Dialogue with Zhen Bensong: DeFi Interoperability Platform Interlay, How to Connect BTC to Multi-Chain Ecosystem

On September 9, 2021, True Bitcoin held an AMA event in collaboration with Interlay and IOSG. This AMA invited Interlay CEO & Co-founder Alexei Zamyatin, who introduced the advantages and operational mechanisms of Interlay's core product interBTC, details related to Kintsugi's participation in the Kusama parachain auction, and future plans.

Here is a summary of the AMA, Enjoy It!

Q1: As a first-time guest in the True Bitcoin community, could you briefly introduce the Interlay project from your perspective? What is its vision and mission?

Interlay is a research and development company focused on blockchain interoperability. Interlay envisions a future where blockchains are seamlessly connected and interact with each other. Users do not need to worry about which chain a Dapp is hosted on; they can use any asset on any chain.

Interlay's urgent task is to make Bitcoin interoperable in a completely trustless and decentralized manner. Anyone should be able to invest, profit, and pay with BTC on any blockchain. This process is trustless and can be operated directly with a wallet.

Interlay was founded by Alexei and Dominik, who are former PhD students in computer science at Imperial College London and have been engaged in Bitcoin and blockchain security research since 2015. Our products are supported by top scientific papers and developed in collaboration with leading research labs and tech companies worldwide.

interBTC is Interlay's flagship product—Bitcoin on any blockchain. It is a 1:1 Bitcoin-backed asset that is fully collateralized, interoperable, and censorship-resistant. interBTC will be hosted as a Polkadot parachain and connected to Cosmos, Ethereum, and other major DeFi networks.

Kintsugi (kBTC) is the canary network for interBTC, serving as a testnet with real economic value for Kusama. Kintsugi shares the same codebase as interBTC, with the difference that Kintsugi will always be 2-3 versions ahead of interBTC, featuring more experimental functionalities.

XCLAIM is the foundational protocol for interBTC and kBTC. XCLAIM was invented in 2018 and published as a peer-reviewed top scientific paper by Interlay's founders. You can read the paper here.

Q2: Can you introduce your team’s background and story? How did you come together to work on this project?

Dominik and I met in October 2017 in London, where we were both PhD students at the Imperial College Cryptocurrency Research Lab. Over the two years, we dedicated ourselves to various research projects, publishing over 20 papers on blockchain security, scalability, interoperability, and DeFi—gaining over 700 citations.

In the summer of 2018, the first trustless protocol for "packing" assets across chains, XCLAIM, was born. Initially an academic project, it quickly turned into a full-time job.

We showcased the use of XCLAIM to trustlessly pack Bitcoin on Ethereum at Scaling Bitcoin'18, EthCC'19, and EDCON'19, and published the paper at the top security conference IEEE S&P'19. By this time, XCLAIM had undergone scrutiny from various communities, and we believed it was feasible in practice, making it time to bring XCLAIM to life.

We found a great partner in the Web3 Foundation, which provided us with funding. Thus, we brought Bitcoin to Polkadot in a trustless manner—interBTC was born.

In the following two years, Dom and I created a 200-page formal specification, implemented a PoC, and secured follow-up funding to build the complete system. Our team expanded from 2 to 12 people today.

In November 2020, we launched the Alpha testnet, followed by the Beta in March 2021, completing two rounds of security audits, and we are now live on Kusama. We have also designed interBTC 2.0 and are developing version 3.0—so we are really eager to go live and showcase what we have built to the world—this is the best cross-chain asset protocol on the market.

Q3: Can you explain the operational mechanism and technical implementation of Interlay's products?

At its core, XCLAIM—the foundational framework of the interBTC bridge—introduces the concept of trustless cryptocurrency-backed assets. Assets are locked in the form of Bitcoin, and interBTC (BTC-backed asset) is minted at a 1:1 ratio on Polkadot. interBTC can be used as any native token within the Polkadot ecosystem, meaning: they can be easily transferred and integrated into other parachains and applications.

Issuance, Trading, and Redemption

The lifecycle of interBTC consists of four stages.

1. Issuance. Lock your BTC with a Vault. Choose a Vault or run your own Vault. Your BTC is always secure and insured by the collateral of the Vault.
2. Minting. After locking your BTC, you receive interBTC at a 1:1 ratio.
3. BTC DeFi: Make money with your Bitcoin.

Use interBTC as collateral for lending, mining, etc. Available on Polkadot, Kusama, Cosmos, Ethereum, and other major DeFi platforms.

4. Redemption. Exchange interBTC for actual BTC—trustlessly, anytime, anywhere.

What makes interBTC unique is its strict commitment to achieving trustlessness and decentralization.

• Insured by collateral. Vaults lock collateral in various digital assets on the interBTC parachain—within a multi-collateral system inspired by MakerDAO. If Vaults misbehave, their collateral will be slashed, and users will be compensated. As a user, you only need to trust that Bitcoin and the DeFi platform you are using are secure.
• Complete openness. Anyone can become a Vault and help secure interBTC. Yes, you can run your own Vault!

interBTC will be hosted as a Polkadot parachain (Kintsugi as a Kusama parachain) → but interBTC will be available on Cosmos (announced partnership), Ethereum, and other major chains through Polkadot's bridges.

Q4: Interlay's product positioning is "Use your Bitcoin. Anywhere." How does it differ from other projects and what are its advantages?

The uniqueness of the interBTC bridge lies in its strict commitment to achieving trustlessness and decentralization. As an interBTC holder, you have the following guarantees: you can always redeem interBTC for BTC or repay in collateralized currency at favorable rates.

If a vault misbehaves, you will be compensated from the collateral of the vault, and you will have a very favorable exchange between BTC and DOT. At launch, the collateral will be held in DOT. In the medium to long term, this may expand to stablecoins or token sets to enhance stability.

In summary, you only need to trust that Bitcoin and Polkadot are secure.

Other projects have centralized custodians (wBTC) or multi-signatures controlled by a small group of people (renBTC and ChainX)—and they lack insurance. If BTC is stolen—it disappears, and users lose money. This is the biggest difference → interBTC is DeFi's BTC. Other centralized wrapped BTC versions are like USDT—interBTC is like MakerDAO's DAI.

Q5: How is Interlay's token economic model designed? What is the main role of the token for token holders?

Kintsugi will be community-managed from day one—through Kintsugi's governance token KINT. Kintsugi will launch through a fair launch plan.

KINT tokens will be distributed to network participants, builders, and early supporters as airdrops and block rewards. There will be no public sale or ICO.

Main Functions of KINT

The main uses of the KINT token are:

• Governance. KINT holders vote on governance proposals and elect council members to make operational decisions. To vote, KINT is locked, and users receive staking rewards.
• Utility. Mid-term, in addition to KSM, Kintsugi will also support transaction fee payments in KINT and other digital assets.

Supply and Release

KINT has an unlimited supply. The release schedule is defined as follows:

After issuing 10 million KINT in the first 4 years (4:3:2:1 million), there will be 2% inflation per year indefinitely.

Distribution

KINT will be controlled by the community:

• 70% will be distributed to the community as airdrops and block rewards.
• 30% will be airdropped to the Interlay team and early and future investors who fund protocol development—subject to a 1-year lock, followed by 1 year of linear release.
• From the 5th year onwards, only the community will receive new KINT from annual inflation.

Initial 4-Year Supply Distribution

Distribution of 2% Annual Inflation Rate Starting from Year 5

Q6: Compared to other decentralized cross-chain bridge solutions like RenVM, what advantages does Interlay have?

The uniqueness of the interBTC bridge lies in its strict commitment to trustlessness and decentralization. As an interBTC holder, you have the following guarantees: you can always redeem interBTC for BTC or repay in collateralized currency at favorable rates. Other centralized bridges do not offer this level of security.

• wBTC is fully centralized. You trust BitGo as the custodian. If they fail, the BTC is gone. wBTC is like USDT.
• RenVM / renBTC holds BTC in multi-signatures controlled by a small group of people. It is better than wBTC but still centralized. There is also no insurance—if BTC is lost, there is nothing to protect users. Ren is like USDC—better than wBTC (like USDT) but still not true DeFi.

interBTC is like DAI. BTC is locked by a decentralized set of Vaults → anyone can become a Vault. BTC is insured by collateral in smart contracts. Essentially, interBTC has the same multi-collateral system as MakerDAO. interBTC is designed for DeFi.

Q7: The strongest technology is not necessarily the key to winning. Centralized solutions still dominate the market. How does Interlay plan to challenge these centralized "dominators"?

We see that centralized solutions still dominate. However, the benefits of decentralized solutions like ours are agility and community support. We can integrate with projects and scale into ecosystems faster. Centralized projects lack community support—communities have no stake in the projects.

In the medium to long term, decentralized solutions like ours will win. It just takes another Mt. Gox to remind the community why things like wBTC are a problem.

In the short term, interBTC and Kintsugi have an on-chain treasury dedicated to ecosystem growth. These treasuries will incentivize liquidity pools across the ecosystem. Coupled with Vault rewards, this makes interBTC the only wrapped asset solution with built-in incentives and LP rewards.

Q8: Can you reveal some upcoming collaborations with other Polkadot projects? Who do you hope to partner with? How will interBTC/kBTC be integrated into other parachains?

We typically do not establish "partnerships" until users can actually test them. However, we are closely collaborating with all major Kusama/Polkadot teams, and we will release a series of "featured use cases" in the coming days explaining what users will be able to do with interBTC/kBTC.

A few examples include:

• kBTC as collateral for the kUSD stablecoin on Karura. Simple, mint kBTC, lock it in kUSD as collateral, and use it in DeFi.
• Earning interest on Hodl BTC: minting kBTC from BTC on the Kintsugi bridge. Transfer kBTC to Karura. Use kBTC to open a kUSD loan on Karura. Put kUSD into another yield-generating DeFi protocol (Sushi LP pool on Moonriver, Basilisk LP, …). Enjoy the yield and price exposure of BTC.
• Vaults using LDOT or Basilisk LP tokens as collateral. In addition to KSM/DOT, Vaults can also use yield-bearing assets like LDOT as collateral to increase their APY, earning from liquid staking and Kintsugi/interBTC rewards.
• Future wBTC/renBTC/kBTC curve mining pools: earning trading fees by providing kBTC to BTC-specific pools like Curve, BadgerDAO, etc.

Interlay is working with large custodians and validators and is also exploring Bitcoin mining pools to run Vaults and bring BTC liquidity to DeFi.

Q9: Besides connecting BTC to the Polkadot/Kusama ecosystem, how does Interlay plan to make the most of this parachain slot?

Short-term outlook:

• Main product = trustless kBTC, which will integrate with Karura, Siden, Moonriver, Basilisk, etc.;
• We are adding an EVM so that (a) others can build BTC DeFi applications, and (b) we can load projects from Ethereum/RSK that want BTC access. This can certainly also be achieved through Acala and Moonbeam EVM, but this gives us more flexibility;
• Synthetic BTC versions and more experimental models;
• Other underlyings: bridging can extend to LTC, BCH, DOGE, etc.

Outlook (mainly for Polkadot, but will first launch on Kusama).

• BTC on all chains: from Kusama/Polkadot to Cosmos, Ethereum, Solana;
• interBTC 2.0: we provide users with a new way to earn BTC yield/passive income directly from their wallets—without needing to "wrap." Essentially, BTC DeFi is designed for those who do not have the time or do not want to try complex DeFi protocols—BTC DeFi will become mainstream and is set to launch in 2022.

Q10: As the L1 ecosystem continues to expand, cross-chain communication and value transfer become increasingly important. How does Interlay position itself in a multi-chain world? Can the underlying technology be used to connect different L1s? Which part has the greatest demand?

interBTC will be available on all major DeFi platforms. We start with Kusama and Polkadot—after that, we will bring interBTC to Cosmos, Ethereum, and others (like Solana).

We have announced that interBTC will enter Cosmos. interBTC on Ethereum will be supported by Polkadot's ETH bridge by default. Our vision is to ensure that people can use any asset on any chain. Our urgent mission is: to make trustless Bitcoin ubiquitous.

Here are questions from the True Bitcoin community.

Q: What stage is Interlay currently at? Are there any specific activities happening recently?

Kintsugi is our canary network, running a parachain slot with a crowdfunding campaign where you can lock KSM to support Kintsugi while receiving airdropped KINT tokens.

Q: What is Interlay's global expansion plan? Currently, which market is Interlay focusing on, or is it working to build and develop to win customers, users, and partners?

We start with Kusama and Polkadot, while we have already partnered with Cosmos and are preparing to expand to Ethereum. After that, we will expand to other public chains like Solana or Avalanche.

Q: Is there anything Interlay is doing that is superior to Ren? We are all in the same race; how can we better differentiate and choose Interlay?

Because Interlay's bridge is the only decentralized bridge. Ren is not trustless or decentralized; you have to trust them with your BTC. However, with Interlay's interBTC/Kintsugi, you are guaranteed not to suffer economic loss due to theft.

Because Interlay's bridge is the only decentralized bridge.

Q: Will interBTC always maintain a 1:1 relationship with BTC? When users map BTC to interBTC, where will the BTC be transferred to?

BTC is locked by Vaults, and anyone can become a Vault by locking collateral (like KSM, DOT, USDC, etc.) on the parachain. This way, if a Vault misbehaves, users will receive 110% collateral compensation.

Q: How does Interlay respond to rollback issues on either chain in a cross-chain scenario? For example, if either Polkadot or Ethereum encounters a state rollback, what will happen to users sending interBTC from Polkadot to Ethereum?

Like other DApps, if Bitcoin or Polkadot fails, the bridge will also fail. That is why the bridge needs to confirm on Bitcoin and Polkadot before allowing minting. In this regard, we follow the same security standards as other major DApps. So everyone will fail in the same way.

Q: The exchange rate for BTC to WBTC is around 0.25%. If using interBTC on Ethereum, what is the exchange rate for BTC to interBTC? Are there any other fees, like ETH bridge fees?

Mining and transaction fees will be very similar to wBTC. Even when you mint interBTC to ETH and "hop" on Polkadot, the fees on Polkadot are so low that there is almost no difference. Additionally, I will have liquidity mining for BTC liquidity, which wBTC does not have.

Q: Where is BTC locked? We know that BTC does not have smart contracts, so it will be held by a key-controlled address, right? Who will own this key? RenBTC has a group of signers, which is not perfect. So how do we do better?

Vaults hold BTC. Vaults are like a group of people in Ren, but anyone can become a Vault; however, in Ren, users cannot simply join. Vaults lock insurance collateral, and if they steal BTC, you will receive collateral, and the value of the collateral is always higher than the locked BTC (you get 110%). Ren has no insurance; if BTC is stolen, it disappears, and you lose.

Q: What work has Kintsugi done to participate in this round of Kusama parachain auctions, and how confident are you in obtaining a slot this round?

We are currently not in the top 5, but we will catch up next week, and we have significant momentum. I believe Kintsugi will win, and people are starting to realize how important BTC is for other Kusama projects.

Q: What advantages do you think XCLAIM has over tBTC/Keep?

tBTC tries to build something similar to XCLAIM. However, they have not succeeded. They have a closed group of signers, and due to issues with their ECDSA threshold signing scheme (which is also detrimental to security), they cannot be open to the public. Additionally, tBTC only allows ETH as collateral, making it unstable.

InterBTC/kBTC is multi-collateral, which makes it more stable while allowing yield-bearing assets as collateral, thus increasing Vault APY. KEEP is moving towards a more centralized tBTC v2 and can only ensure 20-30% insurance, while InterBTC/kBTC always has full 100%+ insurance. We also have v2 ready and are developing v3 of interBTC/kBTC, which will further enhance security.