Bitcoins in Ethereum
Read previous post outlaying main methods behind estimations of network effects for Layer 2 protocols.
In this post we look into the life of the biggest tokenized Bitcoin project on Ethereum, WBTC. We also scrutinize common misconceptions about the total amount of wrapped bitcoins in the Ethereum ecosystem and consider its economic effect that turns to be comparable to Lightning network’s. We leave our main thesis here in the top of the post: Lightning network has likely greater economic activity and value than all bitcoins minted on Ethereum.
We begin with an image of the news article title from 2020, when Lightning Network was even smaller. Since then, LN has added about 4x more nodes, and now 7x more bitcoins are locked into it. However, it is still far less than the amount of minted WBTC.
WBTC Onchain Statistics Overview
Coinmetrics allows user to pull a variety of statistical data for WBTC tokens. Unfortunately this is the only wrapped bitcoin token in Ethereum which Coinmetrics supports. However, estimated supply of WBTC tops many other tokens with smaller market cap such that HBTC and imBTC. Therefore it makes sense to focus on the largest player providing exposure to BTC asset in Ethereum.
More than 50% of all WBTC were minted exclusively for speculation and moving intraday. Almost 90% move in 6 months according to Coinmetrics data. These numbers allow to profile main use case of WBTC token in Ethereum: it was minted for DeFi markets and does not really participate in long term economic activity as opposed to native BTC token that has opposite patterns. Coins on the Bitcoin blockchain tend to be calm and only approximately 35% of them moving inside six months interval with intraday activity around several percents of total supply.
Whereas Active supply mostly shows the velocity of tokens people transact with onchain, supply distribution helps to evaluate the concentration of economic activity. On the DeFi top the lion share of WBTC supply belonged to addresses with more than 1 million WBTC. That points onto tremendous concentration of wealth which should motivate us to reconsider basic law for network effect evaluation.
Our only excuse in this particular situation is that currently “whales” provide less than half of supply. Another point might be made about the law equations specifically: Metcalfe’s law results in higher growth thus our evaluation might overshoot reasonably expected numbers.
Another metric that we have already employed in our analysis but with regard to Bitcoin market capitalization is the amount of active addresses. We use it as for proxy of network effect and in Metcalfe’s law. In the present article we left coefficients in Metcalfe’s law unchanged. This generally allows us to compare BTC network effects with WBTC’s but the BTC’s values are far greater than WBTC’s so it does not make sense to compare them.
Interestingly Lightning network nodes peaked almost precisely one year later after peak in WBTC active addresses. What is more important, Metcalfe’s law coefficient needs adjustment for WBTC probably because of its more centralized nature (from user’s wealth concentration point of view) than Bitcoin’s.
Finally, the estimated Lightning network effect is much higher than cap and network value of the WBTC. BTC is dwarfing WBTC network effects, but it does so with regard to Lightning Network. However Lightning network which already may constitute a substantial share of BTC market cap surpasses in 6(!) orders of magnitude WBTC network effect. It is quite easy to explain with raw numbers: there are not so many addresses holding WBTC if compared to economically active Bitcoin nodes running Lightning Network and providing public liquidity.
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