“Bitcoins are being tokenized to use Ethereum faster than they’re mined” – Zack Voell. That’s right – 6,785 BTC got wrapped in the Wrapped BTC (WBTC) contract while 5,738 BTCs were mined this week. Bitcoin is making it’s way to Ethereum at an unprecedented pace.
— WBTC (@WrappedBTC) August 15, 2020
Currently, the block reward for Bitcoin is 6.25 BTC per block, meaning roughly 900 are mined each day. In total, there is roughly 26,000 BTC locked in the WBTC sidechain, giving it a market cap of more than $300M.
The two main advantages of locking BTC into WBTC is that they can then be used in the wider DeFi landscape and traded with other ERC20 tokens on DEXs like Uniswap. The second, more plausible reason, as to why we are seeing such explosive growth is that they are being used in Yield Bouncers to earn interest on their BTC. Pools like Curve’s sBTC or the WBTC Balancer Pools provide users the ability to earn a very lucrative interest rate.
— Max Bronstein (@max_bronstein) August 15, 2020
FTX CEO, Sam Bankman-Fried, confirmed that both their regular exchange and OTC desk are seeing a ton of new inflow.
Critics are not happy
Critics are not happy about this latest development as WBTC goes against the ethos of the space. When redeeming Bitcoin or WBTC, users have to go through BitGo. BitGo is a digital asset trust company and security company, headquartered in Palo Alto, California, therefore introducing a central point of failure which goes against the core values of DeFi. It should also be noted that when you deposit BTC to BitGo, users have to undergo KYC and AML onboarding along with your BTC. This further turns off many people who would have otherwise used their system.
Many critics have also pointed out that while this is good for the Ethereum ecosystem, this could have negative consequences for the Bitcoin blockchain. This is because with each halving, the block rewards are halved and miners become increasingly more reliant on the transaction fees. The current block reward is 6.25 BTC and sometime in 2024, that block reward will be cut down to 3.125 BTC. What this means is that if a huge portion of BTCs are locked in sidechains like WBTC, renBTC and pBTC, there is a lack of bitcoin circulating in the Bitcoin Blockchain and thus, miners do not get the transaction fees that they otherwise would have earned.
Bitcoin Competition Heats Up
While WBTC is the biggest player in the tokenized BTC space, it is not the only player. Ren Protocol is quickly catching up with it’s wrapper – renBTC – boasting a markcap of nearly $75 million USD. Many have rallied behind renBTC as it is a better alternative to WBTC because it is more decentralised and not reliant on any central custodian nor does it require its users to go through the intrusive KYC/AML procedure. Check out our coverage on Ren here.
— Ren (@renprotocol) August 15, 2020
Bitcoin has its own Layer-2 sidechain called Lightning Network. However, it has failed to attract any major traction and sits at a mere Total Value Locked (TVL) of $12 million USD. This pales in comparison to WBTC’s Market Cap of +$300 million USD and even renBTC’s Market Cap of nearly $75 million USD.
What this goes to show is that the appetite for compelling yield is attracting many users to port their bitcoin over to Ethereum. While it should be obvious that there is a significant amount of risk associated with doing so, this ‘risk-on’ appetite is not one we expect to slow down anytime soon.
In the background, tBTC is quietly preparing for its relaunch after Keep Network shut down its trustless bridge to address bugs that arose from unprecedented demand.
To keep up on how Ethereum-based bitcoin is trending at any given time, check out this Dune Analytics dashboard.
Tarang discovered ETH in 2018 and has been actively involved in DeFi after finding PoolTogether in 2019. He’s most interested in the DEX sector as a frequent user and participant in Uniswap and Kyber Network alongside lending protocols like Aave. Tarang’s active presence in DeFi has given him a front-row seat to cutting edge trends and real-time developments. Stay up with Tarang by following him on Twitter.