Wrapped Bitcoin gained the support of DeFi traders during the 2021-22 bull season, but demand began to wane after multiple crypto contagions caused investors to redeem their holdings.
The supply of Wrapped Bitcoin (wBTC) plummeted to its lowest since May 2021 following the second-largest single-day burn on February 27th. A staggering 11,500 WBTC, worth approximately $260 million, linked to the now-bankrupt crypto lender Celsius was burned, resulting in a negative growth rate.
The current total supply of the wrapped token stands at 164,396 WBTC, with a monthly growth rate of -7.39%. This significant decrease in supply has caused a stir in the crypto market, with many speculating on the potential implications of this drastic drop.
WBTC is an ERC-20 token built on Ethereum that is pegged 1:1 to the price of Bitcoin and mirrors its worth. Developed in 2019 by Bitgo, alongside blockchain interoperability protocol Ren and multi-chain liquidity platform Kyber, wBTC is managed by the decentralized autonomous organization wBTC DAO, which comprises over 30 members.
When a merchant wishes to exchange Bitcoin (BTC) for Wrapped Bitcoin (wBTC), they initiate a burn transaction and alert the custodians. The custodians then send the corresponding amount of BTC to the merchant's Bitcoin address. Users can then exchange their wBTC for BTC with merchants, who burn the received tokens.
Being an ERC-20 token, wBTC offers faster transfers than traditional Bitcoin, but its key advantage lies in its integration with Ethereum wallets, decentralized applications, and smart contracts.
During the peak of the bull run, wrapped tokens became a popular tool in the DeFi ecosystem. wBTC's supply peaked at 285,000 in April 2022, when the BTC price was trading above $48,000.
However, with the onset of the bear market and numerous crypto contagions, the demand for wBTC began to decline. The first signs of this came after the Terra-LUNA-led crypto contagion, which forced several crypto lenders to redeem their wBTC. According to one report, Celsius Network redeemed approximately 9,000 wBTC in response to a surge in withdrawal requests.
A similar situation occurred in November 2022 after the FTX collapse, where reports indicate the now-defunct crypto exchange attempted to redeem 3,000 wBTC just before filing for bankruptcy. This event caused wBTC to experience its largest monthly coin redemption, with over 28,000 wBTC redeemed back to the original coin.
The market contagion caused by the FTX collapse also caused the depegging of wBTC from its original value of BTC. Although the slippage was only around 1.5%, it sparked serious concerns at the time about the viability of synthetic tokens as a reliable form of value transfer.
This incident highlighted the importance of understanding the risks associated with synthetic tokens and the need for robust risk management strategies.
Also, read - US Crypto Industry Increase Lobbying Budgets by 120% in 2022
