Bitcoin on Ethereum: The Rise and Challenges of BTC Anchoring

Bitcoin and Ethereum, as the two giants of the cryptocurrency world, have long had distinctions in their monetary properties. Bitcoin is generally regarded as a foundational currency, often referred to as "digital gold" and "the anchor of the crypto world." In contrast, the monetary properties of Ethereum tend to be more application-oriented, with practitioners typically focusing on higher-level "monetary applications," such as over-collateralizing ETH to generate "derivative coins."

However, the rapidly developing DeFi seems to have broken this subtle division of labor, even making Ethereum's currency role somewhat overshadowed: the BTC pegged to the ERC-20 standard has rapidly expanded in the past few months, especially in the recently concluded July, where the issuance of BTC pegged coins exploded by around 70%. Data shows that as of August 5, the total issuance of BTC pegged coins in the Ethereum ecosystem has reached 20,472 coins, which is close to 1% of the total Bitcoin supply and accounts for 0.59% of the total market capitalization of ETH.

From the perspective of BTC anchoring, wBTC holds an absolute majority with a 75.8% share of issuance, while Ren BTC and sBTC rank second and third with shares of 11.2% and 4.89% respectively. The combined issuance of the three exceeds 90%, which is sufficient to demonstrate their important position.

From the on-chain indicators, these three assets pegged to BTC perform outstandingly in terms of total address count, active address ratio, and large transfers. In July, the total number of renBTC addresses saw the most astonishing increase, reaching 111%. In terms of active address ratio, the average of the three is above 5%, outperforming ETH during the same period and comparable to USDt-erc20 levels. RenBTC's performance is particularly remarkable, with the average active address ratio reaching 42.78% during the same period. This reflects, to some extent, that assets pegged to BTC are important activators in the Ethereum ecosystem.

In terms of large transfers, wBTC and renBTC have carried considerable value transfer. wBTC's peak large transfers in 30 days reached 20,000 BTC, with an average transfer amount close to 50 million USD over 7 days; renBTC's peak large transfers in 30 days approached 1,300 BTC, with an average transfer amount of about 11.5 million USD over 7 days.

Behind the explosive growth of BTC, there are two key driving factors: first, the opening of staking by top lending projects, and second, the wave of liquidity mining. In May, the leading DeFi project MakerDAO proposed to add wBTC as collateral for generating DAI, which greatly increased the imagination space for DAI. Subsequently, the important centralized lending platform NEXO also replaced a large amount of BTC with wBTC and staked it in Maker, further enhancing the activity of wBTC.

Since Compound launched, the "liquidity mining" craze, which has been promoted in projects like Curve, Synthetix, and REN, has boosted almost the entire BTC pegged sector. On June 18, after Synthetix, Curve, and Ren jointly launched a new liquidity incentive pool, the on-chain metrics for wBTC, renBTC, and sBTC saw significant growth, with some metrics nearly increasing by 10 times within 3-5 days.

However, the growth bottleneck of BTC pegging is also quite obvious. First, there is insufficient scalability; the proportion of BTC pegging in the entire cryptocurrency market capitalization is still very small, and various coins are constrained by their issuance mechanisms, making large-scale expansion difficult. Second, the process from generation to transfer and then to participating in yield farming is still relatively complex, hiding numerous risks and hindering more users' participation. In addition, issues such as high whale holdings and premature centralization are also worth noting.

Some believe that anchoring the development of BTC may lead to a reduction in on-chain transactions for BTC, affecting miner earnings and consequently weakening network security. However, others argue that this is a win-win situation for both Bitcoin and Ethereum, as it can expand the application scope and value for both.

From the recent on-chain indicators, the activity of BTC, which is mainly anchored, has shown signs of fatigue. As the enthusiasm for liquidity mining gradually recedes, whether this rapidly rising asset class can continue to progress steadily remains to be further observed.