What is sBTC? A guide to non-custodial native BTC Decentralized Finance.

Have you heard of the “BTC write-in issue”? To put it simply, it is because BTC has limited programmability. That’s why we haven’t seen other types of Decentralized Finance applications like on-chain on BTC. However, to make Decentralized Finance operate normally, users need to be able to exchange, borrow, and earn returns from the assets they hold.

This limited programmability has led to the emergence of blockchains such as Ethereum, which offer more web3 functionality and hosted ‘Wrapped BTC’ Tokens to reflect the value of BTC. However, compromises to security and reliance on centralized entities have resulted in numerous hacker attacks, bankruptcies, and billions of dollars in losses.

Need a solution to go beyond the base layer to utilize BTC. In this article, we will explain why Web3 needs BTC and introduce sBTC: a non-custodial mechanism pegged to BTC, which will be the cornerstone of DeFi.

Why Choose BTC Web3?

The BTC blockchain has never encountered any vulnerabilities or Hacker attacks in its 15 years of use, and maintains a network value of over $1.2 trillion, four times that of Ethereum. Web3 needs the Decentralization, security, and durability that only BTC can provide.

Decentralization

The governance of Bitcoin is in the hands of its holder, Miner, Node operators, and other network participants, and its rules are encoded in its protocol. When the BTC community resists the modification of the protocol, this Decentralization is manifested.

In contrast, the governance structure of the Ethereum network is more centralized, with a charismatic co-founder and influential entities who can make changes to the Ethereum blockchain and monetary policy, including rolling back and settling transactions. This flexibility allows for experimentation, but also undermines the security and durability of the blockchain, which are essential for building trust in a public economic system.

Security

Ethereum has transitioned from Proof of Work (PoW) Consensus Mechanism to Proof of Stake (PoS) mechanism to improve scalability. However, PoS has several fundamental issues that threaten security.

For example, the person who holds Token is also the person who verifies the chain. This leads to the concentration of decision-making power and financial rewards in the hands of the wealthiest currency holder, and relies on wealth measurement standards determined internally rather than externally by the system. Since the largest holder will make decisions that benefit themselves, this may lead to further centralization - the long-term impact of this situation is still unclear.

In contrast, BTC’s Proof of Work mechanism relies on external resources to verify Blocks and reward honest validators. It provides a secure, tamper-proof, and decentralized settlement layer that is valuable for a range of applications.

Durability

BTC has a long history and is not easily changed, making it stable and reliable. The experimental spirit and frequent rule changes of Ethereum make it less reliable. The interdependence between Settlement and Smart Contract functions in Ethereum poses a challenge to ensuring system security. In contrast, BTC’s minimal and pure Settlement layer is considered sacred and inviolable, which helps ensure system stability.

The original intention of BTC’s design is to serve as the underlying layer for high-value Settlement. It is now time to introduce more powerful and expressive Smart Contracts required for Decentralized Finance applications by adding layers.

Stacks BTC Layer

“Layer” can provide scalable web3 solutions.

We have seen that the Ethereum layer has brought the entire Decentralization application ecosystem and attracted more capital and market value. Introducing layers for BTC will also bring innovation and continued rise.

Currently, the number one project for BTC Web3 is Stacks BTC layer, launched in January 2021. Stacks extends the functionality of BTC, using its security as an anchor base layer without making any changes to BTC itself, to provide Smart Contract functionality, thus supporting the development of Decentralized Finance (DeFi) and other Web3 applications driven by BTC.

Proof of Transfer (PoX)

Using a unique Consensus Mechanism called Proof of Transfer (PoX), Stacks can read the state of the BTC chain and anchor its own Blocks to the Proof of Work (PoW) of BTC. When BTC forks, the Stacks layer will also fork, and has a built-in BTC price Oracle Machine: Stacks Miner spends BTC to mine STX, which serves as an excellent on-chain proxy for the BTC to STX price.

Now, advanced Smart Contracts that leverage the security, capital, and networking capabilities of Bitcoin are possible without the need to make any changes to Bitcoin itself.

Clear Language

Stacks uses the Clarity smart contract language, which is deterministic and easy for humans to read. Unlike Ethereum’s Turing Complete language, Clarity provides developers with a secure way to build complex smart contracts on BTC. Ethereum’s Turing Complete language cannot be formally verified and may lead to more undiscovered vulnerabilities.

Speed

Once Nakamoto is upgraded, Stacks will receive a speed boost (up to 5 seconds of block confirmation time) to help scale BTC. One potential unlock is lightning-fast payments on the Stacks layer benefiting from BTC finality. An additional layer built on top of it called “subnet” can further enhance speed and scalability, enabling lightning-fast payments with BTC finality.

sBTC: The Web3 Holy Grail of BTC

Although Stacks has made significant progress, it is still unable to transfer BTC in and out of Smart Contracts in a completely trustless manner. This has been the ‘holy grail’ problem that BTC has struggled to overcome for the past decade.

sBTC is a non-custodial form of pegged BTC with 100% BTC finality. sBTC will soon appear on the Stacks BTC layer, enabling Smart Contracts on BTC. Prepare for Decentralized Finance, Non-fungible Token, and DAO that operate entirely on BTC, using Stacks as an invisible Smart Contract layer.

How does sBTC work?

sBTC functions by using the synthetic asset model on Stacks. To obtain sBTC, users must exchange their BTC for sBTC through a Smart Contract on the Stacks network, without relying on centralized entities.

This is achieved through the use of a PoX Consensus Mechanism that is connected to BTC and facilitates a novel trustless peg design for sBTC. Additionally, since sBTC is an asset backed 1:1 by BTC, sBTC holders can represent their BTC holdings on the Stacks network as sBTC.

This synthetic representation allows users to participate in Decentralized Finance activities, such as borrowing or trading, while still retaining ownership and benefits of their underlying BTC. In addition, users do not need to pay any fees when converting between BTC and sBTC, apart from BTC transaction fees.

If you need full programmability, sBTC is the closest currency to native BTC. It has all the advantages of Wrapped Bitcoin (wBTC) without any of the drawbacks of wBTC. You no longer need to trust custodians to support wrapped tokens and real BTC in a 1:1 ratio as with wBTC.

Here is a quick breakdown of the design of the hooking mechanism, which is rooted in security, decentralization, and availability:

Transfer-in Peg

First, users convert native BTC to sBTC on Stacks at a 1:1 ratio by sending BTC to the native BTC Wallet. This Wallet is controlled by a decentralized open membership group called ‘stackers’, who lock STX Tokens in Stacks’ PoX Consensus Mechanism. Stackers receive economic incentives through BTC rewards to process hooks/withdrawals using the capital they have locked in stacking and the rewards they receive.

These rewards provide them with strong economic incentives to participate in staking/exit without introducing additional staking fees. Then, mint sBTC on the Stacks layer while still being protected by BTC (because Stacks follows BTC’s finality).

Source: sBTC White Paper

Withdrawal Peg

To peg and redeem native BTC, users need to send requests to the staker, which is processed in the same way as BTC transactions.

Then, more than 70% of the stackers must collectively sign to destroy sBTC and programmatically send the corresponding native BTC back to the user’s BTC Address. This process may take up to 24 hours.

Source: sBTC White Paper

sBTC upholds the spirit of Bitcoin

The spirit of Bitcoin has always been to advocate for self-custody.

“Bitcoin is a purely peer-to-peer electronic cash system, allowing online payments to be sent directly from one party to another without going through a Financial Institution.” - Satoshi Nakamoto, 2008.

The sBTC White Paper was written by the sBTC working group, which was open to the public and involved computer scientists from Princeton University, developers of the Stacks layer, and anonymous contributors.

In 2022, the failures of centralized entities such as FTX, Genesis, and Voyager resulted in losses of over $2 trillion for users. These failures demonstrate the importance of reiterating the spirit of Bitcoin: to create a truly decentralized and transparent system.

sBTC is based on these basic principles, solves the ‘BTC writing problem,’ opens a new era of BTC applications, and can quickly accelerate the BTC economy.

The design goal of sBTC is to be both decentralized and secure, especially when transferring BTC to another layer that supports smart contracts and decentralized applications (dApps).

The digital asset enables BTCholder to maintain ownership of their BTC holdings and benefit from the security of BTC, while also gaining access to the ever-evolving BTC Decentralized Finance ecosystem.

Will the staking contract have any erroneous behavior?

sBTC is trust-minimized and incentive-compatible: these properties are the same as the security of BTC itself. The Stacker group will receive BTC rewards for processing sBTC transactions.

In addition, the Wallet is based on a 70% threshold. This means that more than 70% of the stakers must collude in an economically unreasonable way to attempt an attack. If at least 30% of the stakers are honest, then a malicious hook will not occur.

In addition, there is also a recovery mode, where the BTC rewards will be used to fulfill the pegged requests. Therefore, the native BTC will not be “stuck”. In addition, the process is completely transparent, so anyone can see how much BTC is in the Wallet on-chain, and how much sBTC has been minted.

To ensure the system maintains incentive compatibility, the maximum ‘active’ ratio for circulating sBTC is 50% of the total locked STX. If the maximum ratio is reached, hooking services will not be provided until the ratio is restored. This means that even if the price of STX falls significantly relative to BTC, incentive compatibility will still be preserved.

What is Stacks Nakamoto upgrade?

The Stacks Satoshi upgrade is a Hard Fork of the Stacks BTC layer, which aims to unlock the full potential of BTC by improving block creation speed, maximum extractable value (MEV) vulnerabilities, and the transaction finality of Stacks.

• Faster Block time: The Nakamoto upgrade separates the production of Stacks Blocks from BTC Blocks’ arrival time, allowing Stacks Blocks to now be produced every 5 seconds.

• Finality: The Stacks network anchors its chain history to the BTC chain history to ensure transactions are irreversible. In addition, stackers will monitor the behavior of Miners on the network and ultimately decide whether to include the Block in the chain.

• MEV protection: Upgrades can ensure fair reward distribution and prevent manipulation of Maximum Extractable Value (MEV). MEV refers to the profit obtained by rearranging the order of unconfirmed transactions.

Through updates, Stacks will become a more efficient and scalable layer for Decentralized Finance and Web3 on BTC.

How does the upgrade of Satoshi Nakamoto pave the way for sBTC

Satoshi Nakamoto upgraded to Stacks and introduced some features that allow BTC to be transferred from BTC to sBTC on Stacks without trust through a pegging mechanism managed by a group of Decentralization participants called sBTC signers, clearing the way for the launch of sBTC.

The sBTC signers are stakers who lock the BTC sent to them by users in a Multi-signature Wallet, mint sBTC on Stacks, and send it to users.

The Nakamoto upgrade also improved the transaction speed on the Stacks network, reducing Settlement time from minutes to seconds. This enables faster and more efficient deployment of sBTC in the Decentralized Finance protocol on Stacks.

In addition, the upgrade introduces an improved PoX Consensus model, which connects the history of Stack with the history of BTC. In this way, the state of the Stack network will also be recorded in every new BTC Block, making it impossible to change the network’s history without changing the history of BTC.

In addition, stackers can also monitor the behavior of Miners and decide whether to add Blocks to the chain, thereby enhancing the security of the Stacks network.

By providing fast and more versatile infrastructure, Nakamoto upgrades to provide everything sBTC Stacks need, supporting popular Decentralized Finance and Web3 on the Bitcoin layer.

What is the next step for sBTC?

The introduction of sBTC will emphasize that BTC is not only a store of value. sBTC is built as a decentralized and secure digital asset that will extend the functionality of BTC.

In addition to launching on Stacks, sBTC will also land on Aptos Network and Solana to further enhance BTC’s role in the constantly evolving Cross-Chain Interaction Decentralized Finance ecosystem.

With sBTC, builders can fully unleash the potential of Bitcoin as a fully Programmability asset, paving the way for creating BTC-supported Decentralized Finance, non-fungible Tokens (NFTs), etc.