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Chainlink’s novel Proof of Reserve will now audit Wrapped Bitcoin

Photo of: Dennis Ramos
by Dennis Ramos

Wrapped Bitcoin custodian BitGo announced the Chainlink collaboration on Oct. 1, adding this meant  DeFi applications could now receive definitive on-chain proof regarding the fully backed collateralization of wBTC.

BitGo, the custodians of Wrapped Bitcoin have now embraced Chainlink’s Proof of Reserve mechanism to facilitate enhanced transparency and improve the audibility of tokenized assets for DeFi protocols. In order to scale WBTC’s trustworthiness and authenticity to support its growing demand, BitGo will be working with the Chainlink team to rationalize the auditing of the WBTC reserves. DeFi applications will now be in a position to get on-chain proof about the fully backed collateralization of WBTC. 

This utility that is currently live on testnet allows Ethereum based Decentralized applications to automate the rigmarole of WBTC audits. This is a smart as well as much-required move considering Wrapped Bitcoin on Ethereum approaches $1 billion in value, equal to 92,500 BTC. 

The new concept of on-chain proof of reserve has been made possible only because the Bitcoin network is open and transparent. In order to provide more transparency and fully-automated readings of WBTC reserves, Defi applications on Ethereum can simply connect to a Proof of Reserve reference contract. This will be incessantly updated by the Chainlink-powered oracle network. Smart contract application on Ethereum can then use the proof of reserve contract to evaluate each WBTC coin and whether each is supported by an equal reserve balance of BTC in BitGo’s custodian address on the Bitcoin chain. 

The mechanism rules out the reliance on manual off-chain processes like audit reports. It helps in the streamlining of the processes in a trustless way which in turn will give plausibility and safety to the tokenized version of Bitcoin. The new reserves contract can enter a decentralized Chainlink oracle to check the balances of BitGo custody wallets for the wrapped Bitcoin every ten minutes. This will be the average time between BTC blocks. If at all there is some variation from the set benchmark the oracle will automatically push an update on-chain to reference the new balance. 

The nodes will be vigilant while they keep monitoring the contract off-chain. They will provide relevant updates on-chain if and only if the events change the balance something similar to minting or burning of wrapped BTC. This feature can be extremely useful for decentralized applications that use WBTC as collateral to secure other digital assets. With the auditing process being automated, and transparency increased to its zenith, user trust in the system across the market automatically increases. DeFi applications also will have additional ways to protect themselves against unexpected, unforeseen events.

The announcement stated: 

“This feature can be especially beneficial for decentralized applications that utilize wBTC as collateral to secure other digital assets.”

Chainlink protocol co-founder, Sergey Nazarov, told Forbes;

“I think the concept of Proof of Reserve generally is really about proving that an underlying asset somewhere is in a certain state. And that proof is actually very fundamental to how financial systems work.”