The communities have agreed on the broad parameters, via a snapshot of both NU and KEEP stakers that showed unanimous support for this collaboration.

But the communities are still discussing the exact implementation details. There are currently two open proposals:

If you have feedback on either of those proposals (or even a new proposal entirely!), we want to hear from you on the DAO forum.

Let's bring digital gold to DeFi.