BitcoinTechnology

No, Wrapped Bitcoin Is Not a Competitor to the Lightning Network; Here’s Why

 | 

Multiple news outlets have recently run reports comparing the Lightning Network’s liquidity to that of Wrapped Bitcoin (WBTC), an ERC20 token representing bitcoin issued on the Ethereum blockchain.

The amount of liquidity within WBTC has surged in recent times, seemingly outpacing that of the Lightning Network.

This trend has been primarily driven by users turning to WBTC as a way to utilize bitcoin while engaging in allegedly “decentralized” finance (DeFi) fads like "yield farming."

Although an easy way to take a low-effort jab at Bitcoin’s scalability and adoption, these comparisons fail to account for the fundamental differences between the Lightning Network and Wrapped Bitcoin that may make it misleading to compare the two.

Wrapped Bitcoin and Lightning Network: What Are They?

The Lightning Network is a second layer built upon Bitcoin’s blockchain, aimed at increasing the network’s scalability and potentially its privacy.

In order for Bitcoin to reach its full potential as a mainstream currency used daily by individuals across the globe, it is imperative that the network is able to handle a significant amount of transactions without burdening users with high fees and long confirmation times.

Here’s where the Lightning Network comes into play.

The second layer technology was built to enable fast and cheap Bitcoin payments while possibly decreasing mainchain congestion. Importantly, the Lightning Network keeps transactions on this "second layer" instead of bloating the mainchain with coffee purchases. 

Transactions conducted through Lightning occur instantaneously by creating direct payment channels between transacting users.

Wrapped Bitcoin differs greatly from the Lightning Network, as it is an ERC20 token issued on the Ethereum blockchain that is meant to mirror the value of bitcoin.

Those who hold WBTC do not actually hold bitcoin, nor do they transact on the Bitcoin network. Rather, they hold tokens that are backed 1:1 by actual BTC held by a centralized entity and transacted via the Ethereum blockchain.

Why WBTC and the Lightning Network Should Not Be Conflated

Unlike WBTC, which is a token issued by centralized counterparties, the Lightning Network is a decentralized and permissionless layer. This makes it impossible to accurately compare the two.

Lightning transactions are also not in any way promises of future transactions or bitcoin-denominated credit created by a trusted third party. They are actual, completely valid Bitcoin transactions that may be effectively broadcast and committed to the mainchain when and if needed, with strong safety and fairness guarantees based on game theory and cryptography as opposed to social reputation, legal liability, or direct trust.

Adding to the inaccuracies of this comparison is the fact that a good portion of the Lightning Network’s transactional volume is sent across private payment channels – which aren’t accounted for in any of the figures used in recent liquidity and usage rate comparisons between the Lightning Network and WBTC.

According to Christian Decker, a researcher at Blockstream, as much as 40% of the Lightning Network’s channels are private as of late-2019.

Nevertheless, this hasn’t stopped multiple outlets from running headlines like “Ethereum's Wrapped Bitcoin Set to Eclipse Lightning Network Capacity” and “Lightning lags, Wrapped Bitcoin booms in DeFi liquidity race” conflating the two as if they are competitors.

On a similar note, analytics platform Skew also stated that while the dollar-value stored within WBTC is surging to an all-time high, the Lightning Network is stagnating.

“WBTC reaching new ATH in market cap. Lightning struggling to get similar traction for now - both were at the same level only 3mths ago.”

Despite how it has been framed, this isn’t a major victory for Ethereum or WBTC.

The value siphoned into the tokenized bitcoin isn’t outpacing that entering the Lightning Network because it is better, nor because users prefer transacting on Ethereum. Rather, it is due to speculative investors attempting to cash-in on DeFi incentives using collateral that mirrors Bitcoin’s price.  

As Bitcoin continues garnering mainstream adoption, it is imperative for new entrants to the ecosystem to understand that WBTC – despite appropriating Bitcoin’s name – shares no similarities to the benchmark digital asset beyond its price.

author avatar image

written by

Cole is a journalist who has been covering the crypto market since 2017. His interest in Bitcoin was first sparked in 2013 and has only grown since.