In-depth analysis of the development status of wBTC, Ordinals and Runes

Original author: xparadigms wowitsjun_ ( hashed_official )

Original translation: TechFlow

* This is the third in a four-part series exploring current solutions for scaling the Bitcoin ecosystem.

In the overall cryptocurrency market, Bitcoin has the most valuable brand and assets, and its asset class is not limited to its native BTC. Bitcoin can not only be wrapped and sent to other blockchains for use, but also includes Bitcoin-inscribed assets such as Ordinals and Rune protocols. In addition, Bitcoin also has an expanding NFT market, which is issued through the Ordinals protocol.

In this opinion piece, we will explore the asset classes within the Bitcoin ecosystem and how each has performed.

1. Background – Bridging BTC and Bitcoin Token Protocol

1.1 Bridging BTC

As of 2024, Bitcoin remains the largest cryptocurrency by market capitalization, with a total value of over $1.3 trillion, accounting for 53% of the entire crypto market. However, due to the lack of application scenarios for Bitcoin in its native ecosystem, it is bridged to other smart contract-based blockchains, known as bridged BTC. Bridged BTC refers to Bitcoin that is wrapped or tokenized at a 1:1 ratio for use in decentralized finance (DeFi) on other blockchain networks.

Examples of bridged BTC include wBTC, tBTC, and BTC.b:

• Wrapped Bitcoin (wBTC) : Wrapped Bitcoin is an ERC-20 token on the Ethereum blockchain that represents Bitcoin. Each wBTC is backed 1:1 by Bitcoin in the reserve and is currently operated by BitGlobal.

• tBTC : It operates through a set of smart contracts and a decentralized network of signers that manage the minting and redemption process. Users deposit Bitcoin into a multi-signature wallet, and in return, they receive an equal amount of tBTC on Ethereum.

• BTC.b : This is another wrapped Bitcoin on Avalanche, which serves as LayerZeros cross-chain token standard.

Of these bridged BTC, wBTC accounts for the majority of supply and has become the de facto BTC asset in the Ethereum DeFi ecosystem. Recently, BitGo announced a joint venture with Bit Global in Hong Kong and plans to distribute some of the three keys of its multi-signature wallet supporting WBTC to Bit Global in Hong Kong. This has sparked a debate about whether wBTC is safe, and other alternatives are being discussed and potentially developed.

Source: BTC on Ethereum (WBTC, renBTC, etc.)

1.2 Bitcoin Token Protocol – Ordinals and Runes

Bitcoin inscribed assets, such as Ordinals and Runes, are protocols inscribed directly on the Bitcoin blockchain, leveraging its infrastructure for token creation and management. Developed by Casey Rodarmor, the two protocols highlight different use cases for the Bitcoin blockchain, with Ordinals focusing on NFTs and Runes enhancing the scalability of fungible tokens in the Bitcoin ecosystem.

• Ordinals Protocol : Launched in January 2023, the Ordinals Protocol allows for the creation of unique digital assets, or NFTs, or fungible tokens (BRC-20), on the Bitcoin blockchain. The protocol allows users to engrave data onto a single satoshi (the smallest unit of Bitcoin), creating a new form of digital collectibles. BRC-20 tokens are a token standard similar to Ethereums ERC-20, but built on the Bitcoin blockchain, and Bitcoin Ordinals are often viewed as a form of NFT.

• Runes Protocol : This is a fungible token standard that leverages Bitcoins UTXO model. Unlike the BRC-20 standard, which has caused network congestion due to the surge in junk UTXOs, Runes leverages Bitcoins inherent UTXO model to create tokens with minimal on-chain occupancy. The protocol uses Bitcoins existing UTXO model and combines it with a script that allows small amounts of data to be included on the blockchain without affecting transaction outputs. Specialized structures embedded in Bitcoin transaction outputs, called runestones, contain instructions to create, mint, or transfer tokens. This approach allows for more efficient data storage and reduces the potential risk of network bloat.

Source: Regular transactions vs. BRC 20 transactions vs. other inscription transactions vs. Runes transactions

1.3 Ordinals NFT

The Bitcoin NFT market has experienced significant growth over the past year, even as the broader NFT market has contracted. The space is becoming a notable asset class within the Bitcoin ecosystem, forming a tight-knit community.

The expansion of the Bitcoin NFT market is due to the growing interest in Bitcoin-based NFTs. According to CryptoSlam, Bitcoin ranks third in NFT historical transaction volume by blockchain, behind only Ethereum and Solana.

Source: NFT transaction volume by chain

2. Conclusion- Bridging BTC will face fierce competition, and token protocols need to develop better

Author: xparadigms from Four Pillars

2.1 About bridging BTC (such as wBTC) – New bridging BTC will face fierce competition

In addition to being used as digital gold to achieve price appreciation, Bitcoin is often sent to other blockchains as a bridge BTC to be used as collateral or to earn returns in DeFi protocols, especially on Ethereum. This allows DeFi users to easily access BTC.

This week, the operator of wBTC announced plans to hand over some control to Bit Global, a joint venture co-founded by Justin Sun. Of the three multi-signature keys, two will be handled by Bit Global and one will be handled by BitGo. As Justin Sun has not been fully transparent in past projects such as TUSD and stUSDT, the public has expressed concerns about custodial risks arising from Justin Suns reputational risk. As wBTC accounts for more than 95% of Bitcoin assets in Ethereum, this could have a negative impact on the ecosystem and could result in a discount compared to other bridged BTC if not handled properly.

Now that this issue has been identified, more projects may attempt to market it (e.g. tBTC, BTC.b) and create new wrapped bitcoins (e.g. Coinbase cbBTC).

Source: BTC on Ethereum (WBTC, renBTC, more)

2.2 Bitcoin Token Protocol – “Currently, this is purely community driven”

Most Bitcoin-engraved assets, such as meme coins, lack a way to generate revenue or increase in value, so they are highly dependent on community interest. This means that if market sentiment declines, the overall market may suffer a crash. For example, ORDI does not generate traditional revenue, and its value is mainly derived from market speculation and attention to the Ordinals protocol and BRC-20 tokens. While the use of Ordinals increases transaction fees, thereby benefiting Bitcoin miners, this does not directly generate revenue for ORDI itself. This dependence on community enthusiasm makes these assets very volatile, and their value can quickly decline if community interest wanes.

As Bitcoin’s Layer 2 (L2) technology develops, improving the user experience when creating and trading Bitcoin tokens may attract more attention, just like launching a version of pump.fun on Bitcoin. Further development is still needed in order for these Bitcoin token protocols to flourish.

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