Bitcoin is coming to the Ethereum blockchain via MakerDAO

  • The MakerDAO Governance has voted to accept Bitcoin as a new Collateralised Debt Position in the Maker protocol and thus on the Ethereum blockchain.
  • wBTC is the first ERC20 token secured with Bitcoin in a 1:1 ratio.

MakerDAO is a protocol behind the Stablecoin DAI, which is bound to the dollar in a 1:1 ratio. DAI is based on the Ethereum blockchain and therefore carries some volatility risks. On the platform, Ether can be deposited in smart contracts, creating a Collateralised Debt Position (CDP).

The MakerDAO Governance announced that Bitcoin will be included in the Ethereum blockchain. As a result of yesterday’s vote, the wrapped Bitcoin will be launched as an ERC20 token on the Ethereum blockchain, secured 1:1 with Bitcoin. So far, MakerDAO offers ETH, BAT and USDT as collateral:

WBTC will help bring greater liquidity to the Ethereum and decentralized finance (DeFi) ecosystems, and to decentralized exchanges (DEXs). The fourth collateral type approved by MakerDAO Governance, WBTC can now be used in addition to ETH, BAT, and USDC to open Maker Vaults in order to generate Dai.

In simple terms, this means that Bitcoin owners can convert their BTC to wBTC and then use it to generate DAI. The Maker protocol is flexible that almost any type of asset that can be converted into tokens can be brought into the system as collateral.

MakerDAO works together with Oasis Borrow, a decentralized financial platform that handles the custody of Bitcoin. All investors who want to use wBTC to generate DAI must log in to CoinList and register an account, and go through the KYC process. Afterwards a feature of Coinlist can be used to convert BTC to wBTC.

Afterwards wBTC can be sent to Metamask, Ledger, Trezor or any other ERC20 compatible wallet. In the last step a wBTC vault can be created and on Oasis-app/borrow the wBTC can be deposited as collateral and the DAI can be generated. A step by step guide can be found here. The MakerDAO community sees a great opportunity especially in the decentralized financial market, which can benefit from additional liquidity from Bitcoin. Most recently, the DeFi market reached a total volume of more than one billion dollars bound in Ethereum-based DeFi applications.

Liquidity bottlenecks at MakerDAO not uncommon

MakerDAO carries out a comprehensive risk analysis before each integration, as in the past large price fluctuations caused liquidity bottlenecks on the platform. For example, on 12 March 2020, Ethereum, just like the entire crypto market, showed a sharp drop in price, with Ethereum falling by more than 20% in price.

As a result, the platform suffered a system failure and was blocked for several hours. Numerous borrowers had to watch their collateralized CDPs being liquidated at 100% of their value. Normally, liquidations would have cost between 30% and 40% of the borrowed funds.

About Author

Collin is a Bitcoin investor of the early hour and a long-time trader in the crypto and forex market. He's fascinated by the complex possibilities of blockchain technology and tries to make matter accessible to everyone. His reports focus on developments about the technology for different cryptocurrencies.

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