Surging Demand! WBTC Circulation Doubles Overnight, Boosting Bitcoin Price Surge

Since the MakerDAO community added WBTC as an optional collateral last week, a large number of ERC20 versions of Bitcoin have been released on the Ethereum network. According to on-chain transaction records, up to 999.6 WBTC were minted yesterday through CoinList, with a total value of nearly $10 million. Simultaneously, a significant amount of WBTC has been minted and used as collateral, which may contribute to the increase in the price of Bitcoin.

WBTC Circulation Doubles Overnight

WBTC, short for Wrapped Bitcoin, is an ERC20 token pegged 1:1 to Bitcoin. The concept behind it is that for every 1 BTC locked on the Bitcoin blockchain, 1 WBTC is released on the Ethereum chain. Since MakerDAO approved a proposal to include WBTC as collateral on May 2nd, the total WBTC circulation has increased by 15% within a week, a rise that was within the expectations of most industry insiders. However, a fresh influx of $10 million worth of BTC (approximately 999.6 BTC) poured into the Ethereum blockchain yesterday, nearly doubling the existing WBTC total circulation to over $22 million.

Cheap Loans Drive Demand

Data on the changes in circulation of WBTC flowing into decentralized finance (DeFi) protocols indicates that almost all of the 999.6 WBTC generated yesterday flowed into Ethereum's DeFi protocols.

Overseas media outlet The Defiant stated that MakerDAO's low borrowing rates are the main driver behind the influx of BTC into Ethereum. This rate, known as the "stability fee," allows users to collateralize WBTC on the Maker platform and generate (borrow) the stablecoin Dai, paying the stability fee as interest. Currently, MakerDAO's borrowing rates are considered the cheapest option in the entire cryptocurrency ecosystem.

For instance, on the centralized lending platform BlockFi, users can borrow USD using BTC as collateral but at a high interest rate of up to 10%. While DeFi protocol borrowing rates on the Ethereum chain are generally lower, they still significantly exceed those of Maker, for example, Aave with an APY of 4.8% and Compound at 1.39%.

Currently, MakerDAO has set the debt ceiling for WBTC at 10 million Dai (total debt amount with WBTC as collateral), which may limit the future increase in WBTC circulation. However, if the Maker community chooses to change these parameters in the future, the situation may change. Yet, as of now, the likelihood of parameter changes by the community is low.

Reducing Bitcoin Circulation

The significant increase in WBTC issuance and its use as collateral has a positive impact on the market price of Bitcoin. Taking yesterday's issuance of WBTC as an example, the issuance of 999.6 WBTC means an equivalent amount of BTC is locked, and the issued WBTC is used as collateral locked in smart contracts. In this operation, Bitcoin indirectly reduces its market circulation by 999.6 BTC. According to the supply-demand model, when the market supply decreases while demand remains constant, the market price will increase as a result.

On the other hand, the substantial increase in WBTC issuance also raises concerns among investors. If a large amount of Bitcoin is converted into WBTC, leading to a decrease in Bitcoin blockchain transactions and miners losing transaction fee income, could this pose a systemic risk to the Bitcoin blockchain? This issue is not a concern in the short term. Firstly, MakerDAO has a debt ceiling, meaning the demand for WBTC is limited. Additionally, miners' main income still comes from transaction fees, so even if Bitcoin blockchain transactions decrease, miners can still earn enough to sustain operations.

Further Reading

• Creating Dai with Bitcoin! MakerDAO Announces WBTC as New Collateral Option
• Controversy Surrounds Bitcoin-WBTC Running on Ethereum

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