The main building block of Interlay is a decentralized Bitcoin bridge that enables minting of iBTC - a multi-chain 1:1 Bitcoin-backed asset. The design follows the XCLAIM framework introduced in 2018, with considerable functional and security improvements.
The Interlay Bitcoin bridge introduces a new kind of "wrapped" asset: vaulted Bitcoin. iBTC is a fully fungible, tokenized representation of BTC on other blockchains that allows the owner to redeem it for BTC at a 1:1 ratio or, in case of bridge failure, for insurance collateral in other digital assets at a premium rate.
The Interlay bridge is maintained by an open (anyone-can-join) network of over-collateralized vault operators. Each BTC deposited by a user into a vault is insured by collateral provided by the operator. This collateral is used to automatically reimburse iBTC owners in case of operator failure.
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Vaults register: Once at least one Vault has locked collateral on the Interlay chain, users can start minting iBTC.
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Mint iBTC: User requests to issue and sends BTC (on Bitcoin) to the Vault address provided by the Interlay chain. The Vaults collateral is now locked and the Interlay chain issues iBTC to the user at a 1:1 ratio to the deposited BTC, minus fees.
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Use iBTC: iBTC can now be used in Interlay DeFi and on other chains as a fully fungible asset.
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Successful redeem. User returns iBTC to the Interlay chain and requests a redeem. One or more Vaults send BTC to the user (on Bitcoin), minus fees, and prove this to the Interlay chain. The Vaults collateral is unlocked. A user can redeem with any Vault they like.
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Failed redeem. If a Vault does not send BTC to the user within a pre-defined period (currently 48h), the user can decide whether to (a) retry with another Vault or (b) trade iBTC for the Vaults collateral. In both cases, the user receives a premium, slashed from the Vaults collateral.
From economic perspective, the Interlay bridge functions similar to a peer-to-peer lending protocol. Users deposit BTC to borrow iBTC at a 1:1 rate. Vaults receive the deposited BTC as a loan, in return for locking collateral. iBTC represents a claim on the deposited BTC at a 1:1 rate or the vault's collateral at a premium rate.
Following the MakerDAO model, each Vault has exactly one collateral asset, while an operator can open multiple different Vaults using the same account. Collateral assets must be white-listed by a governance vote. Each asset undergoes a risk assessment by community and external risk teams, defining the ceiling (i.e., the absolute amount allowed in the system) and the following safety thresholds per collateral:
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Secure threshold (e.g. 160%). The target collateralization rate at the time of minting. The secure threshold defines how much iBTC can be minted with a Vault.
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Premium Redeem (e.g. 120%). Redeeming with Vaults below this threshold is incentivized: the redeemer claims a small, volume-based premium (e.g. 5%) charged to the Vault.
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Liquidation (e.g. 110%). Vault positions that fall below this threshold are automatically liquidated by consensus nodes.
Interesting collateral assets include BTC-correlated L1 tokens, fiat-backed stablecoins, and interest-bearing assets e.g., liquid staking tokens, lending positions or even AMM LP tokens.
Liquidations ensure that the following invariant between the amount of
iBTC minted and collateral locked
When a Vault is liquidated the bridge considers the BTC lost (the Vault is allowed to keep the BTC) and instead uses the liquidated Vault's collateral to temporarily back the value of iBTC. Any iBTC owner can then re-balance the bridge by "burning" iBTC to claim the collateral at a premium rate (e.g. 110%).
The Interlay parachain tracks and verifies the state of the Bitcoin blockchain using a built-in light client. The so-called BTC-Relay verifies block headers and proofs of transactions being included in the Bitcoin blockchain, handling forks when needed.
This allows the Bitcoin bridge to enforce correct behavior on participants and penalize malicious actions, making it economically trustless: both users and Vault must submit cryptographic proofs to confirm correct execution of iBTC mint and redeem requests, or incur penalties otherwise.
An in-depth security analysis is provided in the original, peer-reviewed XCLAIM paper and the Interlay specification . The open-source implementation has been subject to multiple audits, with reports available online.
In summary, the two main properties of the Bitcoin bridge are decentralization and economic trustlessness.
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Decentralization is achieved by allowing anyone to register as a Vault operator, without requiring any form of permission. The bridge is also censorship-resistant: the minting process is non-interactive, meaning there is no action that must or can be taken by Vault operators to interfere with or prohibit creation of iBTC.
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(Economic) Security is achieved by requiring Vault operators to over-collateralize their BTC positions and cryptographically prove correct redemption of BTC. Liquidations ensure that users can always redeem BTC or are reimbursed in collateral, facing no economic damage.
Economic security holds under the assumption that (i) the bridge is aware of the current exchange rate between BTC and collateral assets (i.e., assumes robust price feeds), and (ii) that the value of the collateral does not devalue faster than the time it takes a liquidator to complete a successful arbitrage trade, i.e., include the liquidation transaction in the Interlay chain and exchange the claimed collateral for BTC or iBTC.
Centralized solutions are quick to build. As such, there exist a number of centralized and trusted wrapped Bitcoin providers, mostly operating on Ethereum. However, Bitcoin was created with a vision of decentralization - and Interlay's mission is to ensure Bitcoin on other chains follows the same principles.
We provide a comparison below, using this peer-reviewed cross-chain analysis framework:
- wBTC was created by BitGo, a crypto-custody company. All BTC locked in wBTC is held by BitGo. You cannot freely join to become a BTC custodian (only BitGo has custody), and there is no insurance against failure. Users must trust BitGo. If BTC is lost, stolen or subject to regulatory events, wBTC will have no value backing it. If using USD stablecoins as analogy, the equivalent of wBTC is USDT/USDC.
- renBTC is a product of the Ren protocol, a crypto-startup that pivoted from Republic Protocol (a former protocol for dark pools, aka privacy-preserving trading). The BTC locked in renBTC is reportedly1,2 held in a multisig controlled by the Ren team. It appears that Ren's Dark Nodes (part of the former dark pool protocol) are not responsible for the BTC custody - and hence it is not possible for new users to help secure Ren's locked BTC, making it a centralized protocol. Just like with wBTC, there is no insurance to reimburse users if BTC is lost - users must simply trust the Ren team. Using the USD stablecoin analogy, the equivalent of renBTC is USDT/USDC.
- tBTC v1 deployed an arguably decentralized version of BTC on Ethereum, similar to the design initially proposed in the XCLAIM paper (i.e., similar to interBTC). The BTC locked in tBTC is locked with Signers, who share control over the BTC keys using ECDSA threshold signatures. Signers provide collateral in ETH, which is used to reimburse users if BTC is lost. While at launch/during the initial period, not everyone could become a Signer, participation is open to everyone now. Due to tBTC v1 being a single-collateral system (ETH only), Signers reportedly suffered from frequent liquidations, when the BTC/ETH price was volatile.tBTC v2 is moving closer to the model that was envisioned (but not deployed) by Ren3: BTC will be controlled by a group of 50-100 Signers sampled from a larger set. Rather than ETH, insurance will then be locked in KEEP tokens and cover a fraction of the locked BTC value.
interBTC, for comparison:
- Anyone can become a Vault in interBTC, making it fully decentralized;
- Vaults cannot prevent users from minting interBTC, making it censorship resistant
- Vaults lock collateral in different assets (MakerDAO-like multi-collateral system), making the price peg more stable and avoiding frequent liquidations. This also allows to use interest bearing assets, such as liquid staking assets, as collatera, making interBTC more capital efficient.
- If BTC is lost or stolen, users are reimbursed in collateral at a beneficial rate (~110%), making it financially trustless.
Using the USD stablecoin analogy, interBTC is comparable to multi-collateral DAI - but better, because interBTC can be redeemed for BTC but DAI cannot be redeemed for physical USD.