Decentralized finance (DeFi) uses blockchain technology and smart contracts to facilitate secure, peer-to-peer financial transactions without intermediaries. And this innovative ecosystem has given rise to a variety of financial services, including lending protocols that allow users to borrow against their cryptocurrency holdings.
Bitcoin, as the largest and most widely recognized cryptocurrency, represents a significant portion of many investors’ portfolios. However, using Bitcoin as collateral in DeFi lending platforms presents unique challenges due to its incompatibility with Ethereum, the blockchain where most DeFi applications operate. In this article, we will discuss in detail about Bitcoin-backed loans in DeFi and how platforms like Rocko make DeFi-backed loans easier. Let’s get to it.
Why Bitcoin Can’t Be Used as Collateral for Ethereum Lending Protocols in Its Natural Form
While Bitcoin is the largest cryptocurrency by market cap, it doesn’t natively operate on the Ethereum blockchain, where many DeFi applications are built. This means Bitcoin’s native BTC format can’t interact with smart contracts on Ethereum and can’t be used directly as collateral. There are a couple key reasons for this:
- Compatibility Issues: Bitcoin and Ethereum are separate blockchain networks. Ethereum-based DeFi protocols primarily operate using ERC-20 tokens, while Bitcoin operates on a different blockchain protocol.
- Smart Contract Limitations: Bitcoin lacks native support for Ethereum’s smart contracts, which are integral to DeFi lending platforms.
However, innovative solutions like synthetic tokens exist to bridge the gap between Bitcoin and the Ethereum DeFi ecosystem. These tokens represent Bitcoin on the Ethereum blockchain, allowing you to participate in DeFi activities like borrowing and lending.
What are wBTC and tBTC?
To allow borrowing against Bitcoin on Ethereum, synthetic tokens have been created that represent BTC. The two main options are Wrapped Bitcoin (wBTC) and renBTC (tBTC).
Wrapped Bitcoin (wBTC)
wBTC is the oldest and largest tokenized BTC project, with billions of BTC collateralized. In order to acquire wBTC, you would typically purchase it from an authorized merchant using BTC. The BTC is held in a secure wallet managed by BitGo, who in return issues wBTC directly on the Ethereum blockchain at a 1:1 ratio. You can then redeem your wBTC for native bitcoin via authorized merchants at any time.
Tokenized Bitcoin (tBTC)
tBTC offers a trustless alternative to wBTC. Unlike wBTC, which relies on a centralized custodian to hold the underlying bitcoin, tBTC utilizes a decentralized network of validators to ensure the security of the underlying bitcoin. This adds an extra layer of trust for users who prefer a non-custodial solution. With both wBTC and tBTC, you effectively receive the value of your bitcoin as a token that can be used on the Ethereum network.
How to Get wBTC and tBTC
To obtain wBTC or tBTC, you need to follow a few steps that involve bridging your bitcoin between the bitcoin and Ethereum blockchains. Here’s a detailed process for both wBTC and tBTC:
Wrapped Bitcoin (wBTC):
- Choose an authorized merchant: To get wBTC, you can use merchants such as CoinList or Maker. These merchants will act as intermediaries to mint wBTC tokens.
- Deposit BTC: Transfer your Bitcoin from your personal wallet to the merchant’s address.
- Request wBTC: After depositing BTC, submit a request to the custodian to mint the corresponding wBTC tokens.
- Receive wBTC: Once the custodian has minted the wBTC tokens, they will be sent to your Ethereum-compatible wallet.
renBTC (tBTC):
- Choose a tBTC vault: Select a tBTC vault that is compatible with your Ethereum wallet. Some examples include Loopring and Kyber Network.
- Deposit BTC: Transfer your Bitcoin to the tBTC vault’s BTC address.
- Mint tBTC: After depositing BTC, the vault will generate an equivalent amount of tBTC on the Ethereum blockchain.
- Receive tBTC: Once the tBTC tokens are minted, they will be sent to your Ethereum-compatible wallet.
Finding a Protocol That Accepts Synthetic BTC Tokens
Now that you have wBTC or tBTC, you can access various DeFi protocols that accept these synthetic tokens as collateral. When selecting a protocol, consider the unique features and interest rates, and ensure you understand the terms and conditions before proceeding.
Major lending protocols like Aave, Maker, and Compound support wBTC or tBTC as collateral. Borrowers can deposit these tokens representing their BTC and take out loans in stablecoins or other cryptocurrencies. Available credit is calculated based on collateralization ratios, with loans requiring overcollateralization for safety. The loans are collateralized by the wBTC/tBTC which can then be redeemed for the underlying BTC upon loan repayment.
What is Rocko and How Can It Be Used to Get a DeFi Loan
While the process of supplying wBTC/tBTC as collateral and obtaining loans on platforms like Aave, Maker, and Compound works well, it still requires a level of technical knowledge and effort. This is where Rocko comes in as a gateway to simplify this process.
Rocko is a non-custodial DeFi application that allows users to leverage their crypto holdings for loans in a streamlined manner. Through its intuitive interface, Rocko guides users through finding the best loan offers available across major lending protocols that support these synthetic bitcoin tokens.
How to Use Rocko to Get a DeFi loan Using Crypto as Collateral
To get started, users first sign up using their email. They can then set up their ideal loan by selecting what and how much to borrow, which crypto to use as collateral, and the lending protocol. They are able to compare various protocols such as Aave and Compound. Rocko users can also easily evaluate parameters like interest rates, loan-to-value ratios, collateralization requirements, and loan terms to select the optimal option.
To transfer the crypto collateral needed for the loan, Rocko users can connect an Ethereum wallet, link their Coinbase account, or manually transfer the funds from a different exchange account. This system allows for ultimate flexibility.
By providing an easy-to-use interface, Rocko removes the technical overhead of getting and managing loans on-chain. This makes it simpler for mainstream users to tap into open finance using their bitcoin in a secure and non-custodial manner. Whether it’s for accessing liquidity, funding investments, or managing financial obligations, Rocko facilitates a seamless borrowing experience while promoting financial inclusivity in the decentralized finance space.
So, if you’re interested in using Rocko, join the Rocko waitlist to access a simpler, more efficient way of unlocking the potential of DeFi borrowing with your Bitcoin holdings. Increase your financial flexibility and take advantage of the opportunities offered by decentralized finance!
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