Decentralized Finance has been on an exponential trajectory since the latter half of 2020. The impressive gains seen in the nascent market took the total value locked (TVL) in digital assets to almost $90 billion in early May, before the recent correction in cryptos brought it down to current levels of around $55 billion. People more familiar with DeFi know that Ethereuem, the second-largest crypto is primarily used as a collateral asset for borrowing & lending in the decentralized finance (DeFi) market.
So you can say that the price action in Ethereum is highly correlated with the growth of DeFi segment in cryptos. Having said that, the lack of interoperability among blockchain networks hinders the participation of other major cryptos in the booming DeFi space — primarily Bitcoin. Lately, however, with clear demand to use Bitcoin across DeFi, solutions have emerged that provide many ways to port Bitcoin to other blockchains.
Although a lot of people are still more comfortable with Centralized finance (CeFi) companies, which allow users to deposit their Bitcoin for use as borrowing collateral or as a simple savings vehicle — the interest in DeFi protocols that are non-custodial, permissionless, and more transparent is growing.
Protocols like Compound and Aave allow users to use synthetic BTC as collateral for borrowing or a deposit for lending. Similarly, protocols like Uniswap allow users to pair their synthetic BTC with other assets to provide liquidity to a decentralized exchange. To solve the problem of interoperability, Wrapped Bitcoin (WBTC) provides a centralized wrapping solution that allows users to use their Bitcoin on Ethereum.
In fact, WBTC is the biggest enabler of Bitcoin on DeFi with its interoperability. WBTC is an ERC-20 token backed 1:1 by BTC, with the custody provided by BitGo. At the time of writing, WBTC controlled about 77% of the market with a circulating supply of about 194,000 WBTC, or $7.06 billion.
WBTC works through a mint and burn process. A user provides an ETH address to a smart contract. The user then sends BTC to a custodian who creates WBTC and sends it to the contract. The contract finally sends the WBTC to the user who is now free to use the value of their Bitcoin on the Ethereum blockchain.
The redemption process is simple too — starting off with a withdrawal request by the user, who then sends their WBTC to the smart contract, which burns it. The custodian confirms the burn and sends the BTC back to the user. HBTC and RENBTC are the other two popular interoperability solutions (chart above) for Bitcoin access to DeFi — with a TVL of $1.45 billion & $388.1 million respectively, at the time of writing.
As Cryptos continue to evolve, we hope to see bigger & better things in the future.
Originally Published on Medium
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