As of Jul 30, the tokenized Bitcoin (BTC) on the Ethereum blockchain has exceeded 20,000 BTCs, worth over $223,000,000+ or $223M at the current price of $11,000+ per BTC. The most widely used Layer 2 protocol for such purpose is Wrapped Bitcoin (WBTC) holding 15,500+ BTC (worth $172M+). It is followed by Ren Protocol (renBTC) which holds relatively modest 1950+ (worth $21M+) and Synth BTC (sBTC) containing 990+ BTCs (worth $11M+). This extensive tokenization is a result of recent development of Layer 2 protocols, which allow scaling of a blockchain (even on another) and appears to be fueled by the demand of highly liquid assets for Decentralized Finance (DeFi).
When it comes to competing with Bitcoin blockchain based L2s, Liquid and Lightning, the total tokenized Bitcoins on the Ethereum far exceed their Bitcoin based counterparts. For instance, the current amount is ~8x more than Liquid (2486 BTCs/$27M locked) and ~20x more than Lightning network public channels (997 BTCs/$11M locked).
What Is Tokenized Bitcoin Used For?
The Ethereum based Layer 2 protocols are becoming popular and attracting large amount of BTCs, because of their ability to scale the Bitcoin blockchain, in an indirect manner. Bitcoin is a relatively slow blockchain, compared to today’s blockchain technology, capping at 5 transactions per second (TPS). A typical transaction costs ~$4-6 in fees and need around 5-10 min, before it is confirmed. In comparison, Ethereum can manage 15 transactions per second (TPS), which offers significant advantage, when it comes to scaling Bitcoin. A typical transaction costs ~$0.30-0.50 and takes as little as <30 sec to resolve (multi-call complex smart contract executions such as those common with DeFi, however can cost >$5). The Ethereum based Bitcoin Layer 2 protocols utilize this property and scale Bitcoin by issuing a 1:1 pegged token, to be used on the Ethereum blockchain. Therefore, Bitcoin holders can enjoy lower fees and faster settlement times.
However, that’s not the whole story. Arguably, the biggest motivation to bring Bitcoin to the Ethereum blockchain, lies in accessing the nascent field of Decentralized Finance (DeFi). Bitcoin is a valuable asset, bolstered by its security and highest liquidity among crypto-assets. However, its base layer isn’t much programmable, which limits its potential somewhat. Its for this reason that DeFi services don’t exist on the Bitcoin blockchain. The Bitcoin users wishing to do something more with their digital assets than simple buy-and-hold, must therefore look elsewhere. The Decentralized Finance (DeFi) services available almost exclusively on Bitcoin offer one such advantage. The tokenized BTCs on the Ethereum blockchain can be used to lend, borrow and invest in DeFi services, which offer much higher profit than hodling. They can be used as collateral for stablecoin issuance, generating interest by borrowing assets against collateral, used as synthetic asset for derivatives trading, used for automated trading/portfolio management and traded for other crypto assets. Especially popular in yield farming and liquidity mining, they allow users to earn rewards and participate in governance, by providing liquidity. Currently, the amount of BTCs on Ethereum is a small, but still impressive 0.001% of the circulating 18.4M Bitcoin supply, however it is expected to rise massively in the coming days, with the advancement and creation of more lucrative opportunities in the DeFi field.
About Wrapped Bitcoin (WBTC)
Wrapped Bitcoin (WBTC) is a layer 2 solution and Bitcoin equivalent ERC-20 based Ethereum token, which is backed 1:1 with Bitcoin. It allows Bitcoin to be used on the Ethereum blockchain and specially for DeFi protocols. Its issuance and handling is taken care by a Decentralized Autonomous Organization (DAO) made up of multiple DeFi projects and asset backing is verifiable via proof of reserves.
The users supply BTC and the system mints equivalent amounts of WBTC. It is easily redeemable back to Bitcoin on its native chain, by burning WBTC tokens. The WBTC is traded on multiple exchanges or can be acquired by going through DeFi protocols of Dharma, Kyber, Set Protocol, GOPAX, AirSwap, Prycto, Ren and DiversiFi (KYC/AML might be required).
About Layer 2 Protocols
The Layer 2 scaling solutions are decentralized protocols applied to increase the processing capacity of a blockchain (hence scaling) and as a result relieve congestion on the network. They work by delegating the network processing “off-chain” to their own chain, processing it there, before settling the final balances on the base layer mainnet.