Bitcoin is Buckling Under Ethereum’s Gravitational Pull and It's Only The First Victim
The Bitcoin-on-Ethereum issue
|Jul 1, 2020||1|
Hello Defiers! One of the key trends this year has been the rise of Bitcoin on Ethereum, or linking BTC with ERC20 tokens for holders to access decentralized finance. While BTC is arguably the first non-native Ethereum asset to be ported over in a meaningful way, it could be the first of many financial assets sucked into the network as decentralized applications continue delivering an experience that’s many times better than legacy finance. This issue dives into this trend.
Drivers behind the Bitcoin on Ethereum going parabolic, and the winners of the BTC-to ETH race, by Lucas Campbell
Key on-chain analytics for BTC on Ethereum, by IntoTheBlock
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Bitcoin is Buckling Under Ethereum’s Gravitational Pull
There’s now over $100M in BTC circulating the Ethereum economy. While it’s only a sliver of BTC’s total market cap, it’s undeniable that the trend is growing. At the end of the day, Ethereum acts as a gravity well for global financial assets. And Bitcoin is the first victim.
The reason? Decentralized finance. With Compound, Maker, and others now offering permissionless financial services using Bitcoin as collateral, people are electing to migrate their native Bitcoin over to Ethereum to capitalize on any of the range of “money verbs” available on the network. I mean who wants to sit around and hold BTC these days anyways? Boring.
They do this by depositing BTC and getting Ethereum’s ERC20 tokens in exchange at 1-to-1 so the coins are effectively pegged to Bitcoin. These Ethereum-ized BTC come in many flavors, from the more centralized with WBTC, to the more permissionless with renBTC.
The largest gravity well in recent weeks for Bitcoin has been Compound. After launching COMP yield farming in mid-June, the lending protocol has increased its BTC locked from ~$90M to over $570M, a 533% rise in less than two weeks.
MakerDAO Started It
Maker was the initial driver behind the spike of BTC on Ethereum, after it added WBTC as collateral in May. However, WBTC reached its debt ceiling of 10M circulating DAI, resulting in the amount of new BTC locked in Maker to flatline.
But this shouldn’t last for long, as MKR holders will likely vote to double the debt ceiling in the coming days and more Bitcoin will be inhaled by Ethereum and its decentralized reserve bank.
Another driver behind the recent surge of BTC on Ethereum is Balancer, the liquidity and asset management protocol that launched yield farming earlier this month. Balancer has soaked up 1,660 BTC into its protocol or roughly $15M in value, since June 1st.
The final player behind Ethereum’s gravitation of BTC has been Curve, the AMM protocol known for its highly efficient stablecoin trading. The rising AMM recently launched a BTC Pool which comprises three major flavors of BTC including WBTC, RenBTC and sBTC, Synthetix’s version of BTC collateralized by SNX.
What’s interesting about the Curve BTC pool is the underlying yield farming incentives. In case you missed it, Ren Protocol and Synthetix teamed up to provide one of the most complex multi-asset yield farming plays that the DeFi ecosystem has seen to date. Users who supply BTC liquidity to Curve will not only receive trading fees but also SNX, REN, BAL, and CRV incentives. As a result, the BTC pool has been quick to accumulate just shy of $16M in BTC in a few short weeks of launching.
The common theme here is yield farming. The incentive to earn native protocol tokens is just too tempting. People simply can’t resist using their otherwise idle BTC to earn the astronomical rewards that typically range between 30% - 100% APY.
The Battle for BTC on Ethereum
WBTC currently dominates the market in terms of tokenized Bitcoin as it’s responsible for ~78% of all BTC on Ethereum. But the introduction of Ren Protocol’s RenVM brought a new fighter into the arena - renBTC.
After launching in early June, Ren protocol’s trustless cross-chain custodian (the RenVM) has facilitated nearly $10M of new BTC onto Ethereum in the past month alone. As a result, renBTC currently comprises almost 10% of all BTC circulating on Ethereum (and rising). As mentioned, one of the reasons behind this growth was the launch of Curve’s BTC multi-asset yield farming incentives along with the launch of wbtc.cafe - a permissionless portal for wrapping BTC on Ethereum via a normal Bitcoin transaction, powered by Ren.
That along with Keep Network’s tBTC struggling to hit mainnet, renBTC has overtaken the narrative for trustless BTC on Ethereum. The only thing missing for renBTC is a wide range of integrations across DeFi protocols, something that is largely dominated by WBTC. However, as Ren continues to flex its trustless muscles, more DeFi protocols will likely support renBTC in the future.
WBTC & RenBTC Crowd Others Out
Outside of WBTC and RenBTC, the other flavors are dwindling in market share. The next two closest competitors are hBTC and imBTC which aggregate for 6.38% and 5.44% of all BTC on Ethereum, respectively.
While imBTC started off as a relatively popular alternative to WBTC, it has lost a significant portion of its market share since the beginning of the year - a decrease from 40.8% down to 5.44%. In addition, hBTC has stagnated as Huobi’s version of wrapped Bitcoin sits idle at 710 BTC in circulation since its launch in late February.
It’s becoming increasingly apparent that Bitcoin as an asset can’t fight Ethereum’s gravitational pull. The potential for BTC in DeFi protocols is simply too strong. Now, with yield farming offering insanely high passive income opportunities —though sometimes at high risk— BTC doesn’t stand a chance.
BTC on Ethereum is a thing and the trend is there. That’s undeniable. The question now becomes: How much Bitcoin will end up on Ethereum from the current 0.05%? 1%? 5%? More?
Could BTC on Ethereum flippen the amount of BTC on Bitcoin? It seems insane to even consider.
But only time will tell.
If you’re interested in tracking the day to day of BTC on Ethereum, check out these two awesome resources:
On-Chain Markets Update by IntoTheBlock
This Week: Key Analytics Behind the Rise of WBTC
“Show me the incentives and I will show you the outcome” - Charlie Munger
While the renown American investor and vice chairman of Berkshire Hathaway was not referring to cryptoassets with this remark, it certainly applies to the industry, especially with recent developments in the DeFi space. As yield farming and staking have boosted rewards for DeFi token-holders, they have also supercharged the demand and prices of protocols’ native tokens. Aside from COMP’s meteoric rise, the so-called ‘Bitcoin on Ethereum’ tokens have also strengthened remarkably as a result of added incentives and functionality.
While there are several tokenized versions of Bitcoin on the Ethereum blockchain, Wrapped Bitcoin (WBTC) — a centralized alternative held by the custodian Bitgo — remains the largest. WBTC uses a proof of reserve mechanism which keeps the peg with BTC at 1:1 through the burning and minting of tokens. renBTC — a trustless ERC-20 pegged to the value of Bitcoin — has managed to capture 10% of the market within less than two months from its inception.
Added incentives is arguably the main factor that has enabled the growth of Bitcoin on Ethereum. With the approval of WBTC as collateral for DAI on MakerDAO’s oasis platform in May, Bitcoin holders gained the ability to leverage their holdings through DAI loans on the Ethereum blockchain. This was the first major step for Wrapped Bitcoin as shortly after crypto lending platform Nexo minted $4 million in DAI using WBTC as collateral. More recently, on June 18 WBTC was introduced to the crypto-agrarian age through a partnership between Ren, Synthetix and Curve Finance.
Using IntoTheBlock indicators we are able to analyze patterns highlighting the impressive growth WBTC has seen throughout the year. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key insights that dive deeper into what is happening under the hood in Ethereum and DeFi tokens. This week we dive into three metrics demonstrating just how much Bitcoin on Ethereum, specifically WBTC, has grown in 2020.
Daily Active Addresses Peak Following Incentives Boost
Added incentives have had a clear impact in the number of users leveraging Bitcoin on Ethereum. Throughout 2019 on-chain activity for WBTC remained relatively stagnant as there was a lack of apparent benefits for holders, averaging only 58 daily active addresses.
In 2020, though, Wrapped Bitcoin hit a point of inflection as use cases and ways to profit from holding it increased. First, following the approval of WBTC as a collateral for DAI, daily active users surpassed 300 for the first time. Since then the number of daily active addresses remained at a higher average level moving sideways until mid-June.
As major liquidity mining updates were launched in DeFi throughout June, Wrapped Bitcoin was poised to benefit from this frenzy. This was certainly the case, as daily active addresses jumped by 5x within 5 days following the release of the yield farming partnership between Ren, Curve and Synthetix.
Overall, through the integrations with other DeFi protocols WBTC has been able to triple its average of daily active addresses to 169 so far throughout the year.
Large Transaction Volume Skyrockets with Yield Farming Release
At IntoTheBlock we monitor transactions of over $100,000 of value through our large transactions series of indicators. While data for this indicator for WBTC was close to non-existent throughout 2019 and the first quarter of 2020, it grew remarkably as a result of the integration into other DeFi protocols.
Similar to the case with daily active addresses, large transaction volume had first reached a high of $28 million following the MakerDAO integration before being propelled by yield farming incentives. The effect of the Ren, Curve, Synthetix initiative in large transactions was so vast that even zoomed in on the 3 month time frame the increase is quite vertical.
As can be seen in the graph above, large transaction volume went from near zero to over $300 million in a few days. To be precise, WBTC's large transaction volume increased by 200x in 6 days following the yield incentives provided to liquidity providers.
New Types of Institutions Leverage Bitcoin on Ethereum
As readers may have guessed, it is not average users that are pumping WBTC’s large transaction volume to $300 million. Asides from the impact in volume, the average balance of a WBTC address also provides an idea of the profile of holders.
Following the same trend, the average balance of a WBTC holder has increased as a result of the potential to profit from DeFi integrations. Starting the year at $2,350, the average balance of a WBTC address has been on an uptrend surpassing $10,000 in late May. Since the yield farming release, it tripled peaking at $30,800 on June 27 before dropping back to $22,000.
With novel features like yield farming, DeFi has ignited the creation of new types of organizations that benefit from sophisticated use of smart contract functionality. As evidenced by the spikes in large transaction volume and average balance, WBTC has attracted these new institutions and large players, boosting its network activity and market capitalization.
Through the ‘money lego effect’ WBTC has leveraged DeFi’s composability to incentivize user adoption. With the approval of WBTC as a collateral type in MakerDAO and the yield farming partnership, the case for Bitcoin on Ethereum has solidified as demonstrated through the growth in on-chain activity. While currently only 0.05% of Bitcoin supply is held in Ethereum smart contracts, incentive-boosting mechanisms such as the ones described are likely to continue increasing this percentage as long as there are no major vulnerabilities exploited in the underlying protocols. Ultimately, both Bitcoin and Ethereum stand to benefit if this growth spurts large players and retail users to leverage these functionalities.
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About the editor: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.