How does oToken Tunnel work?

The first DAO (called "Tunnel") is made for Bitcoin turn to ERC-20 Bitcoin, and the first tunnel name is oBTC, It helps BTC holders bring their Bitcoin to DeFi World.

For each blockchain asset, there will be an exclusive minting tunnel operated in the form of DAO and performing bi-directional mapping between blockchain assets and ERC-20 tokens.

Any community user can open a new tunnel freely through pledge BOR, but each blockchain asset can only have one tunnel. For example, Alice wants to wrap BTC into oBTC on Ethereum network, but the BoringDAO system has yet to create a channel for BTC. Then, Alice can stake a certain amount of BOR and create a BTC-oBTC wrapping tunnel. Although created, the tunnel will not be activated until BoringDAO community has pledged enough deposites that meets the requirement for a tunnel activation, in which Alice’s portion of the pledge will directly enter the pledge pool.

Mint - Make BTC Programmable

  • Transfer BTC into Multi-Sig wallet.

  • Get oBTC and $BOR reward from your ethereum address.

Boring Token is the asset minted by BoringDAO, abbreviated as bToken. The bToken follows the ERC-20 Token standard which enables the wrapped assets to enter the Ethereum DeFi world.

In this chapter, let’s take BTC as a typical example. The bToken minted by BoringDAO is an ERC-20 token backed by BTC and thus is named “Boring BTC”, abbreviated as oBTC. The marketing prices of these oBTC reflect the values of Bitcoins backing them.

Pledge - Create a Trustable enviroment for both BTC and oBTC

  • Pledge BOR token for lifting Tunnel capacity.

  • Get pledge provider token.

  • Farm with "PP token", get more $BOR reward.

Pledging Coefficient & Commission Rate of “the Tunnel”

There are two important parameters in the creation of the Tunnel: pledging coefficient (k) and commission rate (m, n). In version 1, the pledge coefficient k of the tunnel is kept at 50-100%, while the commission rate for minting as well as redemption are both set at 0.2%, and the minting section requires extra network fees. In version 2, however, we aim to let tunnel operators decide on the pledging coefficient and commission rate. the pledge coefficient is abstract, it is only used as a system parameter. Usually, BoringDAO tunnel uses Asset Ratio to describe oToken. For example, at a certain moment, the pledge coefficient is 50%, which means that each oBTC is backed by 1 BTC + 0.5 BTC equivalent ERC-20 assets, then the current oBTC Asset Ratio should be 150% (100%+50%)

Tunnel Settlement

Tunnel settlement would only occur when the losses occur in the cryptoassets under custody. In V1 and V2 stages, in the event of cryptocurrency assets lost under custody, the corresponding minting tunnel will be frozen immediately for settlement. First, the asset custodian will confirm the remaining assets in the wallet and match them with the assets issued on the blockchain to calculate the exposure to be settled. Then, the tunnel pledge will be settled in an equal amount. After clearing, the multi-signature wallet will be replenished with assets, and then the minting will be available. In the V3 stage, dynamic clearing will be realized.

Tunnel Creation

User needs to pledge at least 500 BOR for the initial tunnel creation. However, it should be noted that after the initial creation, the tunnel would maintain inactive until the pledge requirement for tunnel activation is met within 48 hours of initial tunnel creation. In version 1, the activation requirement of each tunnel is set to 3,000 BOR; that is, although the tunnel has been created after pledging 500 BOR, the tunnel would only start to create wrapped b-Tokens after a total of 3,000 BOR is pledged. After the activation requirement has been met, the tunnel will go live after a tunnel-creation countdown.

Why require pledging BOR for proposals: to avoid a large number of meaningless proposals which cause waste of community’s energy; the BOR pre-pledged at the time of the proposal will be converted into the actual pledge of the tunnel as soon as the proposal is passed, allowing the tunnel to have the initial pledge amount and minting capacity.

Insurance

Although the BoringDAO system is well designed, it does not mean that it is foolproof.

50% of the redemption commission in the tunnel will be saved into the insurance pool. The insurance pool is wholly governed and controlled by the community. Only when the community proposal is met and the referendum is completed, the insurance amount locked in the contract will be used for claim settlement. Claim settlement is usually applied to deal with the Black Swan risk in the system.

DAO insurance will provide the BoringDAO system with the third guarantee, allowing all assets to roam freely, safely, and without trust in the Ethereum network.

Understanding BoringDAO Tunnel in details

BoringDAO is a fully decentralized asset bridge operating as a DAO. It will bridge digital assets to any smart contract-enabled blockchain such as Ethereum. By default, it will serve as a Layer-2 solution for BTC and other non-smart contract blockchains, making assets like BTC and LTC programmable.

Using our “Tunnel Mechanism” and “Triple Pledging” features, BoringDAO enables BTC, LTC and other blockchain assets to be seamlessly represented on Ethereum and other blockchain networks, which then allows them to be used within applications on those blockchains.

BoringDAO has a three-layer security mechanism:

  • Asset layer (PS2H multi-sig + OP_Return)

  • Contract layer (over 100% reserve)

  • Application layer (decentralized insurance such as Nsure and Cover)

These security mechanisms allow digital assets to be transferred to other blockchains in a truly secure, decentralized, and trustless way. The first oToken, oBTC, has already been integrated into many mainstream Ethereum-based DeFi protocols such as Curve, SushiSwap, Alpha Finance, etc.

Meanwhile, Mint Mining and Boring Farm works as a double incentive mechanism to further reward users who participate in the ecosystem. With the help of a decentralized multi-signature mechanism and DAO governance, BoringDAO is becoming important blockchain infrastructure for bringing Bitcoin onto the Ethereum Network and into its DeFi ecosystem, making programmable BTC a reality.

BoringDAO has three notable features:

  1. Triple Security Mechanism — Except for BTC mortgages, there are also contract layer mortgages and multiple insurance mechanisms.

  2. Decentralized — With an advanced coin-minting mechanism, oBTC minting is much faster than other cross-chain BTC assets.

  3. High Incentives — Our BoringFarm pool and the Curve pool all enjoy high APYs.

Why do we use OP-Return solution?

Other BTC-pegged coins usually use a centralised server, which generates a new BTC address for minters, then their system can detect transactions sender’ btc address, just like CEX. However, using centralised services is dangerous. There will be a single point of risk of being attacked by hackers or other third parties.

BoringDAO's solution does not use any centralized server, and we uses OP-Return (native function of Bitcoin) to bind minter's btc address and eth address. Minters just need fill in their ETH address on BTC's OP-Return zone, then BTC multi-sig nodes can determine which ETH address they will send oBTC to, that means we use Bitcoin Network as our server. As long as the Bitcoin & Ethereum network is not down, BoringDAO will not be down.