One of the challenges for DeFi applications is finding and using credible collateral — and existing solutions such as Wrapped Bitcoin can be expensive to use.
We spoke to Tim Swanson, Clearmatics’ head of market intelligence and creator of the TAU protocol, about the benefits of stabilizing existing assets such as Bitcoin.
1. In basic terms, what is the TAU protocol?
The TAU protocol is a new method for synthetizing and stabilizing digital assets. The first implementation reuses existing infrastructure, in this case, tokenized hashrate from BTCST to “synthetically mine” new assets. Because some of these assets will reside on a different chain, I introduced a rebase technique to stabilize an asset at a target level.
A protocol is separate from an implementation. For instance, in Ethereum, the “yellow paper” provides a neutral protocol specification from which independent parties can build client implementations of. For TAU, I am striving to reuse a similar model. Other projects on other chains can build their own implementations.
2. Part of the appeal of many proof-of-work cryptocurrencies can be their potential to appreciate. What’s the advantage of stabilizing their value?
The first implementation of the TAU protocol is not attempting to create a stablecoin — rather the BTCST team is synchronizing synthetic Bitcoin (tBitcoin) with respect to its external market value. That is to say, using this protocol that team has devised an automated way of keeping the market rate of tBitcoin in line with the market rate of non-synthetic Bitcoin. Thus a synthetic tBitcoin will move up and down with the price of a non-synthetic Bitcoin.
It is worth mentioning that there are several projects that enable users to create and trade synthetic assets including Mirror, UMA, and Synthetix. The way these assets are created and “stabilized” is different from TAU but the general idea is the same.
3. Can you explain how the TAU protocol affects the mining process?
The TAU protocol does not impact the mining process at all. The first implementation of the protocol plugs into tokenized hashrate. In order to provide a credible, secure, and tested method to back price pegs, there are only a few known methods of doing so in a non-custodial manner. For instance, there have been many attempts at creating “algorithmic stablecoins” but most of them have failed because there were only a couple of credible methods to move the market price back to the target value.
For the seigniorage shares model, one proven method has been implemented by FRAX. Their model starts out fully collateralized via USDC and over time becomes increasingly capital efficient by reducing the amount of collateral needed to manage the target value. The implementation that BTCST has built is also capital efficient as it reuses a portion of the Bitcoin hashrate — and therefore bitcoins themselves — to effectively backstop synthetic Bitcoin.
4. What are the main use cases of τAssets?
One of the challenges for DeFi applications is finding and using credible collateral. There are hundreds of tokens that have been issued in the past year but nearly all of them are “backed by nothing.”
For example, let’s look at the types of white listed collateral used by lending protocols such as Aave or Venus. While the native L1 token is accepted by each of these, another very early whitelisted token added was tokenized or wrapped Bitcoin. That’s because the market perceives WBTC as roughly the same as BTC.
My view is that by creating and stabilizing existing assets, such as Bitcoin, the market will have more choices for premium collateral to be used in the DeFi ecosystem.
5. Wrapped Tokens already exist to introduce Bitcoin into the DeFi industry. How are τAssets different?
In theory the TAU protocol is chain agnostic. However from a user experience standpoint, it did not make much sense to implement the first version on top of a chain whose transaction fees were relatively high.
Back in early January, after I wrote a long article on stablecoins, I googled to see if anyone had tokenized hashrate onto an EVM-based chain that had relatively low fees. Coincidentally, not only did I come across the BTCST whitepaper, but it turns out that they had already launched on BSC which has relatively low transaction fees.
Let’s put this another way: If a regular user of a DeFi product wants to have access to common collateral — such as WBTC — they are currently limited to primarily using mainnet Ethereum. But the transaction fees to just move the asset across the chain is often northward of $10. Add in the costs of executing a set of smart contract functions on an AMM or lending protocol and we are quickly approaching $70 or $80 to just deposit and stake the asset.
The first implementation of the TAU protocol will be able to provide users a synthetic form of Bitcoin that can be used as collateral for DeFi products but with significantly lower transaction fees because it is on BSC.
6. What is the role of the Bitcoin Standard Hashrate Token (BTCST) in this mechanism?
From an infrastructure point-of-view, they did all of the heavy lifting. Recall I mentioned that in order to provide strong mechanisms to stabilize and restore a price target, there are only a couple of non-custodial methods of doing so. One way to create a synthetic is to require overcollateralization like Maker and Synthetix have. But that is not capital efficient. Another way is to create a more capital efficient method, like FRAX and BTCST have done, and introduce a stabilizing mechanism.
7. Which mining companies are in support of Standard Hashrate and the TAU protocol?
Standard Hashrate is an open association backed by a group of major Bitcoin miners, including Atlas Mining, Btc.Top, Easy2Mine, Genesis Mining and Hengjia Group; these miners represent 12% of the entire Bitcoin hashrate.
8. What are the problems that τAssets help solve in the DeFi sector?
In theory, developers building on chains with a state machine similar to Ethereum should be able to implement and provide this utility — synthetic assets — to their nascent DeFi ecosystems. However, there is a caveat: there are only a couple of known ways to create a capital efficient synthetic asset in a non-custodial manner.
With that said, the different implementations that successfully synthesize and stabilize tAssets will be able to provide commonly sought after collateral that can be used in any lending protocol.
9. Can you share your plans for the next 12 months?
Without divulging too much, the protocol advisors (myself included) think that there is a lot of flexibility in TAU’s future state such that it could be modified and enhanced to synthesize different types of digital assets, including NFTs. Though some of that depends on the specific implementation, which could vary from team to team. I don’t think it is the solution to all of the world's ills but I’m always willing to hear feedback from the community as a whole for what they think it can be used with.
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