Bitcoin can be used on the Ethereum blockchain.
Normally a blockchain’s native cryptocurrency cannot be used on another blockchain. For instance, Bitcoin (BTC) is technically confined to the Bitcoin blockchain, and Ether (ETH), is confined to the Ethereum blockchain. This is because each blockchain uses different and incompatible designs when creating their infrastructure.
But in 2015, Ethereum introduced the ERC-20 token standard, which is a set of rules that standardize how tokens are created so they can seamlessly interact on the Ethereum blockchain. These are called ERC-20 tokens, and anyone who follows the standard can create new assets.
In order to use Bitcoin on Ethereum, ERC-20 tokens pegged to BTC were created. Several of these exist, but Wrapped Bitcoin (wBTC) and renBTC are the most active ones by far.
With the boom in DeFi, the demand for wBTC has skyrocketed.
wBTC is by far the most popular Bitcoin-backed token used on Ethereum, and it is rapidly gaining popularity as users look to benefit from Ethereum’s various decentralized finance (DeFi) platforms using their Bitcoin.
There are 20,205 wBTC currently in circulation, which amounts to $255MM. Half of that was minted in the past month, even though the token launched in 2019.
In May, it was reported that there was twice as much locked BTC on Ethereum than on Bitcoin’s own Lightning Network. Today, there is 25 times more BTC on Ethereum.
An increasing number of users are avoiding institutions by using renBTC to buy wBTC.
The important thing to note about wBTC is that it is centrally managed and can only be created by a trusted third party. There are only 19 different organizations that can mint new wBTC. BitGo then serves as the centralized custodian, which in the eyes of many people introduces censorship risks.
Conversely, renBTC allows trustless storage of the Bitcoin backing it. This means no party can prevent users from minting new renBTC or from burning it, and no personal data is being collected.
However, renBTC isn’t available in many Ethereum DeFi projects where the demand for Bitcoin is, like on Compound or Aave for example. So what an increasing number of people are doing is they’re locking up their BTC with renBTC to get into Ethereum anonymously. They then trade their renBTC for wBTC to use it in DeFi.
RenBTC launched in May. Since then, 10% of new addresses using wBTC bought it using renBTC, instead of buying it from a trusted third party. In august month to date, that number has jumped to 19%.
What this Means for DeFi
The recent growth in decentralized finance is astounding. In the past three months the total value locked in DeFi protocols has gone from one billion, to over 6 billion dollars. Considering Bitcoin’s massive market cap – over $225 billion USD currently in circulation – it follows that users would want to bring the world famous asset to DeFi. While wBTC is already a popular asset on protocols such as Compound, Aave and Curve, this clever loophole for providing anonymity is likely to bring a considerable amount of liquidity to the movement.