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Wrapped Bitcoins

Coinbase Roll-Out Support Wrapped Bitcoin Amid Ongoing DeFi Craze

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Thanks to the ongoing decentralized finance [DeFi] boom, tokenized Bitcoin has captured the market sentiment like never before. With its growing popularity among investors, several exchanges were now delving deeper by listing these tokens to allow BTC to participate in decentralized finance. Adding to this trend, leading cryptocurrency exchange, Coinbase also announced support for the synthetic version of Bitcoin that runs on Ethereum – Wrapped Bitcoin [WBTC] on its platform.

According to Coinbase official release, stated,

“Starting today, Coinbase supports Wrapped Bitcoin (WBTC) at Coinbase.com and in the Coinbase Android and iOS apps. Coinbase customers can now buy, sell, convert, send, receive, or store WBTC. WBTC is available in all Coinbase-supported regions, with the exception of New York State.”

Coinbase has a great track record of building new tools for the community and is a widely recognized global platform. This step is certainly a major milestone for the tokenized asset and more broadly for the DeFi space.

Why the traction?

Wrapped Bitcoin or WBTC, as it is popularly known as,  enables users to lock up BTC in exchange for WBTC. This is essentially an ERC-20 token pegged to Bitcoin and allows BTC holders to access the growing Ethereum-driven decentralized finance [DeFi] space using it as collateral. The increasing demand evidenced the fact that the investors were capitalizing on the rising number of opportunities for using pseudo-BTC in the DeFi ecosystem.

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It wasn’t until August that tokenized Bitcoins gained traction. While the supply of this form of tokens has grown at an astonishing pace, which has led to several platforms offering alternate tokenized bitcoin products, it is, however, WBTC that remains the undisputed leader that has been currently dominating the charts.

First started by BitGo, Ren, and Kyber, over the past couple of months, WBTC has become the most popular synthetic version of Bitcoin holding more than 70% of the market share.

$1 Billion Worth Bitcoin Are Now Wrapped in wBTC on Ethereum

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The decentralized finance [DeFi] sector is in a boomtown as it has continued to attract a lot of attention. Riding the success of this space was the popular Bitcoin tokenization protocol Wrapped BTC [wBTC], which increased by a whopping 900 % in just two months as it crossed the $1 billion mark with respect to the total value [TVL] locked in.

This was noted by the blockchain intelligence platform, Glassnode which tweeted,

According to the popular DeFi tracking website, DeFi Pulse, Wrapped Bitcoin [wBTC] is now the fifth-largest DeFi protocol in terms of TVL, accounting for roughly 10% of the entire segment’s locked capital. Additionally, nearly 94.197K Bitcoin is locked in wBTC.

The growth of the tokenized protocol has been nothing less than extraordinary. Its TVL was only $4.30 million on the 1st of January this year and gained massive traction starting in mid-May which can be attributed entirely to
Maker development. This was due to the vote in early May by Maker to begin accepting wBTC as collateral on the platform.

A further push was noted in mid-June when the market share of Compound began rising steadily. This was due to the release of COMP and the frenzy of yield farming on Compound, the amount of wBTC went from a
fairly negligible amount to a massive surge above $100 million for the first time in less than a month later. Since then, despite a very few halts on the way, TVL saw a rapid growth in figures.

Rise in Popularity

Wrapped Bitcoins are essentially ERC 20 token based on the Ethereum network and are backed 1:1 by Bitcoin thus bringing in the value of the world’s largest cryptocurrency and its liquidity on the largest altcoin chain. This mechanism has become increasingly popular primarily because of two factors: flexibility and interoperability between different platforms.

In May this year, the amount of BTC on Ethereum even surpassed the amount of BTC on the Bitcoin’s popular layer 2 scaling network called the Lightning Network. Ethereum’s DeFi ecosystem has had such a strong gravity over a couple of months that even BTC holders are now finding ways to use it.

DeFi Boom Catalyzes Wrapped Bitcoin’s Growth as Market Cap Nears $500 Million

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The story of DeFi in 2020 has been no less than extraordinary and the limelight is now on the world’s largest altcoin, Ethereum. More precisely, the number of Bitcoins “wrapped” and flowing on Ethereum blockchain was now in the focus. So what exactly is ‘Wrapped Bitcoin’? They are ERC-20 token backed 1:1 by BTC.

A majority of trading volume occurs on centralized exchanges with Bitcoin, but WBTC changes that. The ERC 20 format brings Bitcoin’s liquidity to decentralized exchanges [DEX] making it possible to use Bitcoin for token trades, thereby unlocking a wide array of use-cases such as lending, liquidity provision, and decentralized exchange.

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The supply of WBTC has been increasing at a staggering rate on Ethereum, the biggest DeFi ecosystem. This was primarily due to the fact that it gave the investors a way to capitalize on their BTC holdings by leveraging the added functionality and versatility provided by the wrapped token.

According to the latest chart by Skew analytics, Wrapped Bitcoins saw a new all-time high market cap after USD value locked under WBTC hit $470 million. Out of which, 97% of WBTC is locked in smart contracts, solidifying its use case as a smart contract-compatible version of BTC, according to Glassnode.

Since $183 million as recorded on 1st August to the press time figure, WBTC’s market cap has increased by over 156% in one month.

DeFi Pulse

Additionally, Bitcoins locked in WBTC were 39,104 at the time of writing, which is astonishingly high as compared to 15,521 at the beginning of the month.

The fact that BitGo holds the keys to mint tokens and the project gives a fair idea that the initiative is centralized to a degree by a chosen custodian.

Despite this, WBTC could be a blessing in disguise. The DeFi mania has spurred a lot of talks and FOMO surrounding the space seems inevitable at the moment. Hence, this could aid in Bitcoin’s potential bull run to its previously set ATH.

BTC is the biggest cryptocurrency. And converting it to an ERC 20 token to make it compatible with the Ethereum blockchain, brings more utility to the table, far more than the Bitcoin blockchain offers.

Hence, there could be a scenario wherein the investors foraying into the market opt for Ethereum, or for that matter, DeFi protocols, rather than choosing Bitcoin itself. At this point, questions regarding the very necessity of the Bitcoin blockchain would crop up, whose value, as Glassnode noted, comes from the 68 TWh of power that goes into securing the network each year. This is something that warrants serious attention.

Is Ethereum Providing Better Bitcoin Scaling Solutions Than Bitcoin Itself?

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Bitcoin does a whole list of things that are right for the digital asset industry. ; The largest crypto has one of the most secure blockchains, a dependable insurance rate, and a complete decentralization structure.

In the midst of all of its proverbial advantages, the main issue of Bitcoin remains its ability to handle a higher number of transactions; in short, its scalability. The inability of the network to facilitate more transfer has caused network saturation, which in turn spikes up the transaction fee during high on-chain activity.

Now, in the last few years, a number of off-chain solutions have been proposed to solve this conundrum. Bitcoin’s Lightning Network and Blockstream’s Liquid have often led development, but over the past 12 months, Ethereum’s DeFi has also been a popular platform.

In a recent blog post of Arcane Research, the aforementioned off-chain solutions were reviewed to understand their present status.

Blockstream’s Liquid Network and the Lightning Network

Data from Arcane Research suggested that the Bitcoin sidechain Liquid, which processed faster transactions with the help of L-BTC has performed admirably since January 2020.

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According to the chart above, L-BTC in circulation during the month of January was close to 600 but since then, the sidechain has witnessed high adoption as the number of L-BTC has spiked up to 2476 in July 2020.

Lightning Network hasn’t been behind as well, but it is important to note that Bitcoin’s LN chain has received a lot of criticism over the past few months. Since its launch in 2018, it has been touted as the mainstream solution to solve BTC’s scaling problems but the narrative continues to be “underdevelopment”, in spite of launching back in January 2018.

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The above chart exhibits that over time, Bitcoin’s LN adoption rate is not exactly impressive but according to BitMEX Research, it is difficult to measure its exact adoption. The report suggested that 28% of LN channels are private as of January 2020, so BTC locked in those channels are not added up.

Ethereum’s WBTC; Tokenized Bitcoins taking the cake?

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Now, In spite of receiving mainstream adoption only in January 2020, tokenized Bitcoins on Ethereum is rapidly becoming a sought-out solution for scaling Bitcoin.

It is a completely separate off-chain platform where tokenizing BTC as an ERC-20 token enables functionality and makes it compatible with the Ethereum DeFi ecosystem.

Wrapped Bitcoin of WBTC is the largest BTC token on Ethereum and it currently holds 11136 BTC into its protocol. It completely blows Liquid and LN’s adoption out of the water in terms of growth.

Now, the major trade-off is the fact that tokenized BTC on Ethereum has a layer of centralization surrounding its development, and it is also more complex than using Bitcoin on its parent blockchain.

Conclusion

In terms of growth, tokenized Bitcoins on Ethereum are head and shoulders above Bitcoin sidechains and it is becoming rapidly evident that users are preferring Ethereum over Bitcoin’s blockchain but considering the likes of WBTC is completely centralized, Bitcoin sidechains may still have an advantage in the future, only if they can pump up their numbers and establish themselves as a legitimate solution.