However, these three “built-on-bitcoin” protocols are not alone. Other Bitcoin-adjacent networks such as Stacks also support a type of synthetic bitcoin asset. Built with the motto “unleashing Bitcoin’s full potential,” Stacks announced its offering of a form of packaged bitcoin in January 2021. The asset uses the ticker symbol xBTC .
Data overview of tokenized Bitcoins
It’s no secret that synthetic bitcoin products on other blockchains are often mocked on Twitter and not universally used or welcomed by the wider Bitcoin community. But data shows that a non-trivial amount of bitcoin investors are increasingly using bitcoin-backed tokens.
The best example is the growth of Wrapped Bitcoin (WBTC), an ERC-20 token launched by BitGo. The chart below taken from The Block shows the extraordinary growth in WBTC supply over the past two years regardless of downward bitcoin price action:
BitGo’s bitcoin-backed token is not the only asset of its kind on Ethereum. Six other teams have launched similar assets, including tBTC, pBTC, renBTC and more. Each one offers slightly different features and protocol architectures to serve different user demographics.
Ethereum is also not alone in supporting synthetic bitcoin products apart from the Bitcoin blockchain. Other chains later launched these products as gimmicks (eg Tron) or to try to emulate the success of Ethereum’s bitcoin-backed tokens (eg Solana and Avalanche). But Ethereum is by far the network with the largest amount of synthetic bitcoin assets, thanks in large part to the craze of “DeFi Summer” in 2020.
The bar chart below shows current supplies of synthetic bitcoin on alternative blockchains:
Are these Bitcoin products “good”?
Mention tokenized bitcoin products in a crowd and reactions are bound to be polarized. In orthodox Bitcoin communities, Layer 2 protocols (e.g. Lightning and Liquid) are easy favorites and their adoption is steady, although relatively slow.
So, are these products “good”? All of these off-chain uses for bitcoin present different trade-offs, but the idiosyncratic utility of each cannot be ignored. Whether everyone should choose one way to use the coins is not the point. Because becoming a reserve asset—for the global fiat economy or the internet-based “crypto” economy—is bitcoin’s most widely accepted purpose, generally speaking, products that achieve this goal should be encouraged. Lightning pushes utility into the native Bitcoin economy in the same way that tokenized bitcoin has a clear and direct effect on bitcoin acting as a form of reserve asset for non-Bitcoin native sectors of the broader cryptocurrency market.
Remortgaging is another popular concern with most bitcoin financial products. Importantly, this concern does not apply to these products outside the chain. The lack of rehypothecation for Lightning products is evident. And in fact, almost all of these products are built on and apart from the Bitcoin protocol itself designed to serve a one-to-one bitcoin-backed or exchanged asset, whether it’s a simple transfer of bitcoin from the base layer to the Lightning Network or an exchange of “real” bitcoin for a bitcoin token used on other blockchains. One of the leading tokenized bitcoin products maintained by BitGo, for example, publishes proof of the reserves backing the bitcoin tokens it issues.
The future of off-chain bitcoin
Readers who ideologically reject the set of trade-offs inherent in tokenized bitcoin products will certainly not be persuaded by anything in this article to change their thinking, nor are they criticized per se in this article. The point of this data and analysis is simply to show it some people (actually an ever-increasing number) see the value in choosing to use bitcoin somewhere alongside the Bitcoin blockchain – and even places outside of the native Bitcoin economy. After all, HODLing in cold storage is as valid a use case as tokenization.
This is a guest post by Zack Voell. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
