22.06.2024

What are tokenized bitcoins on the Ethereum blockchain (WBTC, HBTC, renBTC)?

The segment of tokenized bitcoins continues to grow rapidly. Projects like WBTC and renBTC have long been entrenched in the listings of the largest crypto exchanges and have become familiar to many users.

The user fullhdpixel on the BitcoinTalk forum wrote that he does not invest in tokens associated with Bitcoin due to the «exit scam risks». The topic of the discussion is titled «Wrapped Bitcoin (WBTC): Why This Is Just Another Complete Disappointment.»

At the height of the bear market, at the turn of 2018-2019, few knew about Decentralized Finance (DeFi). Only a year later, neologisms such as profitable farming and liquidity mining appeared.

Unexpectedly for many skeptics, in a year and a half, the capitalization of the first «bitcoin on the air» – WBTC – grew from almost zero to more than $ 7 billion. Various sales of such assets appeared, a whole market segment was formed with constantly growing competition.

This has not always been the case. The first mention of bitcoins «wrapped in Ethereum» appeared about two years ago. Then some members of the community expressed bewilderment, calling them «just another useless shitcoins.»

We figured out in detail why tokenized bitcoins are needed and what their future prospects are.

Key:

  • Since the beginning of 2020, the market supply of Wrapped Bitcoin (WBTC) has grown more than 200 times.
  • Against the background of the boom in the DeFi sector, other projects have appeared – HBTC, renBTC and HBTC. Competition in the segment has intensified.
  • All bitcoins on air are tied to the price of digital gold in a 1: 1 ratio, but the approaches to issuing and securing assets differ significantly.

Chronicles of the rise of «bitcoins on the air»

Launched in early 2019, WBTC has seen exponential growth in the second half of 2020 amid a boom in the DeFi sector. On January 1, 2020, 591 WBTC were traded on the market. In November, the supply of such coins exceeded 120 thousand.

The amount of WBTC in the market. Source: DeFi Pulse.

According to Dune Analytics, a total of 169,632 tokenized bitcoins are circulating on the market (as of 02/21/2020). This is equivalent to 4.11% of Ethereum’s market cap and 0.91% of the total market value of the first cryptocurrency.

Data: Dune Analytics (as of 02/21/2020).

Against the background of the rapid growth of the DEX segment, the number of trade deals with bitcoins on the air (ethBTC) is also steadily increasing.

Dynamics of the number of transactions with ethBTC. Data: Dune Analytics (as of 02/21/2020).

Let’s take a quick look at the main features of the most popular ethBTC.

Synthetic, centralized and seeking decentralization

There are three main models of bitcoin on air:

  • centralized – WBTC and HBTC, where BitGo and Huobi exchange act as custodians, respectively;
  • managed by systems based on smart contracts – tBTC;
  • synthetic – sBTC from the Synthetix decentralized derivatives platform.

Wrapped Bitcoin (WBTC)  is an ERC-20 token backed by the first cryptocurrency in a 1: 1 ratio.

Kyber Network, Ren (formerly known as Republic Protocol) and BitGo took part in the launch of the project. WBTC has dozens of partners including Compound, Maker, Blockfolio, Uniswap, CoinGecko, Aave, and 0x.

The above companies are certified merchants – they can issue WBTC for verified users and burn tokens.

“To receive WBTC, a user requests tokens from a merchant. The latter verifies the identity of the user in accordance with the KYC / AML procedures. After that, an exchange is made, during which bitcoins are transferred from the user to the seller, and WBTC are transferred from the merchant to the user, « – stated on the website of the Wrapped Bitcoin project.

The scheme of user interaction with the WBTC merchant.

To exchange BTC for WBTC, merchants initiate the token issuance procedure by providing an Ethereum address to a special contract. The merchant then sends the bitcoins to the custodian (BitGo). The latter issues WBTC and sends them to the merchant.

As a result of the operation, the «original» bitcoins remain in custody with the custodian, and the total WBTC supply increases in accordance with the number of BTC provided by users.

If you need to withdraw BTC back, the merchant initiates the appropriate procedure and burns WBTC, sending them to a special contract. Custodian confirms the burn and releases bitcoins for the merchant.

«The amount to be burned is deducted from the seller’s balance, the WBTC supply is reduced,» the project’s website explains.

DeFi users can purchase WBTC from various exchanges including Uniswap. They can also use the wbtc.cafe service based on the RenVM protocol, which allows transferring BTC to WBTC in a few clicks.

Anyone can check the backing of the underlying asset of WBTC using the Proof of Assets tool on the project website. There is an opportunity to see which merchant burned or released coins to the market and when.

The project dominates in its segment. With a capitalization of $ 7.1 billion, WBTC is on the 14th line of the CoinGecko rating (as of 02/21/2021).

The next in terms of capitalization after WBTC is the HBTC token   from the Huobi exchange. Its release took place relatively recently – in February 2020. To date, the total market value of this asset has exceeded $ 1.2 billion.

“Launched by Huobi Global and deployed on the Ethereum network, Huobi BTC (HBTC) is designed to foster the growth of the decentralized market through the introduction of Bitcoin, the largest and most liquid asset , into the DeFi ecosystem,” says Huobi Global’s website.

The project ranks 62nd in the CoinGecko rating.

renBTC is  technologically more complex and less centralized compared to the competitors discussed above.

It uses the open RenVM protocol, allowing assets to be exchanged across different blockchains using the RenBridge tool. In addition to Bitcoin, the protocol supports Bitcoin Cash, Zcash, and other coins.

RenVM is based on the network of decentralized nodes (Darknodes) and the Byzantine Fault Tolerance algorithm. The system also uses Shamir’s Secret Sharing Scheme, Confidential Computing Protocol and ECDSA.

The video below illustrates the process of exchanging BTC for renBTC.

What WBTC, HBTC and renBTC have in common is that they are all tied to the value of bitcoin and backed by it in a 1: 1 ratio. The RenVM protocol is responsible for storing assets. The launch of the latter took place in May 2020.

RenBTC is currently the third most popular tokenized bitcoin. In total, 17 837 RENBTC were released on the market (as of 02.21.2021).

The renBTC development team will become part of Alameda Research, a venture capital firm and market maker in the cryptocurrency market. The project is expected to add Solana support to the RenVM cross-chain protocol.

tBTC . Despite a bad start and vulnerabilities identified in the spring of 2020, the Keep Network developers managed to restart the project. The total market value of tBTC has exceeded $ 100 million.

As with renBTC, tBTC does not have a centralized custodian to control the assets locked in the protocol. However, the approaches of projects to the release of Bitcoin-backed tokens differ significantly.

Bitcoin holders can issue tBTC using the Keep Network, a decentralized signatory network. Signers are selected at random, with a separate group of participants involved for each tBTC issued.

“To guarantee users compensation in case of fraud, signers provide a deposit of 150% of the BTC value of the ETH deposit. tBTC monitors the bad faith behavior of signers, punishing them and fully reimbursing the user for their tBTC, and also excludes the signer from the pool of signers, ” the project’s website says.

By blocking Ethereum as collateral, signers receive a commission upon redemption of tokens.

sBTC  represents a completely different approach to issuing bitcoins on air. The token is not backed by digital gold – it is a synthetic asset backed by the native SNX token of the Synthetix platform. In total, almost 3500 sBTC have been released on the market (as of 02/21/2021).

Despite being pegged to Bitcoin, the market prices for sBTC, wBTC, renBTC, and tBTC are usually slightly different. This is due to varying demand.

Why are tokenized bitcoins needed?

The network of the first cryptocurrency, operating since 2009, is the most secure, it is characterized by antifragility and true decentralization. However, there are not many options for using BTC – these are mainly payments, storage as digital gold and trading on centralized exchanges. DeFi’s capabilities go far beyond the typical use cases for Bitcoin and other «classic» cryptocurrencies.

To make money by lending BTC, the user can use the services of centralized services like BlockFi. Interaction with such platforms involves KYC procedures, which, most likely, seem burdensome to proponents of decentralization and permissionless solutions.

These shortcomings of the first cryptocurrency, perhaps, were one of the main reasons for the emergence and growth of the popularity of ethBTC. The main use case of «bitcoins on air» is decentralized applications that open:

  • access to inexpensive loans, where there is no KYC and other bureaucratic red tape;
  • the possibility of placing funds at an attractive interest rate;
  • spot and margin trading of tokens and derivatives on non-custodial exchanges;
  • asset insurance.

The main components of the DeFi ecosystem.

Bitcoin’s market capitalization is more than four times that of Ethereum. Digital gold can be used productively in the field of decentralized finance.

The scarce nature and unwavering trend towards higher prices in the medium to long term make digital gold a valuable collateral in DeFi applications. Wrapped Bitcoin coins can be used in the Aave, Maker or Compound landing services. Also, users have the opportunity to provide liquidity to the WBTC / ETH pool on the Uniswap exchange and then receive passive income from commissions for exchange operations.

You can even earn money without deviating from the Buy Hold strategy. If the debt is repaid, the WBTC or renBTC used in the landing applications can be unblocked and exchanged for BTC at any time.

Problems and risks

Despite the seemingly wide range of possibilities compared to the «classic» bitcoin, WBTC is not without its drawbacks. The main one is that a centralized custodian is responsible for storing the asset.

In this context, an analogy can be drawn with the USDC stablecoin backed by the US dollar. WBTC and USDC bring the potential of bitcoin and dollar to DeFi, respectively, but are centralized assets.

For Ethereum, the scalability problem is extremely urgent, which is reflected in the extremely high cost of gas. In the second half of last year, the average commission for a simple ETH transfer has repeatedly exceeded the corresponding figure for Bitcoin.

Dynamics of the average commission for BTC and ETH transactions. Data: Blockchair.

The diagram below shows gas costs for typical transactions on the Ethereum network:

  • transfer of native cryptocurrency ETH;
  • transfer of ERC-20 tokens;
  • approval of the ERC-20 token for transactions in the DeFi application;
  • exchange of tokens on the non-custodial exchange Uniswap;
  • deposit to Compound.

Data: Dune Analytics

Obviously, for ordinary users operating with small amounts of money and newcomers testing DeFi applications, such commissions will seem daunting.

Thanks to sharding and the Proof-of-Stake (PoS) algorithm, the new version of Ethereum is designed to solve the problem of high transaction costs. However, it is still very far from the exit from the zero phase, the implementation of sharding and the merger of the PoW blockchain with the new PoS system.

So far, Ethereum apologists can only hope for the widespread implementation of second level (L2) solutions like Optimism and ZK-Rollups, which reduce the load on the main network.

Many users are eagerly awaiting the launch of the third version of the largest non-custodial exchange Uniswap. The upgrade is expected to significantly improve platform efficiency, reduce slippage and increase the speed of operations. Probably at the end of the first quarter, the launch of the Optimism solution will take place, which significantly scales the largest DEX.

When using DeFi applications, do not forget about the risks – software bugs and possible exit scams. Hacker attacks using instant loans have also increased in recent months.

Be especially wary of newly minted applications, in pools of which the annual return (APY) is measured in hundreds of percent. Most likely, the corresponding coins are low-liquid, and the projects themselves were unlikely to attract funding from eminent investors or were audited.

High returns generally involve increased risk. Therefore, investors probably shouldn’t be converting all bitcoins into tokenized counterparts to interact with DeFi.

conclusions

As the supply of WBTC and other tokens increases, it means that users have a growing demand for such assets. The combination of the power of Ethereum and the benefits of the first cryptocurrency creates a powerful value proposition.

Until the problem of Ethereum scaling is resolved, and the cost of gas remains high, further growth in the market share of the coins competing with WBTC can be expected. Similar assets in various implementations will appear on other networks, including the rapidly gaining popularity Binance Smart Chain (BSC) and Huobi ECO Chain (Heco). The aggregate TVL applications based on the aforementioned networks have already reached $ 11.9 billion and $ 2.69 billion, respectively (as of 02/21/2021).

BSC and Heco are clearly inferior to Ethereum in terms of the degree of decentralization, but transactions are confirmed in a matter of seconds with much lower transaction fees. This makes alternative DeFi ecosystems popular with many retail investors.

Amid the ongoing boom in the DeFi sector, we can expect further growth in the capitalization of tokenized bitcoins, for which there are many use cases. The apparent success of WBTC and other similar assets may also drive the rise in popularity of tokenized versions of altcoins.

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