How is eBTC created?

eBTC is created through a collateralized debt position (CDP) using Lido’s staked Ether (stETH) or ETH as collateral. To mint eBTC, a user deposits stETH or ETH into the protocol, which is then locked in a smart contract. The collateral must maintain an Individual Collateral Ratio (ICR) of at least 110%, ensuring that eBTC remains over-collateralized. Once the collateral is secured, the protocol allows the user to borrow eBTC, a synthetic Bitcoin asset, without any borrowing fees. The creation process is governed by immutable smart contracts, making eBTC a secure and decentralized asset.

What is eBTC used for?

eBTC is primarily used to provide users with a decentralized way to gain exposure to Bitcoin while leveraging their stETH holdings. It allows users to go long on Ethereum (ETH) while shorting Bitcoin (BTC) in a capital-efficient manner, enabling decentralized trading of the ETH/BTC pair on the Ethereum blockchain. Additionally, eBTC can be integrated into other DeFi protocols, used in various financial strategies, and potentially earn yield through future staking vaults.

How is the price of eBTC pegged to BTC?

The price of eBTC is soft-pegged to Bitcoin through a redemption mechanism that allows users to exchange eBTC for stETH at a rate based on the current BTC/stETH price as provided by oracles. When eBTC trades below its peg, arbitrageurs can buy eBTC at a discount and redeem it for stETH at a higher value, thereby restoring the peg. The system also employs a dynamic redemption fee that adjusts based on usage to maintain stability and discourage excessive redemptions, further helping to keep eBTC’s price aligned with BTC.