In our previous article, we introduced BTCFi and briefly mentioned the role played by BtcUSD within this ecosystem. But why is BtcUSD so necessary, especially when there are already numerous stablecoins in the market? In this article, we delve deeper into the significance of BtcUSD, its functionality, and how it addresses the pressing needs of Bitcoin holders and all of us in crypto space.
State of stablecoins
There are no shortage of stablecoins in the cryptosphere, some backed by centralized assets, to those backed by decentralized currencies. The collateral used for minting stablecoins have been subject of many discussions, citing the virtue of centralization versus decentralization.
Stablecoins backed by centralized entities currently reign supreme. However, the proliferation of such stablecoins introduces systemic risks to the crypto space, undermining the principles of decentralization and financial sovereignty. In response to these challenges, the need for decentralized stablecoins collateralized with decentralized assets becomes increasingly imperative.
Still within the issue of centralization versus decentralization, a core argument in this discussion is the significance of the strength of collateral for a stablecoin, and the transparency in conveyance of the strength. This directly correlates with the parity in the representation of the fiat; and fluctuation, or misrepresentation of the value of collateral can potentially result in de-pegging. However, when a cryptocurrency is used for collateralization, this becomes a constant concern.
Cryptocurrency has been more susceptible to value fluctuations compared to the US dollar, real estate and other assets that have been used to back stablecoins. As a result, crypto-backed stablecoins have had a mixed bag of results in terms of stability, and in turn, adoption. How a cryptocurrency should be employed in designing a stablecoin remains a hotly debated topic, even to this date.
Some of these crypto-backed stablecoins have been more successful than others, while some have had design flaws and peg failures. Through these experiments over time, it became evident that in order for a crypto-backed stablecoin to be sustainable and widely used, there are a few guideline for a stablecoin to follow to stay maintainable.
How should a crypto-backed stablecoin be designed?
One notable solution in the realm of crypto-backed stablecoins emerged with DAI from MakerDAO, utilizing Over-collateralization to maintain stability. This mechanism requires collateralization of close to 150% of the stablecoin value to withstand collateral value fluctuations, with Ethereum primarily serving as collateral. Despite occasional challenges during extreme market downturns, the system has demonstrated resilience.
However, there is an asset that works even better as a collateral than Ethereum-less volatile, higher in adoption and above all, the most decentralized.
Enter Bitcoin
In the era of Bitcoin ETF, Bitcoin is now a household term that requires no introductions. It is the singular most decentralized crypto asset on the planet, with some studies claiming as much as 13% of all people owning the asset, as of end of 2023. It now exists in different wrapped forms on over 40 different networks, and as various financial products.
Bitcoin also happens to be the least volatile cryptocurrency on the market, which makes it ideal for use as a collateral. As CME Group notes in their study, the correlation between the price of ETH and BTC remains consistently positive, yet Bitcoin price movement is consistently less volatile. In another words, when the market has a downfall, Bitcoin is the strongest asset resisting against the fluctuations.
For stablecoins backed by cryptocurrency, this difference in volatility could mean the difference between maintaining or breaking the parity to the fiat it represents. For a stablecoin, this is akin to a life-or-death situation. A stablecoin backed by Bitcoin would be exposed to a lot less risk to such situation, than those backed by any other cryptocurrency.
Introducing BtcUSD: The Decentralized Solution
In response to these challenges and conclusions drawn, we proudly introduce BtcUSD, a stablecoin backed solely by Bitcoin. BtcUSD not only mitigates liquidation risk and ensures stability against the US dollar more effectively than other cryptocurrency-backed stablecoins. However, its most significant advantage lies in its decentralization.
As the name implies, BtcUSD is fully backed by Bitcoin. This lowers user liquidation risk and ensures the stability of its peg to the US dollar, more so than any other stablecoin backed by cryptocurrency. But more important than the reliability is the level of decentralization.
As the most decentralized asset in crypto space, BTC is resistant to censorship, manipulation, and third-party interference, making it a reliable and secure asset to collateralize. With a decade-long history of network resilience and robustness, Bitcoin has demonstrated its ability to withstand various external threats and attacks. This resilience instills confidence among users seeking to collateralize their assets, knowing that their Bitcoin positions are protected by the network’s cryptographic security measures and decentralized consensus protocol.
And this resilience is distilled right into BtcUSD, positioning BtcUSD as a decentralized stablecoin secured by $1 trillion dollars of Bitcoin TVL.
The Bifrost Edge
Bitcoin-backed stablecoin is not something that is completely new to the market. There have been attempts made on a few Bitcoin L2s, but there exists a problem that prevents their widespread adoption — interoperability. Many of tokens existing on Bitcoin L2s cannot transverse to other blockchain platform, even other Bitcoin L2s.
For a stablecoin to gain traction and widespread use, in the face of emergence of different L1 and L2 platforms, it needed to be able to transverse different blockchains and be widely available. Save for centralized stablecoins such as USDT or USDC, it is difficult to have a fully decentralized, collateralized stablecoin that are also fully multichain. And this is where BtcUSD’s major difference to these other Bitcoin-backed stablecoins exist.
Powered by Bifrost’s robust crosschain capabilities, BtcUSD is the first Bitcoin-based stablecoin to be fully crosschain-capable, that can be leveraged on various networks. It will initially start off on Bifrost Network, but it has capacities to move to any and all EVM-compatible chains, and in near future, Bitcoin L2s as well.
The crosschain edge also works for the Bitcoin used to collateralized BtcUSD. Holders of Bitcoin on various networks can utilize their Bitcoin on their network of choice to mint BtcUSD through BTCFi, and leverage their Bitcoin holding.
This effectively solves the problem most Bitcoin-backed stablecoins face in adoption, making BtcUSD one of the most versatile stablecoins to date, in addition to all the added benefits that comes from Bitcoin collateralization.
In BtcUSD’s infancy, it is planned to be backed by wrapped BTC assets; but upon reaching fruition, it will be backed by native BTC as well, further decentralizing its collateral and mitigating risks. Over time, the number of networks supporting and supported by BtcUSD will increase as well, for wider usage for Bitcoin holders that wants to leverage their Bitcoins.
Conclusion
Decentralization for BtcUSD has multiple meanings. It refers to the state of having Bitcoin, the most decentralized of all crypto assets, as its collateral, as well as the crosschain nature of BtcUSD. BtcUSD can be minted through Bitcoin existing in many forms on different network, as well as itself existing on different networks.
BtcUSD, solely backed by Bitcoin, heralds a paradigm shift towards a more resilient, censorship-resistant, and decentralized financial future. With decentralized stablecoin collateralized with decentralized assets and operational across multiple networks, welcome to the future of decentralized currency.
