eBTC, a collaboration between BadgerDAO and Lido, has emerged as a bitcoin (BTC)-pegged asset built on Ethereum that allows users to borrow BTC directly on Ethereum at virtually no cost.

Read on to learn what eBTC is and how it works. 

What Is eBTC?

eBTC is a protocol designed to facilitate the borrowing of synthetic bitcoin assets using Lido’s staked ether (stETH) as collateral without attracting any borrowing fees. According to the developers, the protocol is powered by “non-custodial, immutable, and governance-minimized smart contracts.” 

eBTC prioritizes the ETH/BTC ratio, which offers an alternative to off-chain trading and strategies that are executed by centralized protocols. By bringing these activities on-chain, eBTC empowers users to engage in ETH/BTC ratio-related activities.  In addition, its composability allows developers to leverage its functionality and build innovative solutions. 

Built on the Ethereum staking layer, eBTC aims to address the drawbacks of centralized and opaque financial infrastructure. 

As proof-of-stake evolves and liquid staking derivatives become more popular, eBTC emerges as a financial alternative to options within decentralized finance (DeFi) and centralized finance (CeFi) sectors.

How Does eBTC Work?

The eBTC protocol operates on a mechanism that allows users to borrow over-collateralized eBTC using deposited ether without incurring any interest fees, which is common with DeFi lending protocols. Instead, users’ deposited ether is staked with Lido as stETH, which is used as collateral when borrowing eBTC.

The protocol generates revenue through the accrued staking yield percentage from all the system’s collateral, termed the “protocol yield share.” eBTC also has a liquidation mechanism to maintain its solvency. It works such that when the collateral ratio of a collateralized debt position (CDP) dips below a set threshold, CDP becomes eligible for liquidation. Incentivized by a gas stipend, liquidators can settle outstanding debt in exchange for surplus collateral. Additionally, under-collateralized debt positions undergo debt redistribution in order to stabilize the system.

Redemptions on the protocol enable users to exchange eBTC for stETH at face value based on the spot BTC/stETH Oracle price, allowing for swapping at price equality regardless of market fluctuations.

Users initiate redemptions by transferring eBTC into the system, which calculates the equivalent amount of stETH based on the latest Oracle price. The redeemed stETH is withdrawn from the CDP, and the eBTC payment is deducted from the CDP’s debt and burned. eBTC uses Chainlink as its Oracle.

The eBTC protocol also supports flash loans, enabling users to borrow eBTC or stETH collateral within the same block. Flash borrowers mint debt or withdraw collateral directly from the pool and repay it within the same transaction. A fee of 0.03% is imposed on the borrowed amount, subject to possible future adjustments through governance processes.

Notably, unlike popular wrapped bitcoin tokens like wBTC, eBTC aims to eliminate the need for custodial services and cross-chain bridges, reducing potential attack vectors in DeFi.

The BadgerDAO and LIDO Partnership

BadgerDAO partnered with Lido, a liquid staking solution, to launch eBTC on March 27, 2024. The eBTC protocol uses the ether collateral for staking with Lido to develop staking rewards, potentially offering a cheaper borrowing option.

This partnership allows users to borrow bitcoin without upfront fees or interest charges. In addition, the collaboration introduces an incentive program known as “Get Paid to Borrow Bitcoin,” which is meant to increase the appeal of borrowing within the ecosystem.  

As part of the partnership, Lido’s Liquidity Observation Lab (LOL) is, at the time of writing, offering an incentive program that rewards early adopters of eBTC with additional stETH rewards worth 15 stETH ($55,000) in total. These rewards to be distributed through an airdrop at the end of this one-month incentive program.

Through the partnership, BadgerDAO wants to establish its market in the Bitcoin ecosystem, while Lido is looking to grow its foothold in DeFi.

What Does eBTC Bring to the Ethereum Ecosystem?

eBTC allows individuals to leverage the Ethereum ecosystem while maintaining their investment and confidence in Bitcoin.

Given that Bitcoin holds a large share of the crypto market, if traditional finance uses DeFi to hedge and earn yields on their BTC holdings, it could substantially increase liquidity within the Ethereum ecosystem. 

For Ethereum users, eBTC is an avenue for gaining exposure to BTC and benefiting from gains associated with a potential rise in bitcoin’s price while retaining their investments in ETH. eBTC also lowers liquidation risk since ether and bitcoin prices are historically correlated, unlike other collateralized debt position products that lend stablecoins against ethereum.

Integrating eBTC also brings more liquidity and cooperation in the Ethereum space by using DeFi mechanisms to manage BTC. This strengthens the Ethereum network and opens the way for more acceptance and use of bitcoin in financial applications.

Final Word

eBTC’s launch has increased interoperability and cooperation between Bitcoin and Ethereum. 

As decentralized finance continues to evolve and integrate with traditional financial products, eBTC supports this shift. The protocol unlocks new opportunities by providing another  DeFi access to Bitcoin enthusiasts, and more BTC access for Ethereum-based DeFi natives.