Bitcoin bridge is a term used to describe the method of tokenizing bitcoin for use on another (presumably ethereum) blockchain. Bitcoin is the largest crypto asset by market cap and enjoys the most liquid markets. However, unlike Ethereum, there are no native btc smart contracts yet (although there are many projects working on this). In order to take advantage of DeFi composability and pooled liquidity, bitcoin needs a “bridge” to move over to Ethereum blockchain. Once on Ethereum, bitcoin can be used as collateral for lending, added to liquidity pools, traded on DEX’s and more.
ERC-20 Wrapped Bitcoin
In order to be used on Ethereum blockchain, btc needs to be “tokenized”. In other words, it needs to be wrapped and represented on Ethereum blockchain as an ERC-20. BTC bridges like tBTC and RenBTC provide the technology to trustlessly create btc on Ethereum. RenVM (Ren Virtual Machine) is part of the web 3.0 ecosystem. A user can send their BTC to a RenVM address. The Ren network locks the BTC on the BTC network and mints, 1:1, a new renBTC asset on Ethereum blockchain. RenBTC can then be deposited in a liquidity pools, traded on Dex’s and used for all other trading strategies on defi.
Once a DeFi trader goes to unwrap their bitcoin, they would simply send it back to a wrap provider and then redeem the ERC-20 version for the original bitcoin.
Bitcoin bridges play an important role in taking the world’s most liquid, and highest market cap cryptocurrency and making it available on all of the DeFi trading infrastructure that has been built on Ethereum blockchain. Because of its large market cap, bitcoin has the potential to add an immense amount of liquidity to the Ethereum DeFi ecosystem. Much of the mined bitcoin in circulation sits idle in wallets. Bitcoin bridges provide a DeFi venue for hodlers to put their coins to work.
Fully decentralized Bitcoin bridges rely on smart contracts to both lock BTC and mint the new asset on Ethereum. Like with any smart contract based coins/tokens, the contracts must be audited for bugs. With centralized Bitcoin Bridges like WBTC, the typical risks of centralized platforms apply.