Share this article

Polkadot Now Has a Decentralized Version of 'Wrapped' Bitcoin

Interlay introduces a decentralized and trustless wrapped bitcoin bridge for DeFi users on Polkadot who are wary of third-party custodians and merchants.

Updated Apr 9, 2024, 11:30 p.m. Published Aug 11, 2022, 2:14 p.m.
(Westend61/Getty Images)
(Westend61/Getty Images)

Interlay, a decentralized stablecoin network, has launched InterBTC (iBTC) – a wrapped bitcoin token. Wrapped tokens are synthetic (or tokenized) versions of crypto assets not native to the blockchains they exist on. iBTC was launched on Polkadot, a network that allows different blockchains to communicate with each other. One iBTC can be redeemed directly on the Bitcoin blockchain for one BTC (1:1 redemption ratio). The wrapped token allows bitcoin to be used for decentralized finance (DeFi) applications on Polkadot via a bridge (a system connecting one blockchain to another).

Wrapped bitcoin

While several brands of wrapped bitcoin exist, the most popular one is an ERC-20 version aptly named wrapped bitcoin (wBTC). BitGo, Kyber and Ren created wBTC in 2019 and it now dominates the wrapped bitcoin market. According to Dune, a crypto data analytics site, wBTC accounts for almost 85% of all wrapped bitcoin on Ethereum.

STORY CONTINUES BELOW
Don't miss another story.Subscribe to the The Protocol Newsletter today. See all newsletters

Read more: What Are Wrapped Tokens?

Advertisement

The wBTC ecosystem has two key players – merchants and custodians. Users exchange regular bitcoin for wBTC with merchants like Kyber, Rhino.Fi (formerly DeversiFi) and Ren. Merchants have relationships with custodians who receive and hold that regular bitcoin and mint one wBTC for each bitcoin deposited with them. The minted wBTC token is sent to the user who can redeem the underlying bitcoin at any time. Redemption involves returning the wBTC token to the merchant, who then requests the bitcoin collateral from the custodian. Finally, the custodian burns the wBTC token and releases the bitcoin to the merchant and user.

What’s different about iBTC?

The traditional wBTC ecosystem has one glaring weakness – centralization. In order to obtain wBTC, users must give bitcoin custody to trusted third parties. Given the recent developments in the DeFi community, a more decentralized and trustless solution would be significantly better.

Interlay claims iBTC is that better solution. Apparently, iBTC is built on a trustless model that borrows its security from the token’s target blockchains (in this case, Bitcoin and Polkadot). The model uses decentralized vaults that hold collateral, instead of relying on third-party merchants and custodians.

How iBTC works

Interlay followed in MakerDAO’s footsteps by incorporating overcollateralized and decentralized vaults. The vaults are run by members of the Interlay community who must deposit multi-asset collateral (e.g. bitcoin, USDC, DOT) as insurance (in case the vault fails). According to Interlay, the overcollateralization gives iBTC a stablecoin-like quality (wrapped tokens and stablecoins have similar mechanics).

A visual representation of how users interact with the Interlay network and its decentralized vaults to exchange bitcoin for iBTC (Interlay.io)
A visual representation of how users interact with the Interlay network and its decentralized vaults to exchange bitcoin for iBTC (Interlay.io)

Users deposit bitcoin into the vaults in exchange for iBTC. At this point, the bitcoin is locked in the vault while vault collateral is locked by the Interlay network. Users then return iBTC to the vault, thereby unlocking and releasing their bitcoin, which triggers the Interlay network to release vault collateral. If a vault fails to return bitcoin to a user, the network liquidates vault collateral and reimburses the user.

Advertisement

Read more: How Does MakerDAO Work? Understanding the 'Central Bank of Crypto'

Acala, a stablecoin and trading platform, as well as Moonbeam, an Ethereum-compatible smart contract platform, are two Polkadot applications where iBTC can be used. Interlay plans to extend iBTC compatibility to Ethereum, Cosmos, Solana, Avalanche and other DeFi networks.

More For You

Exchange Review - March 2025

Exchange Review March 2025

CoinDesk Data's monthly Exchange Review captures the key developments within the cryptocurrency exchange market. The report includes analyses that relate to exchange volumes, crypto derivatives trading, market segmentation by fees, fiat trading, and more.

What to know:

Trading activity softened in March as market uncertainty grew amid escalating tariff tensions between the U.S. and global trading partners. Centralized exchanges recorded their lowest combined trading volume since October, declining 6.24% to $6.79tn. This marked the third consecutive monthly decline across both market segments, with spot trading volume falling 14.1% to $1.98tn and derivatives trading slipping 2.56% to $4.81tn.

  • Trading Volumes Decline for Third Consecutive Month: Combined spot and derivatives trading volume on centralized exchanges fell by 6.24% to $6.79tn in March 2025, reaching the lowest level since October. Both spot and derivatives markets recorded their third consecutive monthly decline, falling 14.1% and 2.56% to $1.98tn and $4.81tn respectively.
  • Institutional Crypto Trading Volume on CME Falls 23.5%: In March, total derivatives trading volume on the CME exchange fell by 23.5% to $175bn, the lowest monthly volume since October 2024. CME's market share among derivatives exchanges dropped from 4.63% to 3.64%, suggesting declining institutional interest amid current macroeconomic conditions. 
  • Bybit Spot Market Share Slides in March: Spot trading volume on Bybit fell by 52.1% to $81.1bn in March, coinciding with decreased trading activity following the hack of the exchange's cold wallets in February. Bybit's spot market share dropped from 7.35% to 4.10%, its lowest since July 2023.

Higit pang Para sa Iyo

Image overlay test three

close up of hands using mobile application on smartphone

Dek: Image overlay test three