In the world of Decentralized Finance, Bitcoin has always been an outlier. However, the wait is over after extensive development as ckBTC is being rolled out on the Bitfinity Wallet, marking a significant but underreported development for BTC in DeFi. Let's look at what ckBTC is and how it works.
What is ckBTC?
ckBTC, short for Chain Key Bitcoin, is a Bitcoin token created by DFINITY on the Internet Computer blockchain - ICP. The token represents Bitcoin and allows users to utilize it on different blockchains, all while being backed by actual Bitcoin on the Bitcoin blockchain.
As a native token on the Internet Computer, ckBTC enables fast and low-cost transactions (~0.0000001 ckBTC) and a higher throughput than regular Bitcoin. Additionally, it's completely tied to the price of Bitcoin, making it possible for Bitcoin to interact with other decentralized applications on ICP.
How does ckBTC work?
As mentioned, ckBTC is backed by real Bitcoin, held in a custodial wallet known as the canister smart contract. When you want to mint ckBTC, you send Bitcoin to the custodial wallet and receive the equivalent amount of ckBTC. Conversely, when you want to redeem your ckBTC for your original Bitcoin, you send back your ckBTC to the canister smart contract and receive your beloved Bitcoin back in your wallet.
This way, all conversions are cryptographically guaranteed, and you will have one-to-one backing between real Bitcoin and the ckBTC you hold. Since a central entity does not do it, you only have to trust in code: the code of the Internet Computer and the good old Bitcoin Network.
Why is ckBTC necessary?
Bitcoin's functionality is still limited to its blockchain. However, the introduction of Wrapped Bitcoin on the Ethereum blockchain has demonstrated the challenges of bridging and trusting your Bitcoin to wrapping services. With the introduction of ckBTC, new possibilities arise for enhancing the trustworthiness and reliability of Bitcoin venturing into other chains. This opens new and exciting use cases for Bitcoin.
What are the use cases of Bitcoin on the Internet Computer platform?
Integrating Bitcoin into the Internet Computer (IC) platform via ckBTC brings several opportunities and benefits for you as a Bitcoin holder and the DeFi user in general.
Bitcoin users will be able to access liquidity pools through InfinitySwap and earn an honest yield on their Bitcoin. Yes, you read that correctly! Farming Bitcoin will be possible, all without leaving your Bitfinity wallet.
Making it also possible to borrow against your Bitcoin, as it will market itself as the more reliable option than borrowing against other cryptocurrencies or on unreliable centralized exchanges, as seen over the last few years.
DeFi applications on the Internet Computer are willing to widely support Bitcoin, making it attractive for new developers to tap into the giant pool of users who already own and understand the concept of the world's oldest cryptocurrency.
Means of Payment
The low transaction fees are meant to make it easier for small payments across the internet; you can tip someone just a few sats on social media platforms or can be rewarded as you play metaverse games on the Internet Computer.
Lastly, the long-awaited and much-discussed topic since the rise of cryptography will take shape as smart contracts on the Bitcoin Network become possible. These smart contracts are meant to be a reliable surrogate for the middleman in all value transfers and could happen on the BTC Network directly instead of relying on third-party chains such as Ethereum or others that have tried but failed.
The introduction of ckBTC in the DeFi space is a long-awaited and monumental Internet Computer development. It opens up new possibilities for Bitcoin - BTC, a household name. We recommend watching out for, studying, and even participating in it as previously unimaginable use cases become a reality for Bitcoin finding its way into Decentralized Finance.