pBTC & synthetic BTC — How do they compare?

In Part I of this series we began comparing cross-chain composability solutions WBTC and tBTC. As we develop and refine the pTokens approach following our testnet launch of pBTC, we analyze how other teams address the challenge of unlocking liquidity and bringing interoperability to blockchains.

Read about our pBTC testnet launch here.

Here we take a look at two synthetic assets which mimic the value of Bitcoin — sBTC by Synthetix, and a hypothesized synthetic Maker-like BTC. MakerDAO is a widely known project powering the first decentralized stablecoin based on pawned Ether, DAI.

Synthetix is an increasingly popular platform which allows anyone to mint their own Synth tokens. These synthetic assets track the price of currencies, cryptocurrencies or essentially any commodity with a stable enough value.

sBTC is one such Synth, tracking the price of Bitcoin. The team says sBTC “was the first of its kind” to be released on Ethereum.

Just like pBTC, sBTC aims to bring the value of Bitcoin to Ethereum users via trustless architecture. It can be traded on decentralized exchanges and used with Ethereum dApps without the need to integrate bitcoin-compatible infrastructure.

However, sBTC is a synthetic asset that is not backed by bitcoin itself, but rather its value is kept stable through an over-collateralization mechanism that leverages Synthetix’ own SNX tokens.

Multi-Collateral Dai

Maker could, in theory, also create a similar synthetic asset. This would have the same multi-collateral structure as DAI, but follow the value of Bitcoin, rather than the US Dollar.

Though powered by trustless architecture just like sBTC, Maker-BTC would not be backed by bitcoin itself, but would require an over-collateralization mechanism that leverages Ethers or other ERC-20 tokens.

How does it work?

Synthetix is built on Ethereum and is home to two types of token; Synthetix Network Token (SNX) which is used for staking and rewards, and Synths, which are issued by stakers within the system.

Users purchase and hold SNX tokens in their wallet. Anyone with SNX can stake their tokens, used as collateral, to create their own Synths that can be traded and exchanged on the Synthetix Exchange.

Similarly, Maker has two key tokens that power its network. MKR serves only as a mechanism in the DAO governance system; holders of this token are given voting rights and the freedom to participate in decision-making processes.

Their synthetic asset, DAI, is designed to maintain 1:1 parity with the US Dollar and collateralized by various other Ethereum tokens.

Want to know how pTokens “work”? Check out our easy intro.


Synths like sBTC are minted by staking SNX as collateral via a decentralized application called Mintr.

All stakers incur debt when they mint Synths. To exit the system (unlock their staked SNX) they burn their Synth tokens and pay back this debt.

The process for issuing is as follows

  1. An SNX holder sends their tokens to a Synthetix smart contract, which is locked up as collateral.
  2. This smart contract verifies that the staker can mint Synths against SNX, which requires its collateralization ratio to be above 750%
  3. Their debt is added to the Debt Register. The debt is the amount of the newly minted Synth value.
  4. The Synthetix smart contract is instructed to issue this amount. It adds these minted Synths to its total supply pool, and the newly minted Synths are sent to the user’s wallet.

Users are incentivized to stake and mint Synths through various reward schemes. They earn a proportionate share of the Synthetic Exchange fee pool, or through SNX staking rewards as general inflation occurs.

However, the gas costs for minting and burning Synth tokens is relatively high.

While the generation of a synthetic Maker-BTC would work differently to that of Synthetix, the final results would be comparable. Maker-BTC would not be backed 1:1 with Bitcoin (and therefore bitcoins cannot be redeemed) and would instead require over-collateralization.

On the contrary, pTokens are pegged 1:1 with the underlying asset that they represent (bitcoin) and there is no staking required.

Two main advantages come from this kind of approach:

  1. Being full backed by Bitcoin, users can convert pBTC into the original asset they represent and redeem such an asset at any time
  2. Overcollateralization is not required, but rather 1 pBTC is always backed by 1 BTC

Instead we allow users to simply send us their bitcoin (or any asset of choice) using our DApp or integration partners, which then automatically mints and sends the corresponding pTokens to the user’s Ethereum address of choice.

This peg-in/out mechanism is not only fast, but as it can be integrated across multiple platforms, it’s incredibly user friendly and streamlined. There is no need to pre-purchase tokens before issuing new pTokens (as is the case with Synthetix’ SNX).

Our gas costs are low, meaning less friction for both users and DApps. And most distinctively, the same issuance process can support a wide variety of tokens and blockchains currencies — not just bitcoin.

Burning (redeeming)

When a Synth holder wants to exit the system and unlock their staked SNX, they pay back their debt.

  1. The Synthetix contract determines the owing balance and removes the staker from the Debt Register.
  2. The Synth tokens are burned, the total supply is adjusted, and the staker’s wallet balance is updated accordingly.
  3. The staked SNX is unlocked and can be transferred or used to mint other Synth tokens.

If debt has fluctuated during the course of their staking, stakers must burn more or less debt than they minted.

Maker-BTC would function similarly, but rather than unlocking SNX, holders unlock the assets used as underlying collateral.

This approach provides a layer of complexity; while synthetic tokens track the prices of other currencies and stable assets, the value of these is different to the underlying asset used as collateral — SNX in the case of Synths, and Ethers or other ERC20 tokens in the case of Maker-BTC.

If the value of the underlying asset follows a downward trend, and the synthetic asset moves upward, this could present a problem for how they remain collateralized. All debts can fluctuate, which means that to unlock collateral, stakers may need to use more tokens than they originally generated to pay back their debt.

While there are mechanisms in place to help prevent this problem, such as the 750% overcollaterization of SNX in Synthetix model, it still carries a higher level of risk, which most stakers are made aware of.

Conversely, with pTokens, there are no debts to be paid. Users can redeem the underlying asset of their pTokens at any time, which is always pegged 1:1.If a user minted 10 pBTC, they can redeem their 10 BTC. Users simply provide the amount of pTokens they wish to be burnt, and the destination blockchain address for where to receive them.

Try out our DApp for yourself — dapp.ptokens.io


While Synthetix architecture is currently centralized, the team is committed to “decentralization and censorship-resistance”.

Their progressive decentralization stance is about easing into decentralization incrementally, rather than “diving in headfirst”. It’s a more considered and thoughtful approach to achieving a fully decentralized network, with creators building mechanisms into smart contracts that assign measured power at the start, and then slowly and transparently retrieve those powers.

Moving towards a community-governance model, the team will introduce Synthetix Improvement Proposals, which enables the community to request changes by all stakeholders. Their upcoming introduction of Ether as collateral was one such community-led initiative, and the first Improvement Proposal executed.

pTokens also embraces progressive decentralization, aiming to be completely trustless in their technology and governance. Leveraging the same underlying technology which powers the Provable blockchain oracle — Trusted Computing and Trusted Execution Environments — and merged with Multi-Party Computation, these techniques guarantee a secure and fully auditable execution of all minting and redeeming processes.

The code running within the enclaves is also open-source to maintain transparency across the entire process.

pTokens and synthetic symbiosis

Though Synthetix offer sBTC, their architecture presents an opportunity to leverage many other existing solutions. Just as the community asked for Ether to be added as a collateral alternative to SNX, to provide more stability and mitigate risk, so too could pBTC be used as an underlying asset to back Synth tokens.

It was only a few months ago that Maker introduced multi-collateral support. pBTC could also make a nice addition, introducing bitcoin to Maker’s collateralization asset pool.

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