Opinion by Yu Zhe'an: What impact would a mishap with WBTC have on Ethereum's TVL?

Researcher Nathan Yu commented on the recent involvement of Tron founder Justin Sun in the Wrapped Bitcoin (WBTC) company, and the potential impact on the DeFi ecosystem. Previously, MakerDAO had implemented risk controls on the WBTC mechanism due to potential risks.

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What Impact Would the Failure of WBTC Have on Ethereum's TVL?

Nathan Yu stated that within the entire Ethereum DeFi ecosystem, there are four fundamental currencies, with WBTC being one of them. Those who have studied money banking and currency banking are well aware that when the supply of basic currency contracts for certain reasons, it can have a significant negative impact on the credit expansion that has previously occurred due to inflation. The transmission mechanism mentioned above in the DeFi ecosystem operates in the same way as traditional finance, and because of the transparent nature of on-chain data, we can more easily assess the impact.

Here we only calculate the top 100 addresses holding WBTC, which account for 76% of the WBTC supply, approximately 92,829 tokens. Out of these 92,829 tokens, 64,119 are held in addresses with smart contract functionality, and these smart contracts can continue to be decomposed according to the type of financial service.

In terms of the financial ecosystem derived from WBTC, it can be mainly divided into the following four categories:

• Collateral for on-chain lending services
• Locking for cross-chain contracts - Cross-chain mechanisms are similar to cross-border mechanisms, such as TSMC ADR depositary receipts
• Acting as a liquidity provider for decentralized exchanges (DEX LP) - DEX LP corresponds to the role of a dealer and dealer funding in traditional finance
• Other types

The WBTC locked in cross-chain contracts affects other chains and is therefore not included in the calculation. Other types of smart contracts that do not have write contract functionality are also not included in the calculation. Although most lending protocols and DEX LP are credit creation, the tokens created from credit creation are mostly non-transferable and not accepted for use in other contracts.

Except for DAI. Using WBTC as collateral to borrow DAI from Maker and Spark will create a new supply of DAI, and these DAI will definitely be invested in other protocols to trade and earn higher yields as they need to pay an annualized interest rate of 7.25% to 8.5%.

At this point, we can calculate how much WBTC contributes to the TVL of the Ethereum DeFi ecosystem. In the figure below, all calculations are based on BTC. The total contribution of around $9 billion worth of WBTC to the TVL of the Ethereum financial ecosystem is currently $4.4 billion, accounting for approximately 9% of the TVL of the Ethereum DeFi ecosystem.