What can Wrapped Bitcoin (wBTC) do for a protocol?
tzBTC has brought the liquidity and brand power of Bitcoin (BTC) into the Tezos dapp ecosystem and effectively enabled BTC-backed use cases on Tezos. Resulting in a huge surge in active wallets as the tzBTC platform registered 1,120 transactions in the last 7-days. Seemingly caused by the latest upgrade to the Tezos network and the introduction of liquidity baking.
tzBTC is bitcoin, wrapped on Tezos. From Tezos’s perspective, it is just another FA1.2 token. The Tezos equivalent of the ERC-20 token standard, made famous on Ethereum. A Swiss association issues these tokens, and commits to keeping one Bitcoin in custody for each tzBTC token that is emitted. The service has utility to traders as it allows the exchange of BTC and Tezos tokens in a decentralized fashion. When you swap Tezos for tzBTC, you know that the tzBTC token that you receive is ultimately redeemable for a Bitcoin.
The premise behind bringing BTC into Tezos is one of utility. This move attracts holders of the gold standard of crypto into the Tezos DeFi ecosystem, allowing it to grow. Although, the introduction of tzBTC took place over a year ago now, so it’s highly unlikely that scores of people only just came to find out about it. Instead, what’s happened is that Tezos has rolled out its latest update, Granada. Granada marks the seventh successful upgrade on the Tezos blockchain and the third to occur in 2021. Moreover, the upgrade is testing a feature called liquidity baking utilizing the Tezos native token XTZ and wrapped Bitcoin or tzBTC.
The Granada proposal adds a new contract to the Tezos protocol between XTZ and tzBTC. This contract is unique in the system because the protocol itself creates XTZ at every block and adds them to the contract. This incentivizes users to provide liquidity to the contract in order to be rewarded with a portion of the payment.
Liquidity baking is an experiment to test whether decentralized networks can use incentives to create liquidity. Liquidity baking attempts to do this on the Tezos blockchain, by introducing an incentive for users to provide liquidity between the Tezos native token XTZ and tzBTC, which is wrapped bitcoin on Tezos. It all happens verifiably, through a smart contract where liquidity providers pool both XTZ and tzBTC. Which then allows them to claim a small subsidy of 2.5 XTZ. Minted by the network every 30 seconds, in every block.
Temple Wallet, a Tezos compatible blockchain wallet also recently announced their support for the baking experiment stating that swaps for the XTZ/tzBTC liquidity pool were now available and that users could easily stake by clicking the delegation tab in the wallet.
Liquidity is key
Decentralized exchanges work well when there is liquidity. Like traditional banks, it just means a lot of people have contributed a lot of funds to secure operations. When there is a lot of liquidity, most trades are of small value compared to the total amount of liquidity available in the pool, and therefore they do not move the price significantly. Just creating a decentralized exchange contract does not automatically guarantee liquidity, because dapps need people to add funds. It has proven difficult to encourage people to add funds due to a lack of rewards. The Granada proposal attempts to solve this problem.
Cross Chain BTC
The Ethereum network is currently the home of the most amount of wrapped BTC. According to data from Dune Analytics, there are 253,510 bitcoin-pegged or wrapped tokens worth more than $11 billion in value on the Ethereum blockchain. Out of the seven different bitcoin-pegged projects, the Wrapped Bitcoin protocol has 194,023 bitcoin-pegged ERC20 tokens in circulation. In addition, the Ethereum network houses the most BTC-pegged tokens out of all the blockchain projects today. However, other blockchain projects are catching up fast as the BTC-pegged token BTCB issued on the Binance Smart Chain is around 73,111 BTCB.
Clearly, the introduction of BTC in a wrapped format has been a positive move for other networks. It represents a key signal for the Tezos DeFi ecosystem and now the possibility to earn from holding tzBTC should further entice users. Only time will tell if the Tezos DeFi ecosystem can grow fast and significantly enough to go head to head with the big boys.
The above does not constitute investment advice. The information given here is purely for informational purposes only. Please exercise due diligence and do your research. The writer holds positions in ETH, BTC, ADA, NIOX, AGIX, MANA, SAFEMOON, SDAO, CAKE, HEX, LINK, GRT, CRO, SHIBA INU, AND OCEAN.