Bitcoin Vaults and Liquidation Engine
Overview
Bitcoin vaults enable native BTC as collateral for lending and stablecoins on DeFi chains like Ethereum, Base, BOB, and Solana. Using BitVM technology, these vaults provide trust-minimized access to DeFi while maintaining Bitcoin's security guarantees.
How Bitcoin Vaults Work
Bitcoin vaults leverage BitVM to create trust-minimized bridges that allow users to:
- Lock native BTC in a BitVM-style vault on Bitcoin
- Mint an NFT on the DeFi chain representing the locked BTC value
- Use NFT as collateral to borrow stablecoins (USDT/USDC) or mint CDP-style stablecoins
- Withdraw BTC at any time by generating a ZK proof that the loan was repaid
Key Advantages over Traditional Wrappers
Unlike fungible BTC wrappers (wBTC, cbBTC), Bitcoin vaults ensure:
- Enforced withdrawals: Depositors can withdraw via cryptographic proof without requiring bridge operator cooperation
- No UTXO mixing: Users receive precisely the BTC they deposited from their original UTXO
- Trust minimization: No third-party trust assumptions under normal operations
BOB Bitcoin Vault Liquidation Engine
The BOB Liquidation Engine addresses critical limitations in basic Bitcoin vault implementations:
Traditional Vault Limitations
- Delayed liquidations: Cannot trigger until loan repayment deadline expires
- All-or-nothing liquidation: Entire BTC amount must be liquidated
- Static liquidator set: Predefined liquidators limit available capital during market stress
- Non-atomic process: Creates inefficiencies and risks for lenders and borrowers
Liquidation Engine Solutions
Base Engine Features
Open Liquidator Set
- Removes predefined liquidator restrictions
- Anyone can participate in liquidations
- Eliminates trust assumptions about liquidator availability and liquidity
Multi-party Liquidations
- Multiple liquidators can collaborate on single liquidations
- Reduces individual capital requirements
- Improves market resilience during high-volume liquidation events
Bridge Integration
- Routes liquidations through Bitcoin bridge deposit addresses
- Compatible with existing bridges (wBTC, LBTC, BitVM bridges)
- No modifications required to bridge infrastructure
Optional Extensions
Partial Liquidations
- Liquidate only to safe LTV ratio, not entire position
- Depositor opt-in with bridge trust for non-liquidated portion
- Significantly reduces collateral loss for borrowers
Fast Liquidations
- Reduces settlement from days to 1-6 Bitcoin blocks (10-60 minutes)
- Trust model options:
- n-of-n consensus: All operators must agree (strongest security)
- m-of-n consensus: Majority/supermajority agreement
- Emulated covenants: Spending restrictions prevent operator theft
- Automatic BitVM fallback if consensus fails
Atomic Liquidations
- Single-transaction liquidation when bridges support pre-deposits
- Eliminates settlement risk for liquidators
- Enables flash loan liquidations
- Requires deep bridge integration
Architecture
Components
-
Bitcoin Vault
- BitVM implementation with BTC deposit input
- Multiple outputs: depositor and bridge addresses
- Fraud-proof challenge mechanism
-
Liquidation Engine Smart Contract
- Tracks liquidator contributions and owed collateral
- Manages bridged BTC distribution
- Deployed on DeFi chain (can serve multiple chains)
-
Operators
- Facilitate BTC withdrawals to bridges during liquidations
- Receive fees from liquidation profits
- Can reuse existing BitVM bridge operator sets
-
Bridge Integration
- Accepts vault deposits at predefined addresses
- Mints wrapped BTC to liquidation engine
- Handles BTC return for partial liquidations
Liquidation Flow
- Vault Setup: Depositor and operators create vault with outputs to depositor and bridge
- Loan Liquidation: Liquidators repay loan via smart contract using own capital
- Bitcoin Withdrawal: Operators assert liquidation and submit to Bitcoin vault
- Bridge Minting: BTC deposited to bridge, wrapped tokens minted to engine
- Distribution: Liquidators claim bridged BTC proportional to contributions
- Operator Fees: Operators receive percentage of liquidated BTC
Trust Models
| Component | Basic Vault | Base Engine | With Extensions |
|---|---|---|---|
| Depositor Withdrawal | Trust minimized | Trust minimized | Trust minimized (+ optional bridge trust) |
| Liquidator Access | Static set only | Anyone | Anyone |
| Liquidation Speed | Multiple days | Multiple days | Minutes to instant |
| Partial Liquidation | Not possible | Not possible | Available (opt-in) |
| Capital Requirements | Single liquidator | Distributed | Distributed |
Use Cases
Lending Protocols
- Native BTC collateral without wrapping
- Efficient liquidations during market volatility
- Reduced bad debt through fast liquidations
CDP Stablecoins
- BTC-backed stablecoin minting
- Partial liquidations preserve user capital
- Open liquidator participation ensures stability
Cross-chain DeFi
- Use BTC collateral on Ethereum, Base, BOB, Solana
- Maintain Bitcoin security while accessing DeFi yields
- Bridge-agnostic design enables wide compatibility
Implementation Status
Development Phase
The Bitcoin Vault Liquidation Engine is currently in research and development, with mainnet deployment planned as part of BOB's Phase 2 BitVM integration.
Current Progress
- Liquidation engine design finalized
- Basic Bitcoin vault tested on mainnet (Babylon experiment)
- Integration with lending protocols in development
Upcoming Milestones
- BitVM3 optimizations for improved capital efficiency
- Bridge partner integrations for atomic liquidations
- Mainnet deployment with select lending protocols
Technical Resources
Security Considerations
Depositor Safety
- Maintain self-custody throughout lending process
- Cryptographic proof ensures withdrawal rights
- Original UTXO return prevents tainted coin concerns
Protocol Security
- 1-of-n BitVM security model
- Fraud proofs protect against malicious operators
- Economic incentives align all participants
Market Stability
- Open liquidations prevent liquidity crises
- Partial liquidations reduce cascade effects
- Fast settlement minimizes price impact risks