With the price of bitcoin falling over the past month, crypto traders have increasingly symbolized cryptocurrency in synthetic versions compatible with the Ethereum blockchain, where it can be deposited for additional return.
The number of bitcoins locked to the Ethereum blockchain via wrapped bitcoin, a decentralized finance (DeFi) protocol used to convert BTC to ERC-20 tokens, has risen to a record 189,000 BTC, according to the weekly Arcane Research memo published Tuesday. The tally has quadrupled in the past 12 months to a record 1% of the circulating bitcoin supply of 18.73 million.
The trend shows how some savvy crypto traders have turned to recovering or sustaining returns even as the price of bitcoin fell 35% last month.
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“Bitcoin’s poor performance and growing interest in Ethereum-based exchange traded products have not derailed the long-term trend of locking bitcoin to the Ethereum network,” said Denis Vinokourov, head of research at Synergia Capital, at CoinDesk. “This shows that yield-seeking trading is far from exhausted and also underscores the growing comfort, as well as a sense of security, that wrapping bitcoin is a safe method of earning a return on assets, that whether through retail or more professional market players.
Each packaged bitcoin token is backed by a bitcoin, so theoretically the token prices should be roughly the same. The protocol essentially allows bitcoin holders to tokenize (lock) their coins on Ethereum for an equivalent number of WBTC tokens, which can be used on DeFi platforms.
“The motivation for tokenization of bitcoin on Ethereum is to enable features that are not natively supported on the Bitcoin blockchain, such as compatibility with the Ethereum DeFi ecosystem,” noted Arcane Research.
WBTC holders often loaned these tokens to DeFi protocols in exchange for market-determined interest rates. For example, DeFi giant Aave currently pays an APY of 1.21% on WBTC deposits. These WBTC tokens are also dedicated to guaranteeing crypto-backed loans, used to generate “yield farming” income or displayed as margin on decentralized derivatives exchanges.
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Holders have also tokenized bitcoin through other sites like Huobi BTC (HBTC), renBTC. However, WBTC leads the field by a wide margin.
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“A total of 240,000 BTC have now been tokenized in Ethereum protocols,” Arcane Research said. “WBTC remains the most popular option for tokenized BTC and accounts for 80% of all BTC working in Ethereum.”