• The MakerDAO Governance has voted to accept Bitcoin as a new security asset in the Maker protocol and therefore on the Ethereum blockchain.
  • The wBTC is the first ERC20 token secured with Bitcoin in a 1:1 ratio.

MakerDAO is a protocol behind the Stablecoin DAI, which is bound to the USD at a ratio of 1:1. DAI is based on the Ethereum blockchain and therefore carries some volatility risks. On the platform, ethers can be deposited in Smart Contracts, creating a Collateralised Debt Position (CDP).

Yesterday, MakerDAO Governance, the community of MKR token holders, announced that Bitcoin will be included in the Ethereum blockchain. As a result of yesterday’s vote, the wrapped Bitcoin will be launched as an ERC20 token on the Ethereum blockchain, secured 1:1 with Bitcoin. So far, MakerDAO offers ETH, BAT and USDC as collateral:

The wBTC will help to bring more liquidity to the Ethereum and decentralised finance (DeFi) ecosystems and to the decentralised exchanges (DEX). As the fourth type of collateral approved by MakerDAO governance, the WBTC can now be used in addition to ETH, BAT and USDC to open maker vaults to generate DAI.

In simple terms, this means that Bitcoin holders can convert their BTC to wBTC (Bitcoin is placed on the Ethereum blockchain) and then use it to generate DAI. The Maker protocol is so flexible that almost any type of asset that can be converted into tokens can be brought into the system as collateral.

MakerDAO works together with Oasis Borrow, a decentralized financial platform that handles the custody of Bitcoin. All investors who want to use wBTC to generate DAI must log in to CoinList and register an account, as well as go through the KYC process. Afterwards a feature of Coinlist can be used to convert BTC to wBTC.

Afterwards the wBTC can be sent to Metamask, Ledger, Trezor or any other ERC20 compatible wallet. In the last step a wBTC Vault can be created and on Oasis-app/borrow the wBTC can be deposited as collateral and the DAI can be generated. A step by step guide can be found here. The MakerDAO community sees a great opportunity especially in the decentralized financial market, which can benefit from additional liquidity from Bitcoin. Most recently, the DeFi market reached a total volume of more than one billion USD bound in Ethereum-based DeFi applications.

Liquidity bottlenecks at MakerDAO not uncommon

MakerDAO carries out a comprehensive risk analysis before each integration, as in the past large price fluctuations caused liquidity bottlenecks on the platform. For example, on March 12, 2020, Ethereum, just like the entire crypto market, showed a sharp drop in price, with Ethereum falling by more than 20% in price.

As a result, the platform suffered a system failure and was blocked for several hours. Numerous borrowers had to watch their collateralized CDPs being liquidated at 100% of their value. Normally, liquidations would have cost between 30% and 40% of the borrowed funds.