Bitcoin on Ethereum: Key On-Chain Insights
Based on guest post on The Defiant.
“Show me the incentives and I will show you the outcome” — Charlie Munger
While the renown American investor and vice chairman of Berkshire Hathaway was not referring to cryptoassets with this remark, it certainly applies to the industry, especially with recent developments in the DeFi space. As yield farming and staking have boosted rewards for DeFi token-holders, they have also supercharged the demand and prices of protocols’ native tokens. Aside from COMP’s meteoric rise, the so-called ‘Bitcoin on Ethereum’ ERC-20 tokens have also benefitted remarkably from added incentives and functionality.
While there are several tokenized versions of Bitcoin on the Ethereum blockchain, Wrapped Bitcoin (WBTC) — a centralized alternative held by the custodian Bitgo — remains the largest with a market cap of approximately $75 million at the time of writing. WBTC uses a proof of reserve mechanism which keeps the peg with BTC at 1:1 through the burning and minting of tokens.
With its market cap increasing by over 10x year-to-date, Wrapped Bitcoin currently holds over 80% of the total supply of Bitcoin locked in Ethereum as per DeFi Market Cap. It is worth noting that renBTC — a trustless ERC-20 pegged to the value of Bitcoin — has managed to capture 10% of the market (1,095 BTC) within less than two months from its inception.
As previously mentioned, added incentives is arguably the main factor that has enabled the growth of Bitcoin on Ethereum. With the approval of WBTC as collateral for DAI on MakerDAO’s oasis platform in May, Bitcoin holders gained the ability to leverage their holdings through DAI loans on the Ethereum blockchain. This was the first major step for Wrapped Bitcoin as shortly after crypto lending platform Nexo minted $4 million in DAI using WBTC as collateral.
More recently, on June 18 WBTC was introduced to the crypto-agrarian age through a partnership between Ren, Synthetix and Curve Finance. Essentially, Bitcoin holders are now able to earn profits on their holdings by providing liquidity to a pool of BTC ERC20 variants as BTC joins the yield-farming frenzy. Following this release, network activity and adoption by large players has increased remarkably.
Using IntoTheBlock indicators we are able to analyze patterns highlighting the impressive growth WBTC has seen throughout the year. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key insights that dive deeper into what is happening under the hood in Ethereum and DeFi tokens. This week we dive into three metrics demonstrating just how much Bitcoin on Ethereum, especifically WBTC, has grown in 2020.
- Daily Active Addresses Peak Following Incentives Boost
Added incentives have had a clear impact in the number of users leveraging Bitcoin on Ethereum. Throughout 2019 on-chain activity for WBTC remained relatively stagnant as there was a lack of apparent benefits for holders, averaging only 58 daily active addresses.
In 2020, though, Wrapped Bitcoin hit a point of inflection as use cases and ways to profit from holding it increased. First, following the approval of WBTC as a collateral for DAI, daily active users surpassed 300 for the first time. Since then the number of daily active addresses remained at a higher average level moving sideways until mid-June.
As major liquidity mining updates were launched in DeFi throughout June, Wrapped Bitcoin was poised to benefit from this frenzy. This was certainly the case, as daily active addresses jumped by 5x within 5 days following the release of the yield farming partnership between Ren, Curve and Synthetix.
Overall, through the integrations with other DeFi protocols WBTC has been able to triple its average of daily active addresses to 169 so far throughout the year.
2. Large Transaction Volume Skyrockets with Yield Farming Release
At IntoTheBlock we monitor transactions of over $100,000 of value through our large transactions series of indicators. While data for this indicator for WBTC was close to non-existent throughout 2019 and the first quarter of 2020, it grew remarkably as a result of the integration into other DeFi protocols.
Similar to the case with daily active addresses, large transaction volume had first reached a high of $28 million following the MakerDAO integration before being propelled by yield farming incentives. The effect of the Ren, Curve, Synthetix initiative in large transactions was so vast that even zoomed in on the 3 month time frame the increase is quite vertical.
As can be seen in the graph above, large transaction volume went from near zero to over $300 million in a few days. To be precise, WBTC’s large transaction volume increased by 200x in 6 days following the yield incentives provided to liquidity providers.
3. New Types of Institutions Leverage Bitcoin on Ethereum
As readers may have guessed, it is not average users that are pumping WBTC’s large transaction volume to $300 million. Asides from the impact in volume, the average balance of a WBTC address also provides an idea of the profile of holders.
Following the same trend, the average balance of a WBTC holder has increased as a result of the potential to profit from DeFi integrations. Starting the year at $2,350, the average balance of a WBTC address has been on an uptrend surpassing $10,000 in late May. Since the yield farming release, it tripled peaking at $30,800 on June 27 before dropping back to $22,000.
With novel features like yield farming, DeFi has ignited the creation of new types of organizations that benefit from sophisticated use of smart contract functionality. As evidenced by the spikes in large transaction volume and average balance, WBTC has attracted these new institutions and large players, boosting its network activity and market capitalization.
Through the ‘money lego effect’ WBTC has leveraged DeFi’s composability to incentivize user adoption. With the approval of WBTC as a collateral type in MakerDAO and the yield farming partnership, the case for Bitcoin on Ethereum has solidified as demonstrated through the growth in on-chain activity. While currently only 0.05% of Bitcoin supply is held in Ethereum smart contracts, incentive-boosting mechanisms such as the ones described are likely to continue increasing this percentage as long as there are no major vulnerabilities exploited in the underlying protocols. Ultimately, both Bitcoin and Ethereum stand to benefit if this growth spurts large players and retail users to leverage these functionalities.
