Users deposit bitcoin into the vaults in exchange for iBTC. At this point, the bitcoin is locked in the vault while vault collateral is locked by the Interlay network. Users then return iBTC to the vault, thereby unlocking and releasing their bitcoin, which triggers the Interlay network to release vault collateral. If a vault fails to return bitcoin to a user, the network liquidates vault collateral and reimburses the user.
Source: https://www.coindesk.com/tech/2022/08/11/polkadot-now-has-a-decentralized-version-of-wrapped-bitcoin/?utm_medium=referral&utm_source=rss&utm_campaign=headlines