Wrapped Tokens
A multi-institutional framework for tokenizing any asset

Whitepaper v0.2
Jan 24th 2019

Kyber Network
BitGo Inc
Republic Protocol

Abstract
With the rise in popularity of ERC20, digital tokens in the Ethereum ecosystem have emerged
as an important asset class. These tokens have all the advantages that blockchains andEthereum have to offer in terms of transparency in total number of coins, owners, minting, fast
confirmation times, transactions details and smart contract execution. Tokens on the Ethereum
blockchain can serve several different functions; this paper will specifically focus on asset
backed or wrapped tokens. The prices of these tokens reflect the price of the asset backing
them and hence they can also be called "stable coins". Asset backed tokens are usually donein two different ways:●

Algorithmic​ - This is a mechanism followed by some tokens on Ethereum where
demand and supply are controlled by smart contracts in order to keep the price of thetoken in line with a fiat currency. Some examples of this are Dai, Basis, Carbon, and
NuBits●Centralized​ - Assets are stored with an organization which publishes proof of reserves.
This is the case with Tether, True USD, USDC (USD), Digix (gold), Globcoin (a mix of fiat
currencies), and AAA reserve (governmental bonds)

Wrapped tokens follow the centralized model, but instead of relying entirely on one institution,
they rely on a consortium of institutions performing different roles in the network. This
whitepaper proposes a framework for issuing asset backed tokens by addressing challenges
with scalability, trust, regulation, and governance. The first wrapped token we launch will be an
ERC20 token backed by Bitcoin (BTC) and will be appropriately named, "Wrapped BTC"(WBTC). Unlike centralized solutions (USD), WBTC will be fully accounted for and proof ofreserves posted on the BTC chain.
There is no additional secondary utility/payment token required to use WBTC, and no transfer
fees other than blockchain fees. WBTC uses a simple federated governance model and strives
to promote usability.

Use Cases
Tokenization
The act of tokenizing assets can:● Increase speed of transactions
Ethereum blocks are created every ~15 seconds and it is possible to have a fair deal of
confidence in the irrevocability of a transaction in less than 5 minutes. This speed isfaster than transacting natively compared to many other assets including Bitcoin, gold,
and fiat currencies● Reduce the number of intermediaries
One of the key benefits of assets on a blockchain is their ability to be transacted
without intermediaries. This can be done through atomic swaps, decentralizedexchange protocols, and lightning/raiden style channels.
● Enhance security
Tokenization enables users to have full control of private keys of the asset. Users who
do not want to hold keys can reduce counterparty risk by moving it from exchanges toa security-focused custodian.
● Usability
The ERC20 standard has been adopted by a large number of institutions and products.
This provides users with a variety of exchanges, wallets, and Dapps to use whilehandling their tokenized asset. They also have the ability to move tokens quickly, 24/7.
● Improve Transparency
The total number of tokens, token creation transactions, token removal transactions,
number of token holders, and rules for transfers can be seen on a public block explorer
by anyone. This level of transparency is not usually available for assets like fiat
currencies, commodities, and stock.

Liquidity on decentralized exchanges and dapps
The majority of ERC20 trading in centralized exchanges today is done with BTC and not ETH.
Most decentralized exchanges offer only ETH/Token and not BTC/Token trades. Wrapped
tokens can bridge this gap and provide more liquidity on decentralized exchanges. In addition,other decentralized applications/protocols (like funds, lending payments) will also benefit fromhaving access to greater liquidity that a BTC token can bring. WBTC brings the ease ofcreation of smart contracts to Bitcoin.

Benefits of fiat tokens
Tokens backed by fiat currencies offer a safe way for traders to keep their money in a
cryptocurrency without having to worry about price fluctuations. This is particularly useful for
traders on both centralized and decentralized exchanges where there is no direct way oftransferring fiat currencies. Fiat currency backed tokens also promise a world in which acryptocurrency can replace traditional finance. Notably, it can be used in e-commerce by bothbuyer and seller without having to worry about conversion rates or taxes (buyers are required
to pay capital gains tax calculated at the time of purchase in the US).

Interoperability between cryptocurrencies
As we see an expansion in the number of cryptocurrencies today, each one focuses on some
aspect of monetary exchange. Some such aspects are transactional throughput, privacy,
cheap transaction fees, smart contract ability, and decentralization of nodes/miners. The
wrapped framework would make it easy to represent any other cryptocurrency, such as
Bitcoin, on Ethereum and thereby enhance it with all the capabilities of the Ethereum
blockchain. One such use case is the ability for initial coin offerings (ICOs) to be directly funded
and mint tokens on deposits of wrapped Bitcoin tokens. In the future, centralized exchanges
and other institutions which accept cryptocurrencies would not need to maintain multiple
cryptocurrency nodes and instead could just develop on Ethereum.

On chain ways to enforce policies
Tokenization also provides a way to enforce policies on chain. On chain policy enforcement
makes rules more transparent and doesn’t rely on one single party to enforce them. Based on
the type of asset, there could be a need to enforce rules on asset transfer or trade. Securities
for example require whitelisting, holding periods, and identity management.

Common Issues
Scalability
As of January 2018, the maximum practical gas limit on Ethereum’s mainnet topped out at
8,000,000 gas per block ​[1]​. This limit is both hardware and software-bound. While there areseveral scalability solutions proposed, many require significant developer lift (state channels),or are too early in development for practical use (plasma, sharding). This is a problem forDapps and users of the network because gas prices skyrocket during periods of contention(hot ICOs, CryptoKitties). Earlier this year in July, transactions caused by Chinese exchange
Fcoin caused all time high transaction fees ​[2]​.

TrustAsset backed tokens usually involve trust in the institution(s) holding the asset. This goesagainst the ethos of cryptocurrencies which seeks to minimize need for trust in operations.
Some key questions to answer here are:●●●Is the asset holder authorized in the existing legal framework to hold the asset?
Can the custodian create an arbitrary amount of tokens?
How does the custodian prove possession of the asset under custody?

Regulation
Custodians of asset backed tokens need to be licensed to hold the asset. This license mayvary based on the asset and geographical jurisdiction of the custodian. Custodians must also
prove reserves regularly given that a lack of 1:1 backing would undermine the whole system.
KYC and AML restrictions also apply to users engaging in asset backed tokens. These
restrictions need to be enforced at the time of purchase, redemption, or transfer of tokens.

Governance
When there are multiple stakeholders in the system, there is a governance challenge with how
to handle changes made to the token. Most asset backed tokens are entirely reliant on theasset custodian to make changes to the rules/smart contract governing the token. Usually inthe case of ICOs, the issuer of the token has full control of protocol changes. There have beensome cases like decentralized autonomous initial coin offerings (DAICOs) where users havevoting rights, but they face the challenge of a low voter turnout ​[3]​.

Implementation and Technology

Key Roles●●

Custodian​ - The institution or party who holds the asset. In the case of WBTC, this will
be played by BitGo ​[4]​. Custodians hold the keys to mint tokens.
Merchant​ - The institution or party to which wrapped tokens will be minted to and burnt
from. Merchants play a key role in distribution of the wrapped token. In the case of●●

WBTC, this will be played initially by Kyber ​[5]​ and Republic Protocol ​[6]​. Each merchantholds a key to initiate minting of new wrapped tokens and burning of wrapped tokens.
User​ - The holders of the wrapped token. Users can use wrapped tokens to transfer
and transact like any other ERC20 token in the Ethereum ecosystem.
WBTC DAO member​ - Contract changes and addition/removal of custodians andmerchants will be controlled by a multi-signature contract. Holders of the keys to themulti-sig contract will be held by institutions as part of the WBTC DAO.

Custodians exchange assets for wrapped tokens with merchants. This is done through two
different types of transactions; minting (creation of wrapped tokens) and burning (reducing
supply of wrapped tokens). These transactions will be available publicly and can be viewed byanyone through a block explorer. After the initial exchange, merchants aim to maintain a bufferof wrapped tokens so that they can exchange it with users. The two-step minting process
helps reduce the time it takes for users to get wrapped tokens, as minting and burning are
more time consuming processes.

Custodian wallet setup
Custodians are expected to have a pooled wallet for all merchants. The wallet will use
multi-signature with all keys controlled by the custodian. The wallet will only be able to send to
the whitelisted merchant address on chain. All minting and burning transactions are expected
to be done within 48 hours of submission to the custodian. Note that in case of multiple
custodians, a single wallet might not have enough funds to redeem all pending wrapped
tokens.

Minting
Minting refers to the process of creating new wrapped tokens. Minting in the wrappedframework has to be done by a custodian, but needs to be “initiated” by a merchant. It is
important to note that minting does not involve the user. It is a set of transactions done
between the merchant and the custodian.

Sequence of minting events for WBTC●●●●

Merchant initiates a transaction to authorize the custodian to mint X WBTC to themerchant’s address on the Ethereum chain.
The merchant sends the custodian X BTC.
Custodian waits for 6 confirmations of the BTC transaction
Custodian creates a transaction to mint X new WBTC tokens on the Ethereum chainSequence of events for users to receive WBTC tokens●●●

User requests wrapped tokens from a merchant
The merchant does the required AML, KYC procedures and gets identification
information from the user
The user and merchant perform an ​atomic swap​, or use a trusted exchange with themerchant receiving Bitcoin and the user receiving WBTC

Burning
Burning refers to the action of redeeming BTC for WBTC tokens. Only merchant addresses canburn wrapped tokens. In order to do so, the ‘burn’ function is called in the contract with theamount of tokens to be burnt on the Ethereum chain. By doing so, the amount is deductedfrom the merchant’s WBTC balance (on chain) and the supply of WBTC is reduced.

`

Sequence of events for burning WBTC tokens●●●●

The merchant creates a burn transaction, burning X WBTC tokens
Custodian waits for 25 block confirmations of the ETH transaction
Custodian releases X BTC to the merchants Bitcoin address
Custodian makes an ethereum transaction marking the burn request as completedSequence of events for users to receive Bitcoins●●●

User requests the redemption of tokens from a merchant
The merchant does the required AML, KYC procedures and gets identification
information from user
The user and merchant perform an ​atomic swap​, or use a trusted exchange where theuser receives Bitcoin and the merchant receives WBTC tokens

On Chain transfer restrictions
Based on the token, there could be restrictions in place for the transfer of tokens. For WBTC,
there will be no restrictions on transfers.

Governance
The wrapped token contract is governed by a multisig contract in which signatures are
required from DAO members in order to add/remove members. All custodians and merchants
will be DAO members, but other institutions can also be included as a member without having
a custodian or merchant role. An “M of N” signature signature will be used in the contract
where M is the required number of signatures in the multisig contract and N is the total numberof members. The values of M and N will be decided mutually between members keeping in
mind security as well as the ease of adding/removing members.

Side chain for wrapped tokens
Initially, WBTC will be launched on the Ethereum mainnet chain. The mainnet chain is easily
accessible and usable as there are a network of exchanges, block explorers, wallets, and other
Dapps on it. One of the key benefits of tokenization, is cheap transactional cost. But withgaining popularity of Ethereum and increased Dapp creation, transaction costs of wrapped
tokens could rise to the point where it is not cheap to do so on the main chain. The
collaboration of multiple institutions in the wrapped framework enables the ability to deploy apractical scalable solution to increase transactional throughput.

This can be done through the use of a pegged sidechain, using existing software (​parity-bridge​)
run among DAO members. The chain will run on it’s own proof of authority network ​[7]​ using
the Aura consensus algorithm ​[8]​. Blocks will be created every 4 seconds predictably and in a
performant manner. Currently, there is already such a chain (Kovan testnet) and it has been in
operation since March 2017. Wrapped tokens will be pegged between the main and side chain
by creating a 2-way multi-sig wallet on mainnet and on the sidechain.​ ​Side chains provide
much needed scalability on ethereum. Some benefits of a side chain for trading andtransferring wrapped tokens are:
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Scaling with minimal development costs (same EVM)
Dedicated, increased throughput - seperate blockchain on separate hardware andpotential proof of authority (PoA) advantages (faster blocks)
Easy to support in existing clients and wallets
Chain is free from other “noisy neighbors”
Minimal transactional cost (to prevent spam)

Validators (block generators) will be chosen from wrapped partners and other trusted parties
who will be geographically distributed and represent several different domiciles / governments.
Validators will also maintain the 2-way peg between the main and side chain. To peg the valueof wrapped tokens on both chains, we propose a multi-signature contract to be used on themainnet and the sidechain.
●●

To send from Ethereum mainnet to Ethereum sidechain:○ Send from mainnet address to the federated mainnet multi-sig address■ It is recommended to send the amount while calling the“sendToSidechain” method on the multi-sig address, specifying as theargument the destination address on the sidechain■ If sent without a method, the destination address on the sidechain will beassumed to be the same as the source address○ An event is generated on the mainnet to record the send
○ Federated signers “lock” tokens on mainnet○ After a “confirmation period”, multisig authorities on the sidechain can validate
the send event on the mainnet and disburse the amount to the destination
address on the sidechain, less transaction fees
To send from ETH sidechain to ETH mainnet:○ Identical (symmetric)

WBTC will be the first asset on the sidechain and will use a combination of these components
working together to create an ecosystem:●●●

Node Software and Configuration
Block Explorer
Wallet Providers

●●

Block Validators
Multi-sig Authorities

Incentivization
Transactions will be charged at the minimal starting gas price of 1 Gwei to cover running block
validators and to prevent spam on the sidechain. Validators can also be incentivized off chain
for each Dapp or have block rewards. Details of distribution/management of Ether on thesidechain are still to be determined.

Atomic Swap
Atomic swaps can be used between merchants and users in order to exchange WBTC and
BTC. If the user would like to receive WBTC or BTC more quickly, a trusted method of
exchange could also be done through the merchants.
Once KYC is completed, the steps for users to atomically swap BTC for WBTC with themerchant are:● User generates a secret and a hash of it is provided to the merchant off chain. The user
and the merchant also agree on other swapping details such as receive addresses (ETHand BTC)● The user creates a Bitcoin HTLC (Hashed Time Lock Contract) using the merchant’s
Bitcoin address, user’s refund address, secret hash, and expiration time. This is used tocreate a P2SH address which the user funds with X BTC● After 6 confirmations, the merchant will create an HTLC contract on Ethereum, by using
the user’s Ethereum address, merchant’s refund address, secret hash, and expiration
time. The merchant then transfers X WBTC to the atomic swap contract.
● The user reveals the secret in order to move X WBTC from the atomic swap contract tothe user’s Ethereum address● The merchant uses the secret in order to move Bitcoin funds from the P2SH address● If the user does not claim the WBTC within the expiration time, the transaction does not
go through and the user can claim the BTC backSome important things to note here:●●

In order to deploy the atomic swap contract and send WBTC to it, there are transaction
fees involved. Hence, the user will have to pay an atomic swap fee before initiating aswap.
Atomic swaps take time and multiple transactions on both the BTC and ETH chain. The
user may have the option of doing a trusted swap in which BTC is transferred to themerchant address and after 6 confirmations on the bitcoin network, the merchant sends
WBTC to the user. This involves trust in the merchant, but it is quicker and cheaper.

WBTC vs Atomic Swaps
Atomic swaps can be performed without WBTC for users which only want to perform a
BTC-ETH trade. They can be done on a decentralized exchange outlined through a mechanismby the Komodo platform ​[9]​. However, it is important to note that WBTC provides arepresentation of BTC on the ETH chain, which is required for DAPPs and the ecosystem tointeract with. A few other tradeoffs to consider while comparing atomic swaps with WBTC:
●

●

●

●

They require price discovery to be done by whoever does the atomic swap. In wrapped
tokens price discovery only needs to be done while trading on a decentralizedexchange after having already obtained WBTC.
Requires atomic swap technology to be supported by existing wallets anddecentralized exchanges. Wrapped BTC will be available for use in any ERC20
supported wallet.
They are really slow because every transactions is as slow as multiple confirmations on
the ETH chain and then the Bitcoin chain (as opposed to WBTC, where the initial
minting/tokenization is slow but after creation it’s easily tradable on the ETH chain)
Doing an atomic swap on a decentralized exchange requires a separate deposit and a
atomic swap fee as well. This is inconvenient each time users want to swap currencies.

Fees
Transfers of WBTC between users will have no cost apart from network fees. There are three
ways in which different parties in the network can earn fees:●●●

Custodian fees: This is taken by the custodian at the time when a merchant mints orburns wrapped tokens.
Merchant fees: This is taken by the merchant who the user exchanges wrapped tokens
with for the asset.
Sidechain transaction fees: This fee is predominantly aimed at preventing spam on thesidechain. This is shared equally among all institutions running nodes on the sidechain.

Legal Binding
Contract between custodians and merchants
The process of minting and burning tokens does not involve the user and is between trusted
institutions. Merchants are required to hold the identity information of the user securely.
Custodians are required to publish details of assets under custody quarterly and perform
minting/burning duties in a timely manner. Failure to meet these criteria can lead to removalfrom the network.

It is to be noted that there can be multiple custodians in the network, but this comes at thecost of increasing the risk involved in the network. A model where custodianship is shared bydifferent institutions holding keys to a multi-sig wallet is also possible in the future. Though
operationally, minting/burning/auditing would require more coordination and time. A security
breach among any of the custodians would cause the loss of trust and could lead to mass
withdrawals. A security breach with a merchant is much less severe as all outstanding tokens
will still be backed up by custodians, but instead could lead to a loss of KYC/AML user data.

Trust model
In some sense custodians are trusted in the wrapped framework, as assets could be stolen or
they might not honour the one-to-one backing. However, the wrapped framework aims tominimize this trust in a few ways:
●

●

●

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Quarterly audits will be conducted by external third parties to verify that all wrapped
tokens minted have an equal amount of asset stored among all custodians. In the caseof WBTC, proof of reserves can be shown by publishing signatures from the addresses
which bitcoin is stored in.
Custodians will not be able to mint tokens on their own, but would instead require theinitiation of a merchant in order to do so. Hence creation of new tokens involves boththe custodian and the merchant.
The user is insulated from interacting with the custodian through a set of merchantinstitutions. An individual merchant does not need to be trusted, but instead all
merchants together would need to be.
Existing credibility of the institutions involved is at stake for all the institutions involved
with the framework.

Transparency
There will be full transparency in the functioning of the wrapped token. All key details of the
network will be reflected in a dashboard, some of which are:
●
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Names and details of institutions performing different roles in the network
Status of mint and burn orders (pending, processing, cancelled, complete)
Total amount of BTC stored by custodians
Total amount of WBTC in the network (Will be the same or slightly lower than BTC
stored)Quarterly audits in the form of transactions which prove that the custodian has the keys
to the Bitcoin
Merchant and Custodians ethereum addresses
The Bitcoin address associated with each merchant, controlled by the custodian
Links to the open source token contract code / deployed contract on a block explorerAn example of what the dashboard might look like:

Conclusion
Through wrapped tokens, we propose a solution to make assets interchangeable andrepresentable on the Ethereum chain. Global liquidity, increased fractional ownership, smart
contract programmability and reduction in transaction fees are some of the key benefits oftokenization. WBTC will be the first such token, enabling Dapps easy access to Bitcoin. Alltransactions, contracts and audits will be publicly viewable to maintain transparency and enable
trust in the network. The framework also provides a way in which multiple institutions in thecryptocurrency space can perform different roles to get past common issues faced by asset
backed tokens.

Glossary
Custodian​ - The institution or party who holds the asset. In the case of WBTC, this will beplayed by BitGo. Custodians hold the keys to mint tokens.
Merchant ​- The institution or party to which wrapped tokens will be minted to and burnt from.
Merchants play a key role in distribution of the wrapped token. In the case of WBTC, this will
be played initially by Kyber and Republic Protocol. Each merchant holds a key to approve
minting of new wrapped tokens and burn wrapped tokens.
User​ - The holders of the wrapped token. Users can use wrapped tokens to transfer andtransact like any other ERC20 token in the ethereum ecosystem.
KYC (Know your customer)​ - FINCEN and OFAC Required Guidelines pursuant to which
institutions must seek information in order to confirm that customers are not subject to OFAC
sanctions, violate any Bank Secrecy Act rules or are otherwise potentially engaged in money
laundering activities.
AML (Anti money laundering) ​- Rules and regulations enforced by regulatory authorities(including the Department of Treasury in the US) to target and combat illicit source of funds
which may be laundered.
WBTC (Wrapped Bitcoin)​ - An ERC20 token on ethereum backed 1:1 by Bitcoin.

References[1] - ​https://etherscan.io/chart/gaslimit[2] - ​https://www.coindesk.com/ethereums-growing-gas-crisis-and-whats-being-done-to-stop-it/[3] - ​https://cointelegraph.com/explained/what-is-a-daico-explained[4] - ​https://www.bitgo.com[5] - ​https://https://kyber.network[6] - ​https://republicprotocol.com[7] - ​https://paritytech.github.io/wiki/Proof-of-Authority-Chains[8] - ​https://wiki.parity.io/Aura[9] -​ https://komodoplatform.com/atomic-swaps/