Wrapped Bitcoin garnered DeFi traders’ support in the 2021–22 bull season, but the demand started to fade when numerous crypto contagions led to redemptions.
The supply of wrapped Bitcoin (wBTC) dropped to its lowest since May 2021 after the second-largest single-day burn on Feb. 27.
A total of 11,500 wBTC ($260 million) linked to now-bankrupt crypto lender Celsius was burned, turning its growth rate negative. The current total supply of the wrapped token is 164,396 wBTC, with a monthly growth rate of -7.39%.
WBTC is an Ethereum-based ERC-20 token that mirrors the value of Bitcoin and is pegged 1:1 with the price of Bitcoin (BTC). Bitgo co-developed wBTC in 2019 alongside blockchain interoperability protocol Ren and multichain liquidity platform Kyber. WBTC is managed by the decentralized autonomous organization wBTC DAO, which comprises over 30 members.
When merchants want to exchange BTC for wBTC, they start a burn transaction and alert the custodians. The merchant transfers real BTC to a custodian address on the Bitcoin blockchain, which is locked. Once it receives the real BTC, the custodian address mints the equivalent amount in wBTC on Ethereum.
Being an ERC-20 token makes the transfer of wBTC faster than normal Bitcoin, but the key advantage of wBTC is its integration into the world of Ethereum wallets, decentralized applications and smart contracts.
During the peak of the bull run, wrapped tokens became a popular tool of use in the decentralized finance ecosystem. WBTC’s supply peaked at 285,000 in April 2022, when the price of BTC was trading above $48,000.
However, with the advent of the bear market and numerous crypto contagions, the demand started to fade away. The first signs of lowering demand came after the Terra collapse, which forced several crypto lenders to redeem their wBTC. According to one report, Celsius Network redeemed about 9,000 wBTC amid a growing withdrawal demand.
Related: Celsius Network coin report shows a balance gap of $2.85 billion
A similar scenario occurred in November 2022 after the FTX collapse, where reports indicate the now-bankrupt crypto exchange tried redeeming 3,000 wBTC just before filing for bankruptcy. After the FTX collapse in November, wBTC experienced its largest monthly coin redemption, with over 28,000 wBTC redeemed back to the original coin.
Interesting nugget from today's $WBTC Twitter Space w/ @BitGo and @KyberNetwork:
— Chris Blec (@ChrisBlec) December 14, 2022
During FTX turmoil, someone from Alameda tried to redeem 3k WBTC for BTC.
BitGo refused to honor.
Tokens were burned anyway.
BitGo isn't sure what to do w/ the 3k BTC.https://t.co/A1wYY72skb
The market contagion caused by the FTX collapse also depegged wBTC from the original value of BTC. Although the slippage was just about 1.5%, it raised serious concerns about whether such synthetic tokens were a viable mode of value transfer.
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