What are Bitcoin-linked tokens? As we explained at the beginning of the article, these tokens are created specifically to replicate the value of BTC as accurately as possible.

But not only that, they are created on a different blockchain than Bitcoin (which, due to its characteristics, is not very practical). The most common is to see them represented on the Ethereum blockchain or on the Binance Smart Chain.

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DeFi world programmed on the Binance Smart Chain.

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The goal? To make it manageable, cheap, and fast, so that it can be used efficiently and with low fees primarily in the world of DeFi (Decentralized Finance).

How is the value of Bitcoin replicated? In order to have a value as close as possible to BTC, these tokens use different mechanisms:

Some fully back their tokens with bitcoins. In other words, for every Bitcoin-linked token they create, they have to acquire one BTC and lock it up in their reserves to "back" the value of this new token.

Others (we will see more about this later) back it with synthetic mining, and to peg the price to BTC, they use a combination of deflationary rebasing and open market purchases.

As you can see, there are different mechanisms, more or less complex, to try to replicate the price of BTC. The question is their effectiveness, i.e. how accurately they replicate it. We will see this in the "advantages and disadvantages" section.

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The main Bitcoin-linked tokens

There are more and more Bitcoin-linked tokens, so it is impossible to know the entire list. But let's give an overview of the most important ones:

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WBTC, pBTC, BTCB y τBTC

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There are more and more tokens linked to Bitcoin, so it's impossible to know the entire list. But let's give an overview of the most important ones:

Wrapped Bitcoin (WBTC): was one of the first to appear. It's an ERC-20 token on the Ethereum blockchain. Each token is backed 1:1 by BTC reserves. Here is its whitepaper.

pTokens BTC (pBTC): is an ERC-777 token on the Ethereum blockchain. Similar to WBTC, each token is backed 1:1 by BTC reserves.

Bitcoin BEP2/BEP20 (BTCB): is a token issued by the Binance exchange, and it can be on either the Binance Chain (BC) or the Binance Smart Chain (BSC). Hence, the token can be BEP2 or BEP20. Each token is 100% backed by the same amount of BTC.

τBitcoin (τBTC): Each token is backed by hashrate tokens, i.e., tokenized mining power. This token is Bitcoin Standard Hashrate (BTCST). And to ensure its 1:1 relationship with BTC, it uses the τ /ˈtaʊ/ protocol.

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Advantages and disadvantages of these tokens

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By now, you may have an idea of the advantages of these tokens linked to Bitcoin: convenience, speed, lower fees, and overall efficiency. All of which are essential for the development of the DeFi world.

It all sounds great, but not everything that glitters is gold, so what are their disadvantages?

Well, obviously these tokens have several risks. To summarize, we will focus on the two main risks: lack of real backing and inefficiency in replicating the price of BTC.

Lack of backing: it's possible that at some point these tokens may not be truly backed by BTC reserves as they claim. However, this information is usually public, so we can verify it ourselves.

In the case of BTCB, for example, we have the BTC reserve address here, and here is the BTCB asset page on the Binance Chain.

Inefficiency in replication: this is a significant issue, especially in the short term, as we may want to exchange these tokens for BTC and realize that they are worth considerably less.

And in some cases, it can be quite severe, as we have seen in recent weeks with τBTC. Below is its performance compared to BTC.

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As you can see, the relationship is not exactly 1:1 compared to BTC. In fact, it even dropped to less than half a BTC at one point!

Then there are other cases that are better for the heart, like pBTC, which reached a value of 1.25 BTC! However, it also shows very high volatility at certain times, and has dropped to half a BTC (which is not so good for the heart).

Tokens linked to BitcoinImage taken from coinmarketcap.com. pBTC/BTC graph.Undoubtedly, the most accurate one is WBTC, as it aligns quite well with the price of BTC. Here is its graph.

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Image taken from coinmarketcap.com. WBTC/BTC graph.

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