A few days ago I read that the number of tokenized Bitcoins on Ethereum skyrocketed this month, reaching 107,000, estimated to be worth $1.15 billion. Tokenized Bitcoins, let people use BTC on the Ethereum network, instead of ETH, to issue loans or earn interest. While Wrapped Bitcoin (wBTC) is the most important tokenized Bitcoin project on Ethereum, people have twelve different alternatives to choose from, with the recent addition of Tron to the DeFi landscape (RSK, Liquid, WBTC, renBTC, hBTC, sBTC, imBTC, pBTC, tBTC, tzBTC, btc2). Last week, Tron entered a strategic alliance with BitGo, to bring WBTC to the Tron ecosystem, as a TRC-20 token. The token is backed 1:1 by Bitcoin deposits on BitGo Trust, a qualified custodian in the U.S. WBTC has been the key growth driver for DeFi on Ethereum. On Tron its meant to do exactly what it did for Ethereum, and create the sparks needed to jumpstart decentralized finance (DeFi) on Tron. Recently, tBTC re-launched and there’s now 83 tBTC ($885k) in circulation and Polkadot is also planning a tokenized BTC project with polkaBTC.
A few years back, could you ever imagine using Bitcoin on another blockchain like Ethereum? Well, the unthinkable has become possible. Tokenized Bitcoin combines the best of both worlds: Bitcoin’s brand and Ethereum’s smart contracts. If we were to make an analogy, Bitcoin is the dollar,= and Ethereum is SWIFT, the network that coordinates cross-border payments among banks.
Bitcoin can be tokenized on Ethereum in a variety of ways, with various tradeoffs including differing levels of decentralization and trust assumptions. But, regardless of the approach, the basic idea behind tokenizing Bitcoin is relatively simple.
Since Bitcoin cannot be easily moved cross-chain, tokenized versions of Bitcoin on Ethereum make it possible. These ERC-20s are pegged 1:1 to the price of BTC, being backed by the equivalent amount of Bitcoin. The first Bitcoin ERC-20 token was Wrapped Bitcoin (wBTC), which was launched in January 2019. While using wBTC does require trust in the custodians backing the token, trustless alternatives are emerging and growing quickly, such as renBTC and tBTC.
Initially, what drove the demand for WBTC was the ability to use your Bitcoin to take our a loan is, but what really ignited this crazy growth was being able to earn compound interest. Bitcoin’s exploded on Ethereum because of the incentives.
Bitcoin’s current market capitalization is five times higher than Ethereum, the second largest cryptocurrency. Tokenized Bitcoin lets investors to bring huge amounts of liquidity to Ethereum’s nascent DEX market. Because DeFi is still very new and immature, large price spreads between different DeFi markets, create huge arbitrage opportunities for traders.
The DeFi captures the early beginnings of a new and decentralized global financial system. It’s changing the game completely, when it comes to lending and borrowing and shows us the complementary nature of Ethereum and Bitcoin.
Bitcoin has come a long way since October 31, 2008. Right now, more Bitcoins than ever before are being sent over to Ethereum. While Bitcoins are being tokenized faster than they are mined, Bitcoin is and will always remain as the defining force driving the crypto markets.
In many ways, DeFi is Bitcoin 2.0. While DeFi is based on Ethereum, it furthers the Bitcoin narrative. As Ethereum 2.0 approaches and DeFi protocols start integrating layer 2 solutions, gas costs will decrease, and investors will be able to tokenize smaller amounts of Bitcoin. Also, USDC “meta-transactions”, which lets users to transfer ERC-20 tokens without having to own ETH, will reduce some of the complexities that new users face.
DeFi will continue to drive more Bitcoin to Ethereum, as crypto investors focus on high yield opportunities. Beyond existing DeFi protocols, future demand for tokenized Bitcoin will come from even more projects, new ones that don’t even exist yet today, given the pace of innovation.
Subscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research)