Interlay Network functions as a Polkadot-based modular and programmable interface connecting Bitcoin with the multi-chain ecosystem, enabling decentralised financial applications for BTC.
Established in March 2022 after securing the tenth parachain position with an investment exceeding 2.75 million DOT (approximately $20 million at that time), Interlay utilises Polkadot’s shared security framework and cross-chain messaging capabilities to establish a trustless Bitcoin bridge.
What is Interlay?
Interlay aims to facilitate widespread Bitcoin adoption by developing decentralised financial applications for BTC and reducing dependence on centralised services.
This objective is accomplished through creating infrastructure and financial tools serving both users and developers:
- DeFi Integration for Bitcoin:
Interlay’s comprehensive DeFi platform provides consolidated Bitcoin financial services, including swaps, lending, and staking opportunities.
The system features high transaction capacity, minimal fees payable in various cryptocurrencies, and native stablecoin compatibility, creating an experience competitive with centralised alternatives.
- Bitcoin Integration for DeFi:
The Interlay BTC bridge offers secure Bitcoin functionality within the multi-chain ecosystem. iBTC, a token maintaining 1:1 Bitcoin backing, receives security from a vault network.
Bitcoin deposits benefit from multi-collateral insurance protection and cross-chain light client security protocols.
Interlay v2 Platform Capabilities
Interlay v2 delivers financial instruments for trading, borrowing, lending, and additional services based on Bitcoin. Key components include:
- Liquidity Protocol
The platform facilitates the borrowing and lending of iBTC and complementary assets through a pool-based liquidity model inspired by Compound v2. Lenders receive interest based on their supplied assets, while borrowers access liquidity through collateralised loans.
System stability is maintained through liquidation procedures triggered when loan positions exceed established loan-to-value ratios.
- Lending Pool Structure
Assets contributed to lending pools receive representation as fungible “qTokens” that accumulate interest based on borrowing demand. These tokens may serve as collateral for borrowing activities or for securing the BTC bridge, enhancing capital efficiency.
- Decentralised Exchange Implementation
Interlay incorporates a decentralised exchange offering substantial liquidity for Bitcoin holders. The exchange supports two automated market maker models:
- Constant Product AMM (Uniswap v2): Facilitates pairing iBTC with diverse crypto assets
- Curve StableSwap AMM: Enables efficient, low-slippage exchanges between similarly valued assets such as iBTC and wBTC
The exchange additionally serves as a capital resource for liquidations within the liquidity protocol and enables advanced financial instruments, including leverage and hedging options for Bitcoin users.
Interlay’s Vaulted Bitcoin System
Network Architecture
Interlay operates as a modular network specifically designed for Bitcoin finance protocols. The network architecture consists of four distinct layers:
- Consensus, Computation, and Governance Layer: Provides foundational security through consensus mechanisms, functionality through computational capabilities, and community control through governance systems.
- Infrastructure Layer: Enables connectivity between Bitcoin and other DeFi networks through Interlay’s bridging technology.
- DeFi Layer: Supports essential financial primitives, including lending, borrowing, and asset exchange functions.
- Application Layer: It delivers user access through intuitive interfaces while supporting developer integration via SDKs and APIs.
The Vaulted Bitcoin Concept
Interlay’s Bitcoin bridge introduces an approach to wrapped assets through “vaulted” Bitcoin. iBTC functions as a fully fungible, tokenised representation of BTC on alternative blockchains, offering 1:1 redemption for BTC or, in cases of bridge failure, insurance collateral in alternative digital assets at premium rates.
Bridge Operation Mechanics
The Interlay bridge maintains security through an open network of over-collateralised vault operators. Each Bitcoin deposit receives insurance coverage through operator-provided collateral, which automatically compensates iBTC owners in case of operator failure.
The operational process follows these steps:
- Vault Registration:
iBTC minting becomes available once at least one vault has secured collateral on the Interlay chain.
- iBTC Minting:
Users initiate issuance requests and transfer BTC to the vault address specified by the Interlay chain. This locks the vault’s collateral, and the Interlay chain issues iBTC to the user at a 1:1 ratio to the deposited BTC, minus fees.
- iBTC Utilisation:
The issued iBTC becomes available for use within Interlay DeFi and on compatible chains as a fully fungible asset.
- Successful Redemption:
Users return iBTC to the Interlay chain and request redemption. Selected vaults transfer BTC to the user and verify this transaction to the Interlay chain, which subsequently unlocks the vault’s collateral. Users maintain the flexibility to select their preferred vault for redemption.
- Failed Redemption:
If a vault fails to transfer BTC within the designated timeframe (currently 48 hours), users may either attempt redemption with an alternative vault or exchange their iBTC for the vault’s collateral. Both options provide the user with a premium derived from the vault’s collateral.
Economic Framework
From an economic perspective, the Interlay bridge functions similarly to a peer-to-peer lending protocol.
Users deposit BTC to access iBTC at a 1:1 rate while vaults receive the deposited BTC as a loan in exchange for collateral. iBTC represents a claim on either the deposited BTC at a 1:1 rate or the vault’s collateral at a premium rate.
Technical Security Implementation
The Interlay parachain monitors and verifies Bitcoin blockchain status through an integrated light client. The BTC-Relay system verifies block headers and transaction inclusion proofs while managing forks when necessary.
This verification system enables the Bitcoin bridge to enforce participant compliance and penalise malicious actions, establishing economic trustlessness.
Both users and vaults must submit cryptographic proofs confirming the proper execution of iBTC minting and redemption requests or face penalties.
Core System Properties
The Bitcoin bridge is characterised by two principal properties:
- Decentralisation:
This is achieved by permitting unrestricted vault operator registration. The bridge maintains censorship resistance through non-interactive minting processes, preventing vault operators from interfering with or prohibiting iBTC creation.
- Economic Security:
This is established by requiring vault operators to over-collateralise their BTC positions and cryptographically verify correct BTC redemption. Liquidation mechanisms ensure that users can consistently redeem BTC or receive collateral compensation without economic loss.
The economic security model operates under two key assumptions:
(a) the bridge accesses accurate exchange rates between BTC and collateral assets through robust price feeds,
(b) collateral value does not deteriorate faster than the time required for liquidators to complete successful arbitrage transactions.
Comparative Analysis: iBTC and Alternative Bitcoin Wrapping Solutions
Centralised wrapped Bitcoin solutions have been developed quickly, primarily operating on Ethereum.
However, these approaches contradict Bitcoin’s foundational decentralisation principles, a gap Interlay aims to address through its commitment to maintaining these principles across blockchain environments. Using a peer-reviewed cross-chain analysis framework, the following comparisons emerge:
1. wBTC (BitGo)
- Operated by BitGo, a cryptocurrency custody service
- All Bitcoin secured within wBTC remains under BitGo’s exclusive custody
- The restrictive participation model prevents external entities from becoming Bitcoin custodians
- No insurance mechanisms against system failure
- Requires complete trust in BitGo’s operations
- Potential vulnerability to Bitcoin loss, theft, or regulatory intervention without value preservation
- Analogous to centralised USD stablecoins like USDT/USDC
2. renBTC (Ren Protocol)
- Developed by Ren Protocol, originally Republic Protocol (formerly focused on privacy-preserving trading)
- Bitcoin reserves are reportedly secured in multi-signature arrangements controlled by the Ren tea.m
- Dark Nodes (components of the previous protocol architecture) appear uninvolved in Bitcoin custody.
- Closed system preventing new participants from contributing to security
- No compensation mechanisms for users in case of Bitcoin loss
- Requires complete trust in the team
- Similarly comparable to centralised stablecoins like USDT/USDC
3. tBTC v1
- Implemented a relatively decentralised Bitcoin representation on Ethereum
- Design similarities to XCLAIM paper proposals (comparable to interBTC)
- Bitcoin reserves controlled by Signers using ECDSA threshold signature technology
- Signers provide Ethereum-based collateral for user compensation if Bitcoin is lost
- Initially restricted participation, now open to broader involvement
- Single-collateral system (ETH only) reportedly resulted in frequent liquidations during price volatility
4. tBTC v2
- Evolving toward the model conceptualised but not implemented by Ren
- Bitcoin management through 50-100 Signers selected from a larger participant pool
- Transitioning from ETH to KEEP tokens for insurance provision
- Coverage limited to a portion of the secured Bitcoin value
5. interBTC Distinctive Advantages
- Complete Decentralisation: An Open participation model allowing anyone to become a Vault
- Censorship Resistance: Vault operators cannot prevent interBTC minting
- Multi-Collateral System: Similar to MakerDAO, it supports various assets for enhanced price stability and reduced liquidation frequency
- Capital Efficiency: Capability to utilise interest-bearing assets (including liquid staking assets) as collateral
- Financial Security: Users receive collateral compensation at favorable rates (approximately 110%) if Bitcoin is compromised
- Stablecoin Comparison: Functionally similar to multi-collateral DAI but with superior properties—interBTC offers direct Bitcoin redemption, unlike DAI’s inability to be exchanged for physical USD
Interlay Tokenomics ($INTR)
Interlay has operated under community governance from its inception, with the INTR token functioning as both a governance mechanism and a utility instrument. The following presents a structured analysis of the INTR token economy based on whitepaper specifications.
Token Details :
- Token ticker: $INTR
- Total Supply: Unlimited supply
- Circulating Supply: 258.006 million (as of April 4, 2025)
- Market Cap: $908,757 (April 2025)
Emission Schedule:
- Initial distribution of 1 billion INTR over the first four-year period
- Subsequent 2% annual inflation rate to fund protocol treasury for ongoing development and maintenance requirements
- Real-time circulation data available through Interlay Subscan monitoring platform
Allocation Structure
- Community Allocation (70%):
- 30% designated for Vault rewards (distributed on a per-block basis)
- 10% allocated for initial crowdloan parachain distribution
- 25% assigned to on-chain treasury under community governance control
- 5% reserved for stake-to-vote incentive programs (distributed on a per-block basis)
- Team and Early Investor Allocation (20%):
- Subject to 48-week cliff period
- Followed by linear vesting schedule extending over 144 weeks
- Foundation Reserve (10%):
- Dedicated to ecosystem expansion and future development initiatives
- Vesting parameters determined according to specific expenditure requirements
Token Utility Functions
- Governance Participation
- INTR holders may secure their tokens to engage in governance processes and earn staking rewards
- Extended lock durations enhance both voting influence and staking return rates.
- Transaction Processing
- INTR serves as a payment method for transaction and cross-chain fees within the Interlay ecosystem
- Reserve Asset
- Functions as collateral supporting iBTC and other assets within the Interlay framework
- Prospective Benefits
- Potential additional advantages for token stakers may include improved liquidation rates, enhanced collateral terms, or reduced exchange fees.
Conclusion
Interlay Network represents a significant advancement in Bitcoin’s integration with modern DeFi ecosystems through its approach to bridging technology.
By creating iBTC as a fully fungible, 1:1 backed representation of Bitcoin that operates across multiple blockchains, Interlay addresses critical limitations that have historically restricted Bitcoin’s participation in the broader cryptocurrency economy.
As the cryptocurrency landscape continues to evolve, Interlay’s community-governed approach through the INTR token provides a sustainable framework for ongoing development and adaptation.
The strategic balance between immediate utility and long-term ecosystem growth in its tokenomics design demonstrates a thoughtful approach to creating lasting value in the Bitcoin DeFi space.