Chainlink Brings Onchain Proof of Reserve to WBTC
With close to $1 billion bridged to the Ethereum blockchain in the form of Wrapped Bitcoin (WBTC), it’s clear that the demand for cross-chain crypto assets within DeFi is very real. To scale WBTC’s reliability and support its growing demand, we are excited to be working with the Chainlink team to streamline the auditability of WBTC reserves. DeFi applications can now receive definitive onchain proof about the fully backed collateralization of WBTC. This novel onchain proof of reserve is possible because of the openness of the Bitcoin network, transparency provided by BitGo and the highly secure decentralized oracle network that Chainlink powers.
To boost the transparency and auditability of Wrapped BTC (WBTC), the most liquid and utilized wrapped form of Bitcoin in the market, BitGo has adopted Chainlink’s Proof of Reserve mechanism. Now live on testnet (and soon mainnet), this Chainlink functionality enables decentralized applications on Ethereum to fully automate the burden of auditing the BTC value custodied by BitGo, in a trustless and censorship resistant manner, removing the need to rely on manual off-chain processes like reading audit reports.
How Chainlink’s Proof of Reserve Feature Works for WBTC
In order to provide transparent and fully automated readings of WBTC’s reserves on-demand, DeFi applications on Ethereum can connect to a Proof of Reserve Reference Contract that’s continually updated by a Chainlink-powered decentralized oracle network. Smart contract applications on Ethereum can then query the Proof of Reserve Contract to instantly verify that each WBTC coin is fully backed by an equal reserve balance of BTC in BitGo’s custodian address on the Bitcoin blockchain.
The WBTC Proof of Reserve reference contract uses a decentralized Chainlink oracle to check the balances of BitGo’s WBTC custody wallets every ten minutes (the average time between Bitcoin blocks). Whenever a deviation is spotted beyond a certain defined threshold (e.g. 1%), Chainlink oracles will push an on-chain update to the reference contracts with the new balance. In this regard, Chainlink Nodes will constantly monitor the contract off-chain, but only push on-chain transactions when events happen like the minting and burning of WBTC tokens, which result in changes to the reserves.
If the collateralization reported by the Proof of Reserve contract deviates from the minted amount of WBTC, applications can employ customized logic to swiftly and safely protect user funds. For example, a money market protocol can check WBTC collateralization before taking a borrowing/lending action, which either accepts or denies a transaction based on the oracle report. This feature can be especially beneficial for decentralized applications that utilize WBTC as collateral to secure other digital assets. By automating the auditing process and increasing the transparency in WBTC collateralization, user trust increases across the market and DeFi applications have additional options for protection against unexpected events.
To ensure that ownership data from the Bitcoin blockchain is accurate and delivered on-time to the Ethereum network, it’s imperative that the oracles be tamper-proof against any kind of manipulation or downtime. At BitGo, security is our utmost priority, which is why we decided to leverage Chainlink’s market leading solution as a means of providing another strong security guarantee to our users about the collateralization of WBTC. Chainlink is the most secure oracle network available in the market, with a proven track record of securing high-value smart contracts through the delivery of high-quality data in a highly available and tamper-resistant manner. We are confident that Chainlink will provide WBTC users with a dependable, on-demand source of collateralization information, as well as an additional level of transparency for tracking WBTC reserves.
We are excited to see how smart contract developers leverage WBTC in new and interesting smart contract designs, thanks to the additional level of trust they receive on their WBTC funds. If you would like to implement the new feature into your smart contract applications, use the following documentation to integrate it into your application as soon as we hit mainnet.