A co-founder of the Bitcoin Infrastructure Company, Babylon Labs, claims to have built a system that allows native bitcoin to be used as trustless collateral to borrow on the Ethereum blockchain.
On a Wednesday x Post.BTC) “To be used trustlessly as collateral to borrow Ethereum for the first time.”
Comments follow Babylon’s let go of a white paper in early August, outlining what it calls a Bitcoin trustless vault system. The system uses the Bitcoin Smart Contract verification system Bitvm3 To lock BTC in per-user vaults, where withdrawals (redemption or liquidation) are gated by cryptographic proofs of the external contract state of the contract verified in Bitcoin.
It allows users to lock bitcoin and bridge it to Ethereum without relying on a federated custodian or bridge. On the Ethereum side, a smart contract validates BTC Vault through a Bitcoin light client before accounting for collateral.
An experimental version of the resulting token already exists available in onchain lending protocol morpho. However, it is in the testing phase, with a total market liquidity of $ 14 in USDC (USDC). TSE described VaultBTC as “an intermediate unregulated asset that interfaces the vault with Morpho and allows trustless depositors and liquidators to withdraw BTC.”
Babylon Labs and TSE did not respond to Cointelegraph’s request for comment by publication.
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How reliable is it?
While the previously explained part of the system is trustless, some parts remain trustless. Per the white paper, Babylon’s Bitcoin evasions use whitelisted liquidators to monitor the price and state of the vault, resulting in a liquidation system that is not permissive and introduces assumptions of trust.
Even with co-sign means to prevent censorship, the model still assumes sufficient liquidity (and sometimes large lenders) are acting correctly. Even though they cannot steal Bitcoin thanks to the system design, it introduces an assumption of trust in the system.
Liquids depend on an oracle price, so they inherit the Oracle’s accuracy, timeliness, and censorship resistance risks. If the oracle is wrong or delayed, the system makes the wrong call. Oracle provider with existing relationships with Babylon Labs, Band Protocol and Pyth Network did not respond to Cointelegraph’s request for comment by publication.
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What really changes?
The white paper gives a simple example: “Bob holds 1 BTC and wants to borrow $50,000 in a stablecoin from Larry through a lending protocol on Ethereum.” It will be necessary that if the price of Bitcoin falls below $ 50,000, Larry can liquidate the collateral, and if Bob pays the loan on time, he withdraws the BTC.
Babylon Labs explains that current systems require many assumptions of trust. Bob can give the Bitcoin to Larry for safekeeping, trusting that he will return it.
Otherwise, Bob can keep the Bitcoin and promise to allow Larry to liquidate it if the price falls – but Larry trusts Bob to keep his word. Finally, Bob can bridge Bitcoin to Ethereum as wrapped Bitcoin (WBTC) and use it in a smart contract as collateral. However, he had to trust the casing mechanism itself.
WBTC requires trust because the bitcoin backing is held by a centralized custodian who must be trusted not to lose, freeze, or abuse the funds. Users depend on the honesty and solvency of the custodian rather than cryptographic guarantees. This is the main issue discussed by the trustless implementation of Babylon.
“Trustless vaults eliminate all presumptions of trust. Bob and Larry co-sign a set of bitcoin transactions specifying conditional spending rights,” the white paper notes.
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