Bitcoin is widely acknowledged as a store of value in the crypto space, and its high adoption rate, liquidity, average trading volume, and position as the highest market capitalizer reaffirm this. Some argue that there isn’t any need for altcoins because Bitcoin can handle all their use cases. If you are interested in bitcoin trading visit BITLQ.NET
Blockchain technology continues to grow and evolve, especially when it comes to the Decentralized Finance (DeFi) movement. DeFi applications operate on public and permissionless networks that can facilitate thrustless financial transactions without a centralized party. This type of activity is blockchain technology, meaning it could be gone on smart contract platform; however, most DeFi activity is occurrence on Ethereum at present. Bitcoin is the driving force behind the cryptocurrency market, yet it cannot benefit from advancements made elsewhere in that domain. Fortunately, some projects are attempting to resolve this issue by utilizing new technologies.
About Tokenized Bitcoin
Tokenization allows users to convert Bitcoin (BTC) into tokens on other networks, enabling them to make use of BTC as a token. Through this process, each token is representative of a specific amount of bitcoin; consequently, maintaining the peg between network tokens and the original bitcoins. Reversibility is another feature characteristic concerning this method in which destroying these very tokens can result in newly generated Bitcoins being unlocked again from the Bitcoin blockchain.
Ethereum enables users to make transactions on its network denominated in bitcoin through the use of ERC-20 tokens. This makes bitcoins programmable like any other token that exists on Ethereum’s blockchain, adding a digital layer of flexibility and usability to them.
The reason behind Tokenizing Bitcoin on Ethereum
Bitcoin has been purposefully designed with a few specific capabilities that it delivers exceptionally well. However, these features bring inherent limitations as part of the package. Though Bitcoin holds the most significant value of all digital currencies, it can’t reap the advantages brought by other parts of this industry’s innovation. Though you could technically run smart contracts on Bitcoin, its range is substantially lower compared to Ethereum or other platforms optimized for carrying out such tasks.
Tokenizing Bitcoin on other blockchain networks could provide many advantages, such as increased utility, functionality not natively supported on Bitcoin, faster transaction speeds, better fungibility and greater privacy. All while maintaining the core security of Bitcoin intact.
One of the defining features of DeFi is its composability. This means that, because all these applications are built on an open-source, public, and permissionless base layer, they can easily interact with each other for maximum efficiency. In this way, it provides an even greater degree of flexibility than traditional financial systems offer.
Many consider the prospect of bringing Bitcoin to a composable layer of financial building blocks very exciting, as it could open up possibilities for new types of applications that would make use of bitcoin. By leveraging this technology, projects can be developed that wouldn’t have been possible without them.
Working of Tokenized Bitcoin
Tokenizing Bitcoin on Ethereum and other blockchains is becoming increasingly popular, offering various advantages such as a greater degree of decentralization, lower trust and risk assumptions, and different approaches to maintaining the peg.
Custodial and non-custodial wallet types are the two main classifications of wallets. Custodial wallets involve an intermediary, such as a financial institution or exchange, that holds your cryptocurrency tokens for you and may also issue new ones.
This solution carries counterparty risk because the entity managing your funds needs to be trusted; however, it is generally considered more secure than other options. Unlike other solutions, an intermediary is not required as automated on-chain processes are used to manage the minting and burning process. To ensure security, collateral assets are locked while tokens are issued through certain on-chain steps.