The demand for WBTC has been soaring lately. Here’s why.

The demand for tokenized bitcoin — Ethereum-based tokens pegged to bitcoin — has been surging as of late. 

In fact, the outstanding supply of WBTC, which accounts for 78% of the total tokenized bitcoin in circulation, has seen a 632% increase since May. 

The rush for WBTC has been so intense that it has strained the nascent infrastructure for its issuance and redemption. On June 22, CoinList, the only firm that issues and redeems WBTC to retail investors, ran out of its supply. (The shortfall was quickly resolved: Coinlist said in a June 23 tweet that it’s WBTC “minting” service had been restored.)

CoinList has offered its WBTC services since February. Before that, these services were only available to companies that had been accepted into the WBTC Network. Retail investors had to wait until one of these approved companies issued WBTC themselves. Coinlist plays the role of a middleman between those investors and crypto custodian BitGo, issuing WBTC in exchange for bitcoin and vice versa. 

So what's causing the WBTC rush? The general idea behind tokenized bitcoins is that they open the world of Ethereum and DeFi to investors who want to use bitcoin to participate. Indeed, the recent demand for WBTC appears to have been driven largely by DeFi lending platforms like Compound introducing so-called governance tokens. 

Compound began distributing its governance token, called COMP, to users on June 15. On June 22, Coinbase listed the token for trading. Holders of COMP have the power to vote on future changes to the protocol, and at some point in the future may also be able to earn a portion of the transaction fees the protocol generates. 

More than half of the COMP tokens have been or will be distributed among the developers and investors who founded the protocol. Around 42% of the supply will be doled out to people who either borrow or lend on the Compound platform. Borrowing or lending on Compound expressly for the purpose of earning COMP has become popularly known as “yield farming.”

According to a change made last week to the token distribution rules, roughly 2,880 COMP will be distributed per day, according to the dollar value of the assets they have either borrowed or lent out using the platform. (Previously, it had been distributed according to the amount of interest accrued by those assets.) 

Factoring in the so-called subsidy – the value of COMP multiplied by the number of COMP issued per day to borrowers and lenders – can make lending rates more appealing to retail investors, particularly if the price of COMP rises. It peaked at around $372 last month; at press time it was nearly $199. 

Unlike the other tokens listed on Compound, WBTC can be issued and redeemed as needed to meet demand. The rush to farm yield on Compound using WBTC explains why Coinlist ran out it.

High demand for the token, paired with high interest rates for lending it out, can have an attracting effect on speculators. As shown in the chart below, in late June, the effective interest rate for lending WBTC when factoring in the COMP subsidies was as high as 75% APR. 

Rates have shifted since that peak, with WBTC’s current lending rate now down to 1.33% APR. These fluctuations are happening due in part to a steep decrease in the price of COMP, which means there’s less money to be made via yield farming. The increased supply of WBTC in the market is likely also contributing, making it less expensive for retail investors to borrow. 

These factors could dampen enthusiasm for yield farming with WBTC, which might slow the rate at which its supply expands. But for now, WBTC demand is still soaring.