Interlay BTC — the most decentralized Bitcoin bridge in the world?
2nd batch of Polkadot auctions is almost concluded and one of the most interesting projects competing for the slot was Interlay. Interlay aims to be the most secure, decentralized and user-friendly BTC bridge that is currently out there.
So let’s breakdown Interlay’s features, its competition and how it can benefit not just the Polkadot ecosystem but the whole crypto world.
Why do we need a BTC bridge anyway?
A simple look at the CoinGecko will give us an answer — the current Bitcoin market cap is sitting at around $800,000,000,000 with BTC dominance over all other coins at almost 40%. This is a huge amount of money and potential sitting on the Bitcoin blockchain, waiting for a truly decentralized opportunity to enter the DeFi markets.
Obviously, a lot of Bitcoin fans prefer to HODL their precious asset, however, some of them are feeling more adventurous and would like to tap into the DeFi markets for further yields. But unfortunately, there wasn’t a truly decentralized alternative that would provide enough security and user-friendliness for them to do so — until Interlay came into play!
Enter the new era of Bitcoin
So why is Interlay so cool? It brings a couple of innovations that haven’t been available so far for the BTC bridges. Let’s have a short breakdown
- Interoperability — interBTC will be used across all the chains (think of Cosmos, Ethereum and others), not just Polkadot
- Decentralization — BTCs will be kept in decentralized vaults (in a similar fashion to MakerDAO), meaning it’s safe from any malicious intents
- Insurance — all the BTC in vaults are collateralized by either DOT or KSM
- Governance — like every parachain, Interlay and its canary Kintsugi will be governed by the token holders
In short, interBTC is a 1:1 Bitcoin backed asset that can be used to invest, earn and pay with BTC across the DeFi ecosystem on Polkadot, Ethereum, Cosmos and many more.
So let’s have a close look at all these features and why they are so important.
Interoperability
All current solutions are tied to the particular chain (be it Ethereum or something else) which results in not using Bitcoin to its full potential and fragmented liquidity across chains. Also, especially for the DeFi enthusiasts, it can be difficult to handle their BTC on various blockchains because of different user interfaces, fee models or even non-existing bridges between chains.
This is why Interlay utilizes bridges to other blockchain networks (in the spirit of Polkadot’s interoperability) and provides the same user interface for such transfers. This is truly powerful because BTC will be able to flow freely between various blockchain projects and unlock its immerse liquidity whenever is needed. And all that while using a single and slick user interface that allows for easy BTC transfers between networks.
Decentralization
The biggest culprit of current BTC bridges (be it Ren or Wrapped Bitcoin) is that they are still somewhat centralized. BTC sent to those projects is always held in some kind of multisig wallet with the keys mainly held by the project team itself. Obviously, this is a huge flaw in decentralization because this system is not completely permissionless (not everyone can hold the key) and definitely not transparent (because we usually don’t know all the parties involved in holding the keys).
Let’s see the following table for a further illustration
As you can see, the decentralization problem is solved by using vaults, a mechanism similar to how the MakerDAO operates. Anyone can join the network and create a vault which is basically a decentralized BTC custodial. The operator of the vault cannot withdraw funds and has no access to the underlying wallet therefore it’s perfectly safe for the Interlay’s users and yet very transparent and decentralized.
Insurance
The multisig scheme is also having another serious flaw — what happens if the keys are compromised? That would obviously completely destroy the underlying wrapped BTC (be it wBTC or renBTC) and create a devastating cascading effect across DeFi projects on Ethereum (caused by liquidations). This can very well be one of the ticking bombs of the entire DeFi and luckily, Interlay has a solution for that.
We have talked about vaults in the previous section but we didn’t mention that there’s one mandatory requirement for all of them. The amount of BTC they can accept (and obviously the amount of interBTC they can mint) is limited by the collateral they have put into their vault. Their position always needs to be over-collateralized by at least 110% in assets like KSM, DOT or USDC.
This means users' BTC is always secure even in the case of a software bug, vaults acting maliciously or any other disaster. And not only that, users will receive more money than the value of their original BTC as compensation — thanks to the over-collateralization.
Multi-collateral vaults
As of now, Kintsugi (Kusama version of Interlay) will support only KSM as the collateral. However, the network will soon allow adding more types of collateral to the vaults to provide more stability!
- kUSD — Karura’s stablecoin
- USDC — another stablecoin from the Ethereum network
- L-KSM — what about interest-bearing collateral? Vault can stake their KSM in Kusama’s liquid staking program and use the L-KSM as a collateral
And not only that! In the future, users will be able to provide collateral to the vaults as well and share the profit with vault operators!
Tokenomics
Let's focus on both Interlay $INTR and Kintsugi $KINT tokenomics.
INTR, a governance token of Interlay, has an unlimited supply. The emission schedule is defined as follows:
- 1,000,000,000 INTR emitted over the first 4 years
- 2% annual inflation afterward, indefinitely.
INTR distribution is such that 70% of tokens go to the community and only 30% is reserved for the team (20%) and foundation reserve (10%).
KINT is a governance token of Kintsugi and similarly to INTR, it has also an unlimited supply. The emission schedule is defined as follows:
- 10,000,000 KINT emitted over the first 4 years
- 2% annual inflation afterward, indefinitely.
KINT distribution also reserves 70% of tokens to the community, the rest 20% went for the team and 10% is a Foundation Reserve used to fund development, ecosystem growth and future fundraising.
Here is the distribution of the 2% annual inflation starting in year 5.
Current state & The Future
Kintsugi has already become a parachain on Kusama and will be fully launched during March. We will see vaults with only KSM as collateral first and the team will be slowly adding new assets afterward (with delegated collaterals provided by other users as well).
Interlay has recently won the 9th slot in the Polkadot auctions and is scheduled to be on-boarded as a parachain during March.
However, there are interesting features that the team will be working on in the future — what about locking your BTC directly inside your BTC wallet? This is technically very possible and it would bring even more bitcoiners into the DeFi space — because, what can be safer than having your BTC locked directly in your wallet for which you own the keys?
Also, there’s an integration with the Cosmos ecosystem coming pretty soon so we might see interBTC very early on Terra Luna :-)
Summary
As you can see, Interlay & Kintsugi are definitely the most advanced BTC bridges — completely decentralized, trustless, interoperable and subject to transparent governance. There is still a huge amount of BTC being idle in various BTC wallets and one of the reasons for this situation is an absence of a really decentralized and trustless bridge. Interlay provides a solution for these painpoints and not only that — it will be usable throughout all the important ecosystems!
And as always, Polkadotters are going to be there with our collator and vaults on both of these networks :-)
If you like this article, consider supporting us by nominating your tokens to our Kusama or Polkadot validator going by the POLKADOTTERS name.
