# Strudel Protocol Wiki
Strudel is the first one-way, trustless bridge linking Bitcoin to Ethereum.
## Table of Contents
* Strudel Protocol Overview
* The Value of a Trustless Bridge
* Terra Farms
* Seigniorage Auctions
* Reflexive Yield rate
## Strudel Protocol Overview
Centralized Bitcoin bridges expose the Ethereum ecosystem to systemic risk. Projects like REN and WBTC lock BTC in insecure multisig setups and raise concerns of total value collapse.
"I continue to be worried about the fact that these wrapped BTC bridges are trusted... I hope that they can all 'at least' move to a decently sized multisig" - Vitalik Buterin
(Inventor and co-founder of Ethereum)
Strudel is the first one-way, trustless bridge linking Bitcoin to Ethereum. vBTC, the resulting asset, trades off counterparty risk for market risk, bringing more diversity to the tokenized-BTC landscape. In the long term Strudel is about using the forces of crypto-economics to challenge the status quo of blockchain and free BTC from the grip of Wall Street.
## The Value of a Trustless Bridge
The supply of tokenized Bitcoin on Ethereum relayed through centralized, trusted bridges now tops $1.1B. While the demand for Bitcoin in DeFi is expected to grow, a better solution without counterparty risk for bridging is needed. This topic will introduce the technical components of the trustless, one-way bridge operated by Strudel.
### Strudel Bridge Design
When BTC is requested to be transferred using the Strudel Dapp, a transaction output with the transfer amount and the recieving Ethereum wallet address is created. This output is handed to the user's Bitcoin wallet through the QR code. When a user signs a transfer the resulting transaction might look something like this.
Next, the header of the Bitcoin block containing the transaction needs to e registered in the relayer contract on Ethereum, where its proof-of-work is verified and the canonical chain is extended. Simple payment verification (SPV), a protocol used by Bitcoin light clients and wallets, prevents invalid blocks from entering the relayer.
Once the transaction containing the burn has been buried under enough proof of work (6 blocks), an inclusion proof is relayed onto Ethereum. The proof is verified by the Strudel contract which mints vBTC in a ratio of 1:1 to the designated Ethereum address. The protocol strictly mints 1 vBTC for 1 burned BTC, not taking any fees for bridge crossings.
### Relayer Contract
The relayer contract is the heart of the bridge architecture. It is able to verify new block headers of the Bitcoin blockchain and construct a canonical chain. It acts as an on-chain implementation of a Bitcoin light client.
The Strudel team is very thankful to our friends at Summa for creating and operating the first version of such a contract. Our bridge wouldn't be possible without the function and data that the contract provides. We want to support the operation of the contract through relayer rewards. Currently, 3 different function of the contract are proxied by the vBTC contract and pay out rewards for valid header relays.
## Opening Bitcoin to DeFi
Current Bitcoin holders have no way to let the capital in their wallets work for them - to hodl is the only way. By equipping BTC with ERC20 interface and smart-contract interoperability it becomes versatile - it becomes vBTC. The future for Bitcoin on the DeFi space is bright, as its supply can be locked into protocols for lending, options, and other DeFi use-cases, reducing its volatility and potentially increasing market value.
vBTC upgrades BTC with another tool to hold its ground in Blockchain finance - flash loans. Flash loans are instant uncollateralized loans for the duration of only one transaction. While other tokens need to be pooled, before they can be flash-loaned, every vBTC holder has the ability to borrow up to 21,000,000 vBTC at any time - this feature is also used in our pegging algorithm.
## vBTC (The Meaning & Value)
### **vBTC and the Strudel Protocol is about trusting crypto-economic incentives without middlemen. It is the next logical step towards a trustless bridge of Bitcoin to Ethereum.**
### The Importance of Crossing Trustless
There is systemic risk in the ecosystem! Trusted ridge solutions like $REN and $WBTC lock BTC in insecure multisig setups (<8 signers). They raise concerns of total value collapse causing harm to protocols and pools locking these assets. Strudel is here to help. vBTC has a fully auditable supply and no risk of compromise. It is the assest of choice for traders and DeFi users.
By crossing only in one direction vBTC is covering the basic supply of tokenized Bitcoin that stay on the Ethereum blockchain.
### The Purpose of vBTC
Currently, centralized and decentralized tokenized BTC solutions are just a gateway for people to join the Ethereum ecosystem. They are depended on 3rd party protocols to make use of their assets.
Strudel is offering a shortcut. Once the BTC bridge is crossed - vBTC and the earned $TRDL tokens can be put to use immediately. The Strudel Dapp allows instant yield farming and rewards claiming through incentivized market mechanisms. vBTC is BTC with an ERC20 interface allowing smart-contract interoperability, lending, options and other DeFi use-cases. All of these, reducing its volatility and potentially increasing market value. Additionally, vBTC has a flash loan capability making it even more attractive and allowing it to be a core function in pegging the algorithm.
### Market Conditions
The Ethereum ecosystem is gaining strength through new use-cases such as DeFi and many more e.g. NFTs, Governance. Strudel is optimistic and the bridge is a signal for all that feel the same.
Be part of the future and enter the Strudel.
Strudel stands as the token that governs vBTC, the reward token, and is the protocol that wraps vBTC creating the trustless bridge that moves DeFi to a more secure BTC and Ethereum link.
### On-Chain Governance Reimagined
Until now, governance parameters and contract upgrades have been in the hand of the multi-sig signers. A delay of 24h and 7 days respectively before governance actions go into effect has been the only safety for protocol users.
Strudel users are be able to lock their $TRDL tokens to receive voting power over future protocol changes. When locked, the tokens will be transferred into a dedicated layer-2 network producing governance outcomes for the protocol through voting. All decisions by the community will be fully transparent and executable without any involvement from the multi-sig signers in the future. This gives full autonomy to the Strudel community.
Governable protocol aspects include:
Dev-fund share for all mint operations.
Farm settings like reward distribution and size.
### Market Lookout
The liquidity providers in the $TRDL protocol take a special position when entering the Power Pool. They combine their assets into a high-liquidity leveraged long position on ETH vs. BTC. Holding this position they are rewarded in $TRDL, while profiting additionally every time when surplus is skimmed off the pool. The surplus is used to buy $TRDL of the market and burn one half, while staking the other half in the Uniswap $TRDL/ETH pair.
### The Road to Full Community Ownership:
Strudel allows a new level of flexibility and complex feature sets. It is the first step towards a fully decentralized and community owned protocol that every DeFi protocol wants to achieve.
## Terra Farms
You can put your vBTC and $TRDL into DeFi immediately and support the project by providing liquidity. Strudel makes use of crypto-economic incentives to strengthen the trustless bridge and the protocol. When you put liquidity pool tokens into the Strudel — 🛰 Terra-Farms — you stabilize the peg of BTC to vBTC and earn rewards by taking a short position on BTC dominance and go long on Ethereum.
1. Deposit Liquidity into the major pools of vBTC-WETH or $TRDL-ETH. You will need both of the assets to stake liquidity. For vBTC-WETH you will need vBTC and wrapped Ether. For $TRDL-ETH you need $TRDL and ETH.
2. Once you staked the desired amount of vBTC and WETH or $TRDL and ETH you will get LP tokens (Liquidity Provider Tokens). The LP token of vBTC-WETH is called vBTC++.
3. Now that you have the respective LP token you can stake the respective LP tokens in the reward pools vBTC-WETH LP or $TRDL-ETH and farm $TRDL.
4. Earn $TRDL rewards — harvest your rewards, enter more liquidity and repeat.
## Seigniorage Auctions
A perpetual auction contract is introduced, running one auction per day:
- When the free-floating supply of vBTC needs to decrease, then \$TRDL is minted and auctioned for vBTC, which is then locked in the contract.
- When the free-floating supply of vBTC needs to increase, then previously locked vBTC is auctioned off by the protocol in exchange for \$TRDL, which is then burned.
Auctions are accessible through the Frontend of Dutchswap and will run continuously.
The figure below describes the principles of a Dutch Auction. The price starts high and continuously lowers with time progressing. Bids can be placed at any time while the auction is running and secure a price not greater than the current price. Once the number of tokens at auction multiplied by the current price match up to the sum of bids placed the auction concludes with every participant receiving the last active price.
If vBTC is at under 95 % of the averaged BTC price, the Auction manager creates an Auction to sell off $TRDL to buy back vBTC. Enough $TRDL is minted to stabilize the price of vBTC up to a percentual limit in the relationship of total $TRDL issuance. We will start with a very low percentage in the first auctions and slowly increase it depending on participation. At the start of an auction, the price of the $TRDL begins at 125% of the market price, denominated in vBTC. Over the auction duration, this price drops to 75% of the market price.
If vBTC is trading above 95% of the market price of BTC and the Auction manager holds vBTC it creates an auction to go in the adverse direction, buying back $TRDL and burning it. Because the price of the vBTC should be higher than the buying price, this should create a reduction of total emission if the project stays at the peg longer than it strays from it.
## Reflexive Yield rate
Farming rewards with a high issuance of new coins and static schedules have proven to produce negative effects on protocols, like in the case of SushiSwap. A high issuance of new coins is often accompanied by strong selling pressure on the token. Even if these profits are reinvested into the farms, the token price dwindles over time, and farmers are potentially left with a loss.
At strudel, we have started off with a small issuance of only 1 $TRDL per block.
### Reflexive Issuance
A token’s supply needs to grow with the ecosystem it is creating. In the case of $TRDL that is the supply of vBTC, and the opportunities that vBTC offers to its holders in the DeFi ecosystem.
The Bonus multiplier is a governance parameter in the Strudel protocol and currently set to 4. It is used by the TorchShip, the contract managing the issuance of farming rewards. Even though it can be changed with a delay of 24 hours, an effective response to supply changes and market activity is not possible.
Hence, we are proposing to automate and couple the bonus multiplier to the issuance of new vBTC over the course of the last 7 days (window size). After simulations of different coupling methods, we have come up with a modified variance metric (σ) normalized over the supply of vBTC. The exact formula is:
x(n) = last observation of total supply of vBTC
x(n-7) = total supply of vBTC as observed 7 days ago
To give you a feeling of the automated bonus multiplier, we have simulated an increase of vBTC total supply in different steps.
When the supply increases by 1 vBTC on day 3, the bonus multiplier jumps from default 1 to ~2.2, then decreases over the next days as the supply stays constant.
A doubling of supply, like on day 10, leads to an increase of the bonus multiplier to ~5.7. It then decreases back to 1 over the course of 7 days (remember window size) if no more mint occurs.
When the supply rises constantly, like between days 17 and 27, the bonus multiplier has a more moderate response.
This alrogithm is expected to slow down the inflation of the $TRDL supply, yet yield higher returns to farmers that stake liquidity on days when the protocol is growing. Happy farming!