Part 7/12:
The peg mechanism involves locking Bitcoin on the main chain and issuing equivalent tokens on the side chain.
Security of pegs is paramount; the trust assumptions here are often the federated multisig or miners’ honesty.
Risks:
A compromised federation or colluding miners could potentially steal or invalidate tokens.
The security in these systems depends heavily on the trustworthiness of the federation or miners, aligning with the broader theme that trust is traded for scalability.
Wrapped Bitcoin (WBTC): The Trust Layer
Wrapped Bitcoin involves locking BTC in a custodian-controlled multi-sig address and issuing an ERC-20 token on Ethereum that represents Bitcoin.
- This enables Ethereum-based DeFi and other applications to use Bitcoin’s value.