Stretched thin? Wrapped Bitcoin assets may encourage supply crisis

In a blog post of Friday, Binance re-introduced BTCB to the world — a wrapped Bitcoin asset intended to bring liquidity from the world’s largest cryptocurrency, BTC, to Binance Smart Chain’s DeFi (decentralized finance) ecosystem. 

However, hodlers may be cheering the renewed interest in BTCB for a different reason: each Bitcoin locked on BSC may contribute to a looming BTC supply crisis.

First announced last year, Binance initially saw wrapped Bitcoin solely as a vehicle for traders to obtain cross-chain asset exposure without leaving BSC. Since then, however, the utility of wrapped Bitcoin has boomed due to the precocious maturation of the DeFi ecosystem.

For instance, WBTC — a wrapped Bitcoin token on Ethereum — has enjoyed massive success since its January 2019 launch: it currently ranks as the #14 cryptocurrency by marketcap, and has found significant adoption in protocols such as Aave and Uniswap, whose contracts both rank among the top-10 holders of WBTC. 

In their blog, Binance noted that similar adoption may be possible for BTCB. The wrapped Bitcoin could be used to mint stablecoins with BSC-native protocols such as QIAN and Venus; as collateral for lending protocols such as CREAM; and in yield farming and liquidity mining protocols such as Beefy, Bakery, and Pancake. 

According to what Binance calls a “Proof of Assets” page, there are currently over 9,600 Bitcoin on BSC — over $181 million worth. However, the blog post specifies that only 2,000 are circulating. 

Other smart contract-enabled chains intend to compound the growing scarcity. Solana’s cross-chain Wormhole project will turn ERC-20 tokens into SPL tokens, including WBTC, and likewise, Interlay is using support from a Web3 Foundation grant to build a trustless bridge bringing wrapped Bitcoin to Polkadot. Interlay will launch in early 2021.

Particularly if the success of wrapped and cross-chain Bitcoin assets continue to grow, institutions looking to hoover the BTC supply may well be faced with mounting scarcity. Aaron Wright, the co-founder of OpenLaw, pointed to such a possible future in a Tweet:

0.6%+ of Bitcoin is now wrapped and being put to work on Ethereum (and growing).

What happens when it hits 10%? pic.twitter.com/4dGT0yXHBP

— Aaron Wright (@awrigh01) November 17, 2020