BTC Parachain at a Glance

The BTC Parachain connects the Polkadot ecosystem with Bitcoin. It allows the creation of PolkaBTC, a fungible token that represents Bitcoin in the Polkadot ecosystem. PolkaBTC is backed by Bitcoin 1:1 and allows redeeming of the equivalent amount of Bitcoins by relying on a collateralized third-party.

PolkaBTC in the Polkadot ecosystem.

Fig. 1 The BTC Parachain allows the creation of collateralized 1:1 Bitcoin-backed tokens in Polkadot. These tokens can be transfered and traded within the Polkadot ecosystem.

Functionality

On a high-level, the BTC Parachain enables the issuing and redeeming of PolkaBTC. The issue process allows a user to lock Bitcoin on the Bitcoin chain and, in return, issue PolkaBTC on the BTC Parachain. Consequently, the redeem process allows a user to burn PolkaBTC on the BTC Parachain and redeem previously locked Bitcoins on Bitcoin. Users can trade PolkaBTC on the BTC Parachain and, through the Relay Chain, in other Parachains as well. The issue and redeem process can be executed by different users. Typically, this process is augmented by a collateralized realized third-party, a so-called vault.

BTC Parachain functionalities.

Fig. 2 The BTC Parachain includes a protocol to issue PolkaBTC by locking Bitcoin and a protocol to redeem Bitcoin by burning PolkaBTC tokens.

Components

The BTC Parachain makes use of two main components to achieve issuing and redeeming of PolkaBTC:

  • XCLAIM(BTC,DOT): The XCLAIM(BTC,DOT) component implements four protocols including issue, transfer, redeem, and replace. It maintains the PolkaBTC tokens, i.e. who owns how many tokens and manages the vaults as well as the collateral in the system.

  • BTC-Relay: The BTC-Relay component is used to verify that certain transactions have happened on the Bitcoin blockchain. For example, when a user issues a new PolkaBTC an equivalent amount of Bitcoins needs to be locked on the Bitcoin chain. The user can prove this to the PolkaBTC component by verifying his transaction in the BTC-Relay component.

The figure below describes the relationships between the components in a high level. Please note that we use a simplified model here, where users are the ones augmenting the issue and redeem process. In practice, this is executed by the collateralized vaults.

BTC Parachain components.

Fig. 3 The BTC Parachain consists of two logically different components. The XCLAIM(BTC,DOT) component (in green) maintains the accounts that own PolkaBTC tokens. The BTC-Relay (blue) is repsonible for verifying the Bitcoin state to verify transactions. Users (in purple) are able to create new PolkaBTC by locking BTC on the Bitcoin chain and redeeming BTC by burning PolkaBTC. Also, users can trade PolkaBTC on the BTC Parachain and in the wider Polkadot ecosystem.