The idea of Bitcoin on the Ethereum network can be a surprise to many. A few months down the line at tokenized bitcoin have gained much popularity. By June 2020, there were about 15000 BTC tokenized on Ethereum. At the time, the shares of Decentralized Finance’s (DeFi) capitalization represented by BTC had increased by almost 150%. In September, BitGo’s wrapped bitcoins (WBTC) supply topped 76,000 after setting a record of nearly 21,000 wrapped bitcoins minted within one week. As of September 15, more than $1 billion worth of BTC had been tokenized to access Decentralized finance protocols ion the Ethereum network.
What is tokenized bitcoin?
Generally, Bitcoin cannot be easily moved across the chain. Bitcoin tokenization protocols provide a way to use bitcoin on other blockchains. It let users lock up their Bitcoin and mint a corresponding ERC-20 token. This allows the value of a user’s Bitcoin holding to interact with smart contracts on the Ethereum network. These ERC-20 are pegged to the ratio of 1:1 to the price of BTC. The peg between the two should be kept, and the process should be reversible. In other words, you can destroy these tokens, resulting in the “original” bitcoins getting unlocked again on the Bitcoin blockchain.
There are many ways to tokenize Bitcoin on the Ethereum blockchain and other blockchains. The different ways have various degrees of decentralization, different assumptions about trust, and risks. They may also maintain different pegging ratio.
Currently, tokenized bitcoin can be defined by two main types. These are custodial and non-custodial. The first type involves a centralized custodian. In this type, the tokens may be minted by the central custodian in question. This introduces counterparty risk; as the entity wading, the bitcoins have to be trusted. But this implementation may be considered more secure than the alternatives.
There is no trusted entity needed in the second type, as automated on-chain processes do the entire minting and burning process. This system locks collateral assets and mints tokens on the other chain through some on-chain machinations. The funds are locked on-chain until they are unlocked again when the tokens are destroyed. His type eliminates counterparty risks but increases potential security risks.
Tokenized Bitcoin allows investors to bring large amounts of value over to the Ethereum network. Developers started with wBTC, followed by renBTC and the newly relaunched tBTC by the Keep Network. While talking to reporters, Kyle Davies, co-founder of Three Arrows Capital, explained, “WBTC continues to exhibit strong growth as demand for bitcoin in DeFi has exploded. I expect this trend to continue.”
While the tokenized bitcoins are gaining popularity, Bitcoin maximalists have made harsh criticism of these new versions. They believe that any representation of Bitcoin not “real” Bitcoin. They add that these representations do not have the key benefits of holding a sovereign asset.
A growing number of tokenized bitcoin in DeFi
A vast majority of BTC in the DeFi sector take the form of Wrapped Bitcoin (WBTC). But the launch of the different tokenized bitcoin protocol has also increased Bitcoin expansion into DeFi. Scalar Capital Managing Director, Linda Xie, explains:
“A decentralized version of tokenized bitcoin is key to catalyzing the next stage of growth in DeFi. I’m confident that tBTC offers the best solution with the team’s commitment to security, transparency, and decentralization as well as the strong community that has grown around the project.”
The rate of bitcoin tokenization signals the surging demand to use bitcoin in Ethereum-based DeFi applications. Initially, what drove the demand for tokenized bitcoin was the ability to use Bitcoin to take up a loan. This, however, changed, which in turn spiked more growth as more users began earning compound interest form their assets
Some of the leading firms in tokenized bitcoin include; Curve Finance who ranks top with 27,600 Bitcoin (worth $295 million). Aave comes in second with 17,800 BTC (worth $190.5 million) and Balancer third with 9,500 BTC (worth $101.6 million). In total, the three protocols have attracted more than half of all tokenized Bitcoin.