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BTC-ETH Bridges Will Support Crypto’s Great Migration


Ethereum Price: $158.80
Ethereum Price (BTC): 0.022492BTC
ETH Locked in DeFi: 2.70M (2.45% of circulating supply)
Market Cap: $17.47B
ETH Network Dominance*: 61.34%
7 Day Candle**: $171.21 / $174.70 / $150.00 / $158.80

BTC is beginning to migrate to Ethereum in a meaningful way. There are now several different versions of BTC on Ethereum (BTCe) each with their own unique implementation.

  • Synthetic BTC (sBTC) from Synthetix is a token that tracks the price of Bitcoin through price oracles.
  • tBTC, imBTC and pBTC use a multi-sig wallet or Trusted Execution Environment (TEE) to allow users to mint BTCe using BTC as collateral.
  • wBTC (wrapped Bitcoin) uses a central custodian to issue BTCe from BTC deposits.

Each of these tokens has a different risk profile. In the case of sBTC, the price feeds (oracles) on which the system relies pose a significant risk and one that has already been realized in Synthetix and elsewhere.

Counter-party risk is also significant for tokens like wBTC where trust must be placed in a third-party custodian. This risk is reduced in TEE and multi-sig setups like the others mentioned above but the security guarantees come nowhere near to that of holding BTC on the Bitcoin blockchain itself.

Quantifying these risks is extremely difficult. One of the strongest metrics is in a value-weighted variation of the Lindy effect: how long has each token existed and how much value has it successfully stored over time?

Unfortunately, time is not on the side of any of these tokens. wBTC is the longest running BTCe token with less than a year under its belt and just $7.4M in value stored.

Fortunately for Blockchain bipartisans who desperately want to start putting their Bitcoin to work on Ethereum, there is a newly launched project that may help expedite the process.

BTC++ is a new token from that holds a basket of BTCe tokens (imBTC, pBTC, sBTC and wBTC). The purpose of BTC++ is to partially mitigate the risk of holding any given BTCe token through diversification. This token provides a stopgap for Bitcoin holders who want to start earning interest with their BTC without being fully exposed to what are – at this stage – experimental cross-chain assets.

BTC++ isn’t the only way of safeguarding a BTCe token. It’s likely that we’ll see decentralized insurance platforms offering users the ability to hedge against a failure in a particular BTCe implementation. Opyn is already offering this type of security for ETH, USDC and DAI in the form of options contracts.

A combination of both diversified baskets of BTCe tokens and the ability to hedge against their failure will find Bitcoin quickly making its way onto Ethereum while we wait for the battle-hardiness that time affords. Of course, an insured BTCe token would trade at a premium, but this premium would pale in comparison to the utility and income granted by the Ethereum blockchain.

What does this mean for the price of BTC and ETH?

With a secure bridge to Ethereum, Bitcoin can now become an income generating asset or used as collateral for borrowing and leveraging. A bridge would also open up the ability for Bitcoin holders to provide liquidity to decentralized exchanges like Uniswap along with a plethora of other use-cases enabled by Ethereum.

It’s clear that the fundamental value of Bitcoin will get a boost from the ability to safely interact with the Ethereum blockchain.

This increase in demand for BTCe will also increase the demand for Ethereum, increasing gas consumption and flooding the chain’s decentralized ecosystem with the most liquid blockchain asset in the world. More liquidity will attract more users, attracting more liquidity and so on.

Assuming the advent of an impenetrable and trustless BTC-ETH bridge, Efficient Market Hypothesis would also predict that something close to 100% of Bitcoin will move to Ethereum as a means of earning income (note that EMH does not account for Bitcoin ideologues who would sooner burn their BTC than profit by using Ethereum).

At some point in the future and when this migration is well underway, it will become a given that interacting with Bitcoin will – at least under the hood – require the execution of the Ethereum Virtual Machine. In the meantime, the continual transition of BTC to Ethereum will begin to reveal the stark misvaluation of these assets’ relative prices.

Nick, Owner

* calculated as: (ETH Market Cap / Ethereum Network Market Cap)
** open / high / low / close

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