Course Content
Tokenized Bitcoin on Ethereum Explained
Explain Like I'm Five (ELI5) Tokenized Bitcoin is a way to use bitcoin on other blockchains. But wait, isn’t Bitcoin great already? Indeed it is! It has a solid use case, and it already acts as a kind of public good. At the same time, its purposely limited features leave little room for further innovation. What else could we do with Bitcoin? Some Bitcoiners say we shouldn’t do anything in particular, and that’s reasonable. Then again, others believe we should find ways to use Bitcoin on other blockchains. And this is where we arrive at tokenized BTC on Ethereum. Why tokenize Bitcoin? Does this even make sense? How is tokenized Bitcoin created? Can you get your hands on tokenized BTC? Read more below if this interests you.
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Tokenized Bitcoin on Ethereum Explained
About Lesson
There are many ways to tokenize Bitcoin on Ethereum and other blockchains. They all have various degrees of decentralization, different assumptions about trust and risks, and may maintain the peg differently.
The two main types can be defined as custodial and non-custodial. The first type involves a centralized custodian, and the tokens may also be minted by that party. This introduces counterparty risk, as the entity custodying the bitcoins has to be trusted (and it has to stay in business). On the other hand, this implementation may be considered more secure than the alternatives.
The other solutions are a bit different. There’s no trusted entity needed, as automated on-chain processes do the entire minting and burning process. The collateral assets are locked, and tokens are minted on the other chain through some on-chain machinations. The funds are locked on-chain until they are unlocked again when the tokens are destroyed. While this eliminates counterparty risks, it increases potential security risks. Why? Well, in this case, the burden of risk is entirely on the shoulders of the user. If a user or contract error happens that leads to loss of funds, they’re likely lost forever.
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