Trustless, with caveats: Babylon’s big Bitcoin DeFi claim

A co-founder of Bitcoin infrastructure company, Babylon Labs, claims to person built a strategy that allows for autochthonal Bitcoin to beryllium utilized arsenic trustless collateral to get connected the Ethereum blockchain.

In a Wednesday X post, Babylon Labs co-founder and Stanford University prof David Tse claimed Babylon built a proof-of-concept allowing for autochthonal Bitcoin (BTC) “to beryllium utilized trustlessly arsenic collateral to get connected Ethereum for the archetypal time.”

The comments travel Babylon’s release of a achromatic insubstantial successful aboriginal August, outlining what it calls a Bitcoin trustless vault system. The strategy leverages the Bitcoin astute declaration verification strategy BitVM3 to fastener BTC successful per-user vaults, wherever withdrawals (redemption oregon liquidation) are gated by cryptographic proofs of outer astute declaration authorities verified connected Bitcoin.

This allows users to fastener Bitcoin and span it to Ethereum without relying connected a federated custodian oregon bridge. On the Ethereum side, a astute declaration verifies the BTC vault via a Bitcoin airy lawsuit earlier accounting for collateral.

An experimental mentation of the resulting token is already available connected the onchain lending protocol Morpho. Still, it is successful the investigating phase, with a full liquidity successful the marketplace of $14 successful USDC (USDC). Tse described VaultBTC arsenic “an intermediate non-fungible plus that interfaces the vault with Morpho and allows depositor and liquidators to trustlessly retreat BTC.“

A schematic of the Bitcoin vault-based lending system. Source: Babylon Labs

Babylon Labs and Tse had not responded to Cointelegraph’s petition for remark by publication.

Related: Kraken launches Bitcoin staking with Babylon integration

How trustless is it?

While the antecedently explained portion of the strategy is trustless, immoderate parts stay non-trustless. Per the achromatic paper, Babylon’s Bitcoin vault liquidations utilize whitelisted liquidators to show the terms and vault state, resulting successful a liquidation strategy that is not permissioned and introduces spot assumptions.

Even with co-signing meant to curb censorship, the exemplary inactive assumes capable liquidators (and sometimes ample lenders) behave correctly. Even if they cannot bargain Bitcoin acknowledgment to the system’s design, this introduces a spot presumption into the system.

Bitcoin vault liquidation schematic. Source: Babylon Labs

Liquidations hinge connected a terms oracle, truthful they inherit the oracle’s accuracy, timeliness, and censorship-resistance risks. If the oracle is incorrect oregon delayed, the strategy makes the incorrect call. Oracle providers with existing relationships with Babylon Labs, Band Protocol and Pyth Network had not responded to Cointelegraph’s petition for remark by publication.

Related: The aboriginal of DeFi isn’t connected Ethereum — it’s connected Bitcoin

What truly changes?

The achromatic insubstantial provides a elemental example: “Bob holds 1 BTC and wishes to get $50,000 successful a stablecoin from Larry via a lending protocol connected Ethereum.” This would necessitate that if Bitcoin’s terms falls nether $50,000, Larry tin liquidate the collateral, and if Bob repays the indebtedness connected time, helium recovers the BTC.

Babylon Labs explains that existent systems necessitate galore spot assumptions. Bob tin manus implicit the Bitcoin to Larry for safekeeping, trusting that helium volition instrumentality it.

Otherwise, Bob tin support the Bitcoin and committedness to let Larry to liquidate it if the terms falls — but Larry would spot Bob to support his word. Lastly, Bob could span Bitcoin to Ethereum arsenic Wrapped Bitcoin (WBTC) and usage it successful a astute declaration arsenic collateral. Still, helium would person to spot the wrapping mechanics itself.

WBTC requires spot due to the fact that the Bitcoin backing it is held by a centralized custodian who indispensable beryllium trusted not to lose, freeze, oregon misuse the funds. Users beryllium connected this custodian’s honesty and solvency alternatively than cryptographic guarantees. This is the superior contented addressed by Babylon’s trustless implementation.

“Trustless vaults destruct each specified spot assumptions. Bob and Larry jointly pre-sign a acceptable of Bitcoin transactions defining conditional spending rights,” the achromatic insubstantial states.

Magazine: ‘Debasement trade’ volition pump Bitcoin, Ethereum DATs volition win: Hodler’s Digest, Oct. 5 – 11