A New Synthetic Bitcoin Is Coming to Ethereum

Badger DAO plans to bring a synthetic bitcoin onto Ethereum through liquid staking derivatives.

The aim of the new cryptoasset, Dubbed eBTC, is to become one of the most decentralized synthetic bitcoin (BTC) assets in the market backed solely by liquid-staked ether (ETH) and reliant on immutable smart contracts.

There’s historically been a difficult environment to drive consistent utility and yield sources for bitcoin assets on Ethereum, Badger DAO’s head of marketing, who goes by Will, told Blockworks.

Assets such as wBTC are in the custody of centralized entities. By comparison, liquid staking derivatives (LSDs) on Ethereum have driven a consistent, sustainable source of yield, and Badger hopes to tap the asset to build a bitcoin primitive on Ethereum that does not require bridging or wrapping.

“Your native bitcoin can stay on Bitcoin and you can play around, speculate and hold a decentralized bitcoin on Ethereum,” Will said.

Fewer censorship risks than wBTC

As it stands, wBTC is one of the most commonly used forms of BTC on Ethereum, but Badger believes there are significant censorship risks.

“Due to the centralized nature of wBTC, it carries inherent censorship,” Will said. “[There is a] potential to blacklist [wBTC] in a similar fashion to how Circle did with USDC related to Tornado Cash — with no governance or public opinion required.”

eBTC, on the other hand, “eliminates the custodial risk as anyone can mint it and at launch, the protocol will be significantly governance minimized with a clear path toward further decentralization and censorship resistance,” according to Will.

Will said with eBTC, smart contracts will be immutable, and the user’s collateral or debt positions will not be controlled by any governance. Even so, plans for a multisig are still in place, and multisig governance will operate through BadgerDAO that can adjust the yield share fee earned from staked ETH collateral.

“This is in direct contrast to many existing CDP systems and on-chain money markets that constantly need to adjust their risk parameters such as minimum collateralization ratio or others that have upgrade rights to the underlying smart contracts,” Will said.

How is eBTC pegged to Bitcoin, anyway?

The new primitive is designed as an over-collateralized debt position that uses liquid-staked ether to borrow eBTC, meaning: To borrow eBTC, a user must provide a higher value as denominated in staked ether.

The debt position will be primarily determined through Chainlink’s LSD/BTC oracle, with Tellor as the backup oracle.

“If a user’s debt position falls below the minimum overcollateralization ratio, they are subject to liquidation,” Will said. “This is based on the staked ETH/BTC ratio not BTC in USD terms. These liquidation mechanics are open to the market to participate.”

The amount of staked eth backing eBTC will be publicly available for all buyers to see and is also available on-chain, Will said.

One driving factor for Badger to leverage staked ETH/BTC for BTC: Both assets have “historically tracked well together in terms of price…thus [ranking] low on the volatility scale.”

Will does say though, that as price fluctuations happen, liquidations are very much possible.

“With that being said, users’ positions are fully redeemable for the underlying collateral at all times as long as their positions are within the liquidation threshold,” he said.

Badger is currently working with RiskDAO to examine its risk exposures to different market conditions. Stability mechanisms and parameters are being explored as part of an ongoing design process.

“This process is still underway and will inform some key architectural decisions such as liquidation parameters and collateral ratios,” Will said.