Bitcoin Bridged to Avalanche Surpasses BTC Locked in Lightning Network

The number of bitcoin (BTC) bridged or ported from the Bitcoin blockchain to the Avalanche smart contract blockchain has surpassed the tally of coins held in the Lightning Network, a second-layer solution for Bitcoin's scalability problems.

On Tuesday, the total circulating supply of bridged BTC, or BTC.b, on Avalanche rose to a record 5,700 BTC ($118.6 million), according to data sourced from Dune Analytics. Meanwhile, the number of bitcoin locked in the Lightening Network stood at 4,929 BTC ($100 million).

The flippening has brought cheer to the Avalanche community and developers behind the project.

"Yesterday marked a pretty awesome milestone for the asset as it exceeded 5,700 in total circulating supply on Avalanche and, in only a handful of months, surpassed the current capacity of the Lightning network," Morgan Krupetsky, director of BD for institutions and capital markets at Avalanche's creator Ava Labs wrote in a blog post on Wednesday.

Avalanche added support for BTC in its cross-chain bridge in June 2022, opening the doors for bitcoin holders to transfer coins to Avalanche and access the Avalanche-based decentralized finance (DeFi) ecosystem.

To initiate BTC to Avalanche, a user sends a user sends a transaction on Bitcoin from the new Core Wallet that transfers BTC to the bridge address controlled by the SGX enclave, a trusted execution environment embedded in a process. The SGX enclave then creates or mints an equivalent amount of BTC.b to the user wallet that sent the initiating Bitcoin transaction.

When moving BTC.B back to the Bitcoin Blockchain, the user sends a transaction on Avalanche, calling the "unwrap" method, which burns the BTC.b tokens.

Per Krupetsky, BTC.b is a better option than Wrapped Bitcoin for institutions or anyone looking to earn yield through DeFi on their BTC holdings.

"A lot of institutions I speak with have at least part of their holdings allocated to BTC–either as a reserve asset, for portfolio diversification, or other reasons. Whether you’re looking to simply send/receive BTC quickly and cost effectively, earn yield passively on your BTC holdings, or borrow against them, BTC.b on Avalanche is your easy answer to doing so," Krupetsky said.

"Unlike wrapped Bitcoin, BTC.b allows users to seamlessly bridge between bitcoin and Avalanche whenever they want for a relatively minuscule cost," Krupetsky added.

To the uninitiated, wrapped bitcoin (WBTC) is the largest wrapped version of bitcoin on Ethereum, the world's largest smart contract blockchain. WBTC is an Ethereum ERC-20 token that represents bitcoin and can be swapped on a 1:1 basis for BTC.

A bitcoin holder wanting to access the Ethereum-based DeFi first needs to mint the wrapped bitcoin token called WBTC. The process is handled by merchants such as Loopring, DeversiFi, and the custodian BitGo.

Once a BTC holder submits a request for WBTC, merchants perform verification procedures to confirm users’ identity and initiate the minting process by authorizing BitGo to mint WBTC. The merchant then transfers the user's BTC to BitGo in exchange for the newly minted wBTC, which the user can deploy in DeFi to generate additional yield. The user's underlying bitcoin is held in BitGo Trust in segregated cold storage accounts.

The redemption process involves users again paying a fee to the merchant, which then initiates the transaction to burn WBTC and release BTC from BitGo's custody.

Here the user cannot unwrap BTC on its own and hence stands exposed to potential disruptions in constant stream of redemptions, which may prove costly during bouts of market volatility.

"The issue with this (WBTC] process is that in times of volatile markets, redemptions typically do not occur on-demand causing de-pegging since a user cannot simply unwrap the BTC themselves," Ava Labs' Head of DeFi Luigi D'Onorio DeMeo, tweeted.