On October 1, 2020, BitGo announced that it would integrate Chainlink, the largest decentralized oracle network in the world, for on-chain auditing of wrapped Bitcoin (WBTC). In the past few months, BitGo has helped bring over $1 billion worth of Bitcoin onto the Ethereum blockchain as WBTC, which is an ERC20 token backed by Bitcoin on a 1:1 ratio.
Bringing Liquidity To DeFi
The use of wrapped Bitcoin has helped bring billions of dollars of liquidity into the DeFi space on the Ethereum blockchain. To confirm that Bitcoin held at BitGo Trust represents wrapped Bitcoin in circulation, anyone can check the public blockchain using a blockchain explorer. However, BitGo felt it was necessary to boost transparency and audit-ability of WBTC. As a result, they have become the first to adopt the “Proof of Reserve” mechanism developed by Chainlink.
About The Proof of Reserve Mechanism
The Proof of Reserve mechanism makes it possible for DeFi applications that use WBTC to automate the process of auditing the value of BTC held by BitGo Trust. Using the mechanism will help to streamline and speed up the audit process.
With the Proof of Reserve, developers can easily integrate the WBTC verifiable reserve into smart contracts. The result is that transparency of WBTC Bitcoin reserves can be easily accessible to all users of the DeFi application.
Commenting on the issue, the BitGo CEO, Mike Belshe said that the proven ability of Chainlink to secure value in the blockchain space gave them great confidence that users could trust the new feature. It will ensure that users have access to the most accurate record of the WBTC Bitcoin reserves.
Total Transparency And Full Automation
DeFi applications on Ethereum can connect to a continually updated Proof of Reserve Reference contract that is powered by a decentralized oracle network. It will ensure access to total transparency, and a fully automated mechanism of reading WBTC reserves.
DeFi apps can query the Proof of Reserve Contract to verify that every WBTC is fully backed by an equal reserve balance of BTC at the BitGo custodian address on Bitcoin’s blockchain. The Chainlink oracles will check the balance of WBTC custody wallets every ten minutes. If it spots a deviation beyond a set threshold, the oracle will send an on-chain update to the WBTC reference contract.
Monitoring
While Chainlink nodes are going to monitor the contract off-chain, they will only push on-chain transactions when WBTC is burned or minted, causing a change in the reserve balance. If there is a deviation, applications can use customized logic to protect the funds of their users.
For instance, a money protocol that uses WBTC as collateral can check the current collateralization before authorizing a lending or borrowing action. It can then reject or accept an action based on the updated oracle report. The mechanism will protect against black swan events while being beneficial for DApps that use WBTC as collateral to secure other digital assets.
Summary
The DeFi sector is still relatively young but it has experienced a major boom this year. There have already been numerous Issues with security such as the recent hacking of Andre Cronje’s new DeFi protocol. By adding the Proof of Reserve mechanism, it will help to scale the reliability of WBTC to match the massive growth in demand, which will increase the value of the DeFi sector securely.
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