In this three of four part series, we explore several different innovative products available on Core Chain, with a particular focus on non-custodial BTC staking, liquid staking, wrapped bitcoin, and peer-to-peer BTC swaps.

Understanding this material will help you grasp what we mean when we say that Core Chain is the most aggressively Bitcoin-aligned blockchain project in existence.

One of the primary motivations for introducing things like non-custodial bitcoin staking, wrapped bitcoin, and peer-to-peer bitcoin swaps is to facilitate the emergence of a Bitcoin-backed DeFi ecosystem, or BTCfi, for short. Before we get into the technical material, let’s first touch on what BTCfi is and why it matters.

Bitcoin has long been prized for many properties, chief among them its security, decentralization, and trust. Not only have these qualities established Bitcoin as the supreme store of value, they’ve also caused many to wonder about its potential in the field of decentralized finance (DeFi).

As we discussed in part I, Bitcoin's architecture is built around simplicity and robustness, which limits the role it can play underwriting complex applications like those catering to DeFi use-cases. Because Bitcoin is a perfectly sound store of value, increasing its utility and performance requires solutions that do not change the base layer. We want to build decentralized finance applications on Bitcoin, but in a way that doesn’t make it harder for Bitcoin to transform money for all of us. What’s more, this implies that unlocking Bitcoin DeFi means building a smart contract platform, such as Core Chain, that can expand Bitcoin’s unique incentive structure.

The opportunity represented by BTCFi is enormous, as there is a little north of $1T worth of bitcoin waiting to be unlocked via BTCFi (at today’s prices). Needless to say, this means that there is substantial value in building a Bitcoin-backed DeFi ecosystem.

But that doesn’t mean it’ll be easy! Though Bitcoin technically does support certain things like smart contracts, and (sometimes) simple versions of dApps, DAOs, and the rest of DeFi can be built on Bitcoin. But that just isn’t what the network was intended to do. It’s kind of like how things have changed with the emergence of quantum computing. Sure, you can simulate quantum mechanics on a classical computer, but it sure is easier if you can throw a quantum-native system at the problem (if you happen to have one lying around!)

It wasn’t until we saw advances such as staking, wrapping, and swapping, that BTCfi frontiers began opening up at last. The next few sections discuss the implementations of these techniques on Core Chain, how they work, and why they’re important.

Non-custodial bitcoin staking is a major update. If you read our whitepaper, you know that Satoshi Plus has heretofore been based around Delegated Proof of Work and Delegated proof of Stake. With non-custodial bitcoin staking, bitcoin holders are being incorporated as the third part of Satoshi Plus consensus.

How does non-custodial bitcoin staking work on Core Chain? It begins with a Bitcoin-native cryptographic feature that locks up the outputs of a transaction for a pre-defined period of time, during which they can’t be spent. Since this feature locks an asset absolutely for some amount of time, it’s called an “absolute time lock”.

All bitcoin stakers on Core Chain need to do is place their bitcoin in absolute time locks as part of a transaction, and this doesn’t require them to surrender custody of it. Since non-custodial bitcoin stakers also participate in Core Chain’s consensus by delegating their staked bitcoin, they have to add the same information that Bitcoin miners include in their delegated blocks:

Of course, bitcoin stakers are rewarded for this by receiving CORE token rewards. The end result is that billions of dollars in underutilized Bitcoin value will become productive, remunerating stakers while also expanding the scope of Bitcoin’s utility.

Core Chain’s non-custodial bitcoin staking offers a number of benefits, including:

Furthermore, there are a few aspects of Core Chain’s implementation of staking that set it apart.

You can find the full breakdown of how non-custodial bitcoin staking works in our “Unlocking Bitcoin DeFi” paper, but the basic steps are pretty straightforward. A user creates a transaction from wallet A to wallet B, locking their bitcoin up for some amount of time. Core Chain relayers wait until there are enough confirmations on the Bitcoin blockchain before sending the transaction to a Core-Chain smart contract. That contract verifies the transaction before sending information on Validator delegation and CORE reward addresses to a staking contract, and rewards are sent to wallet c as they become available.

Along with Proof of Work, Proof of Stake (PoS) is one of the two best-known consensus mechanisms, and it requires participants to stake a certain amount of a network’s native asset before engaging in crucial activities like mining blocks.

It’s not hard to see why this is a compelling mechanism for aligning everyone’s incentives around building the long-term health of the network. In a way, staking is like both a carrot and a stick. If stakers are successful, the value of their assets goes up and they make money; if they do something to undermine the network, their stake can be slashed as punishment.

But one downside to staking is that locked assets become illiquid and inaccessible. You can think of this as being like claiming a piece of land by nailing a gold bar into the ground. The land might be yours now, but you’ve literally staked your assets into the dirt, and there’s nothing else you can do with them for as long as that’s the case.

Liquid staking aims to solve this problem by allowing users to stake on a PoS network and receive a corresponding liquid staking token (LST) in return. These LSTs directly increase liquidity because they can be traded, transferred, or used in various other DeFi applications.

Well, all of this holds true of DPoS networks, like Core Chain. Core LSTs are called stCORE, and their primary purpose is to:

Of course, it’s always been possible to stake CORE tokens to individual validators directly, but when you do that you have to take the yields and restake them manually, through the website. With stCORE, yields are restaked automatically, and we expect that over time this will drive adoption of liquid-staked CORE.

We also expect that stCORE will help in other ways, such as by providing liquidity pairs of CORE and stCORE in decentralized exchanges.

Users mint stCORE using CORE, at whatever the current conversion ratio. So, if the conversion ratio is 1:1.1, then users can mint 100 stCORE using 110 CORE. The actual ratio can be found here.

Going the other way, the system is designed such that users can always redeem whatever amount of stCORE token they currently have. If the conversion ratio is 1:1.1, users can redeem 100 stCORE to get 110 CORE back.

Note, however, that there is a redemption period, which by default is seven days. Once users request redemption from the system, it can take up to one week to finalize the withdrawal of CORE to the user’s wallet.

Now, let’s cover the last major innovation, Core-native bitcoin wrapping.

As you may know, for a long time different blockchain projects operated in a very isolated manner. There was no way to send information, assets, or anything else between them, and people noticed that this had a slowing effect on the space.

In order to enable different blockchains to talk to one another, various approaches to cross-chain interoperability were developed, with the two most common being “bridges” and “wrapped assets.”

To create a wrapped asset, a user locks an asset up on the source chain and then a synthetic representation of that asset is minted on the target chain. If you’ve read any old science fiction, this will feel like a “teleporter,” in which you step into a terminal on Earth and a copy of you steps out on a faraway planet.

When Bitcoin is the source chain, the synthetic asset is (of course) wrappedBTC, the most famous example of which is probably Ethereum’s “WBTC” token.

Wrapped bitcoin has gained widespread acceptance in various DeFi environments, but earlier versions have encountered significant centralization issues because minting and redeeming wrapped bitcoin tokens have usually been controlled by a singular centralized entity.

Given Bitcoin’s stature as the most secure and self-sovereign store of value, any wrapped asset meant to fully unlock its supply must inherit foundational principles such as security, decentralization, trustlessness, permissionlessness, and censorship-resistance. These are the highest priorities for Core Chain’s native wrapped bitcoin asset, coreBTC.

The main entities involved in creating coreBTC are Lockers, Relayers, Liquidators, and Guardians.

Lockers securely hold users’ bitcoin on the Bitcoin blockchain. Anyone can register as a Locker by locking up collateral, and both the assets and required collateral ratio are parameters set by the Core DAO. If the ratio between the price of bitcoin and the value of the collateral changes, the Locker has to adjust its collateral or face potential liquidation. What’s more, collateral also serves as a deterrent against malicious behavior because it can be slashed if Lockers transfer bitcoin without authorization or do not promptly return bitcoin when coreBTC is burned.

When a user wants to mint coreBTC, Core Chain identifies legitimate Lockers and sends bitcoin to that Locker’s Bitcoin address.

Relayers watch the Bitcoin blockchain for incoming transactions to the Locker’s address and detect the user’s request for coreBTC. When there have been enough confirmations of that transaction on the Bitcoin network, the Relayer submits it to a smart contract on Core Chain with proof of the bitcoin transaction. The advantage of having Relayers do this work is that it obviates the need for users to engage with both Bitcoin and Core Chain separately, a time-consuming process that would involve transaction fees on each chain.

When the coreBTC smart contract receives the request, it mints an equivalent amount of coreBTC.

Redeeming coreBTC for bitcoin is essentially just the whole minting process in reverse. A user will send a request to a Core Chain smart contract to burn a specified amount of coreBTC, and that request has to contain a valid Bitcoin address where they want to receive their bitcoin.

The smart contract then burns the specified amount of coreBTC, removing it from circulation on Core Chain, and then the smart contract alerts the Locker to release the equivalent amount of bitcoin to the user’s address.

While all this is going on, entities called Liquidators are watching over the health conditions (i.e. collateral ratios) of all Lockers. As the value of the collateral begins to drop relative to the value of the bitcoin locked, Liquidators begin a series of maneuvers that rebalances the ratio and restores the Locker to a healthy condition.

In addition to liquidation, slashing is another important part of propping up the value of coreBTC. If a Locker fails to do its job, its deposited collateral is slashed by Guardians, who are similar to police officers inasmuch as their job is to check for any misbehavior.

HTLC Atomic Swaps enable trustless, peer-to-peer exchange of tokens between Core Chain and other blockchains, including (and especially) Bitcoin. These swaps are built around Hashed TimeLock Contracts (HTLCs) that lock transactions with a hash function and set additional time constraints on when the tokens can be spent. Together, this ensures that either both parties gain access to the other’s funds, or neither does.

HTLCs are pretty simple as these things go, and for this reason, they’re the most Bitcoin-friendly (and secure) way to allow the trustless exchange value across Bitcoin or EVM blockchains, and Core Chain.

Even better, atomic swaps between these networks can also involve other assets, like ERC20, BRC20, NFTs, Ordinals, and more, which makes it much easier to access liquidity between Bitcoin and Core Chain.

Did you (or do you) collect baseball cards, coins, or anything like that? Well, procedurally, Atomic swapping can be analogized to swapping collectibles through little lockboxes. Party A and Party B each put their cards (or assets) into their own lockboxes (called HTLCs) on separate tables (blockchains). To ensure that no one grabs a card without making the swap, each lockbox can only be opened with a secret code. Initially, only Party A knows the code to their lockbox. They agree to a time by which they have to share this code, or else the deal is off, allowing each to retrieve their card if the other doesn't follow through.

Here’s how it works: Party A locks their card and sends the lockbox to the blockchain, where it’s visible to Party B. Party B does the same with their own lockbox containing their own card. To prevent any tricks, Party B sets a slightly earlier deadline for sharing their secret code. If Party A shares the secret code on time, Party B can open Party A’s lockbox and get the card. Once Party A’s code is out, Party B’s code becomes known too, allowing Party A to open Party B’s lockbox. This way, they either successfully make a trade or, if someone backs out, they just take back their own card.

This process ensures that both people either swap their cards completely, or not at all. If Party A never shares their code, Party B can still get their card back after their own deadline passes. If Party B doesn’t act in time after Party A shares the code, Party A can just take their card back.

If you’ve made it this far, you should have a better grasp on BTCfi, the technical innovations it requires, and how those precise innovations are being born on Core Chain. Check out part IV in this series, in which we’ll walk through building a simple application on Core Chain, complete with code snippets and a detailed breakdown of all the steps involved!