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Tokenized Bitcoin on Ethereum explained
Tokenized Bitcoin on Ethereum explained
Updated over a week ago
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Bitcoin is typically viewed as a “reserve asset” or store of value in the cryptocurrency space. As a result, it has the highest adoption, best liquidity, highest average trading volume, and remains the top crypto by market capitalization. In fact, some people believe that there isn’t even a need for any cryptocurrencies other than Bitcoin. Their argument is that Bitcoin could cater to all use cases that altcoins are attempting to.

However, blockchain technology is flourishing in many different segments. The Decentralized Finance (DeFi) movement aims to bring financial applications to the blockchain. These decentralized applications (DApps) run on public, permissionless networks and enable trustless financial transactions without the need for a central coordinating party. While the idea of DeFi is blockchain-agnostic, meaning it could happen on any smart contract platform, most of this activity is happening on Ethereum.

Bitcoin is the backbone of the cryptocurrency market, and yet, it can’t take advantage of developments that happen in other parts of the ecosystem. Some projects have been working on solving this problem.

Is there a way to use bitcoin for more than what it can do while keeping the Bitcoin network intact? Well, the growth of tokenized bitcoin on Ethereum suggests that there is a demand for it.

What is tokenized Bitcoin?

Before we start, there’s something we should clear to avoid confusion. If you’ve read our What is Bitcoin? article, you know that Bitcoin with an upper-case b is the network, and bitcoin with a lower-case b is the unit of account.

The idea behind tokenizing bitcoin is relatively simple. You lock BTC through some mechanism, mint tokens on another network, and use the BTC as a token on that network. Each token on the other network represents a specific amount of bitcoin. The peg between the two should be kept, and the process should be reversible. In other words, you can destroy these tokens, resulting in the “original” bitcoins getting unlocked again on the Bitcoin blockchain.

In the case of Ethereum, this means ERC-20 tokens that represent bitcoin. This allows users to make transactions on the Ethereum network denominated in bitcoin. This also makes bitcoins programmable.

You can check the current total sum of bitcoin tokenized on Ethereum on btconethereum.com.

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