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The Land Grab for Wrapped Bitcoin Dominance
178 Plays2 months ago
There was significant news in the crypto ecosystem this week as Maker DAO passed a proposal to limit their exposure to WBTC across their platforms, effectively offboarding the asset from their ecosystem. We talk through what's happened and what the implications of this are.
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Transcript
Introduction to 'Decrypting Crypto'
00:00:12
Speaker
Hello and welcome to the Decrypting Crypto Podcast. It's August 15th, 2024. And this is Off Chain, your weekly recap of the biggest stories in the crypto space. I'm Matthew Housebarbie and I'm without my co-host today. Austin is tied up ah today, but we're gonna do a bit of a bumper episode of the early next week so we can we can catch up on a few things.
Topic Introduction: Wrapped Bitcoin Controversy
00:00:36
Speaker
But today I want to put out an episode where we talk a little bit about wrapped BTC. And there's a lot of controversy happening right now. If you're not familiar with what wrapped BTC is, I'm going to dig into all of that. So ah we'll, we'll jump right in.
Wrapped Bitcoin in DeFi
00:01:02
Speaker
Wrapped Bitcoin. There's been a lot of controversy around WBTC, which is the ticker for for wrapped Bitcoin. And overall, there's just a huge shifting landscape in the wrapped Bitcoin ecosystem. Now,
00:01:20
Speaker
You may be wondering, if you're not super familiar already, what wrapped Bitcoin is. ah Why would you want to wrap Bitcoin? And what does that even mean? So BTC Bitcoin is obviously the largest asset in the whole crypto ecosystem by market cap. The problem is there's no way to actually utilize Bitcoin outside of the Bitcoin blockchain. And we've got a whole load of stuff that we've been talking about around Bitcoin layer twos that have been trying to spring up to to to solve this problem, but if you want to use your Bitcoin in DeFi, for example, to borrow against it or, you know, and some kind of like yield on other blockchains like Ethereum and some of the other major L1s and L2s beyond that, you can't.
WBTC Market and Issuance
00:02:08
Speaker
So this is where wrapped Bitcoin comes in and wrapping Bitcoin
00:02:14
Speaker
enables an ERC-20 token in the in the context of Ethereum to be created that represents and is backed by an equal amount of Bitcoin, native Bitcoin. ah So these ERC-20s can be traded on Ethereum and it effectively unlocks the liquidity of Bitcoin on other chains.
00:02:43
Speaker
So what is WBTC? So WBTC is the largest ah wrapped BTC token that exists today. There's lots of different wrapped Bitcoin tokens.
00:02:57
Speaker
and it has as of the time of recording roughly nine billion dollars in uh worth of tokens in circulation today this this equates to roughly 0.78 percent of bitcoin's circling supply so it's pretty meaningful i know that doesn't sound a lot but you know bitcoin's circulating supply is like 1.1 trillion dollars worth so quite a lot and WBTC, like nothing comes close to this scale.
Criticism of WBTC Centralization
00:03:32
Speaker
All of the other competitors are in max, like the tens of millions in circulating supply value. I think in 2021, RenBTC was the closest ah that came as like a competitor, but it was multiples off of WBTC.
00:03:56
Speaker
WBTC is issued by BitGo, a centralized company. they They are the owner and issuer of WBTC. And one of the criticisms of of WBTC is how centralized it is. The way it works is I'm going to dumb this down a little bit because there's merchants involved and and things like that. But the simplest way to think about this is for new WBTC to be minted.
00:04:22
Speaker
native Bitcoin, native BTC must be deposited and held in custody by BitGo, or one of their merchants, and they will then mint the corresponding amount of WBTC in return. So if there's one WBTC that's on the Ethereum blockchain, it is backed by one kind of native BTC ah in BitGo's self-custody that that that they hold.
00:04:50
Speaker
So that is what WBTC
BitGo Partnership and Security Concerns
00:04:52
Speaker
is. Why are we talking about this? It doesn't sound that interesting. But it's a pretty critical component across a lot of DeFi. In fact, WBTC makes up a reasonably large chunk of the backing of DAI, the largest decentralized, somewhat decentralized stable coin. So here's where the controversy has started. BitGo, the company behind WBTC, recently announced plans to transfer its wrapped Bitcoin business
00:05:31
Speaker
into a joint venture with Bitglobal, they're a Hong Kong based company. Looking at the the the the PR that BitGo recently published on this,
00:05:47
Speaker
they They said that the move was meant to enhance security through a multi-jurisdictional and multi-institutional custody structure. So they're looking at having like multiple custodians and being able to operate across multiple jurisdictions with the focus of enhancing security, de-risking in certain areas, which at face value kind of makes sense. Here's where the problem lies.
00:06:14
Speaker
BitGo CEO Mike Belchi confirmed that Justin Sun was involved in the company's new partnership. And to better understand Justin's controversies, various controversies, I'd highly recommend that you Google the many
Justin Sun's Involvement and Reputation
00:06:33
Speaker
escapes of Justin Sun. It's a fantastic article that was put together by a journalist at The Verge, I think.
00:06:40
Speaker
maybe two years ago. I remember that Austin and I discussed this on the podcast at great length. And we have talked about Justin Sun many, many times. He is the founder of Tron, which is rife with conspiracies and controversies and he also ah purchased ah the BitTorrent network from Bram Cohen who we actually interviewed at the time on the podcast way back in I think 2018 as that was happening. So there's a lot of controversy and I think anything that Justin touches in the crypto space
00:07:19
Speaker
comes with a lot of questions from the community. Whether he is acting in um and a good way or a bad way, there are questions. So when you also look at this structure, BitGo will actually be a minority shareholder in the new venture. BitGo said, and I quote, this is a strategic partnership between BitGo Justin Sun and the Tron ecosystem, heavily reliant around a lot of this um Tron and Justin Sun kind of piece. And Mike Belchi, to his credit, at least, has been very open about this, not tried to hide it. he's he's He's clarified several times that he knew that there would be a lot of questions.
00:08:09
Speaker
And they have went to great lengths to make sure this is made well, very obviously, to everyone. justin So obviously, everyone's kicking off about this, just as a starting point. Justin's son has taken to to X and and has released a number of statements. And I think he addressed a few points. He said, basically, that I think a root of ah many people's concern is,
00:08:36
Speaker
would this enable Justin Sun to change the ways and the methods or interfere with the minting process of WBTC, which is obviously a huge fear in any kind of backed, wrapped asset because it can affect the peg that's holding those two together and create huge amounts of, I mean, if WBTC de-pegged in DeFi, there would be mass liquidations and would be a major event. So we're not at that stage. And I don't want to raise alarm bells, but that is the concern around this. Justin came out and said, you know, there's been no changes to RAP BTC compared to how it was before. All the audits are being done in real time, can be accessed on wbtc dot.network. And importantly, he said that the the minting process, it's entirely managed by
00:09:30
Speaker
BitGlobal and BitGo, and it follows the exact same procedures as before. The keys are safeguarded using the same BitGo cold wallet technology and offline keys, backups in multiple countries, regions, et cetera, et cetera. So we have to take Justin's word for this. And um history has said that hasn't always been a fruitful way to to approach risk.
00:09:56
Speaker
So we'll see.
MakerDAO's Response to WBTC Risks
00:09:58
Speaker
um But there have been some immediate ripple effects that have happened here, most notably with MakerDAO. So if you're not familiar with MakerDAO,
00:10:10
Speaker
Maker are the creators, an issuer of DAI. They also have a relatively new lending product called SparkLend. It's ah an on-chain lending protocol. And Maker is also one of the largest on-chain lending protocols and platforms.
00:10:30
Speaker
So a proposal was published on August 10th. So I think it was the end of last week, a couple of days after the announcement from BitGo and it was made by BA labs. They're like a risk and analytics crypto team.
00:10:48
Speaker
And it was on the Make It Our Governance Forum. And what they have called for was to reduce the WBTC ah vault debt ceilings. So the way they do this, they have various vaults that um can be borrowed against. And they've suggested that basically the vault debt ceiling goes to zero die and disable WBTC borrowing on the Sparkland and money market protocol.
00:11:17
Speaker
ah for all intents and purposes, like off-boarding WBTC, which is very significant. um So I took a little quote from the initial proposal. Given the upcoming change in control, BA Labs believes that WBTC collateral integrations on Maker and Sparkland present an elevated level of risk.
00:11:39
Speaker
BA Labs recommends the stability facilitator to propose the following immediate actions to limit growth of WBTC exposure. though ah Those immediate actions are what I just mentioned. Now, context here is the roughly 10, I mentioned this earlier, right, about dye. Roughly 10% of dyes 5.2 billion token supply is backed by WBTC, very significant. Maker's vaults, they currently hold around $500 million dollars worth of WBTC, not insignificant by any stretch of imagination. Users have also deposited just under $290 million dollars worth of WBTC to Sparkland, that makes up around 7% of the the whole TVL of that protocol.
00:12:33
Speaker
This went to a full governance proposal and it was passed at the start of this week. ah So that is being enacted as we speak. Very, very significant.
Aave's Cautious Approach
00:12:47
Speaker
And it's caused a lot of discussion, obviously, across crypto Twitter, but across various governance platforms as well.
00:12:57
Speaker
And interestingly, there were obviously some questions pushed to Aave, the largest of the decentralized lending protocols that have a very significant um WBTC kind of position in in their their various pools.
00:13:15
Speaker
They've taken a very different approach, actually. um So the Aave Champa founder, there one of the main facilitators of the Aave Dow, Mark Zeller, he tweeted out the following. Let me just grab the tweet here. So he says,
00:13:30
Speaker
1. WBTC users are legitimate. Aave values it uses. I won't vote to rug anyone overnight. Clearly, nowhere they come from from a standpoint there. 2. Aave is a DOW. No single entity can unilaterally decide the fate of a collateral, especially one worth billions. This may be a slight jab at BA Labs.
00:13:55
Speaker
Three, we've successfully replaced WBTC before. On Avalanche, we off-boarded it for, he says BBTC, but I think he means BTCB, a superior alternative. This approach remains viable.
00:14:10
Speaker
And four, Aave Dow pays Chaos Labs and LlamaRisk for risk assessments. They're trusted. I'll await their feedback before taking a stance. Five, no immediate changes for at least two months. WBTC team and alternatives are welcome to discuss. We're open to solutions and value long-term relationships. There's no need for rush, blah, blah, blah, blah, blah.
00:14:32
Speaker
So, Mark is clearly pushing for a pause on hysteria, I think, and their view here is that actually the risk until they they see something telling them otherwise from the auditing firms, they're going to be reactive versus kind of maker being very proactive. This is an incredibly difficult balance to strike, I think. and it you know On one side, yeah do you want to take a knee jack reaction with ah an asset that is is held by huge amounts of people, is representing an enormous amount of TVL, um and is a material core component building block of DeFi?
Risks of Custodial Solutions
00:15:15
Speaker
ah On the other hand, you know, do you wait? And we've seen what happens when you wait too long and an issue does arise and there's a rush to the exit and things can get really, really messy, really quick. I'm personally just glad that not having to make this decision, but it does seem like a lot of the early hysteria, at least for now,
00:15:38
Speaker
has been maybe overblown a bit. And I think we need to wait and see and learn a little bit more about what's to come. the I mean, that the same concerns remain around things like RAT Bitcoin, which is that you're relying heavily on a third party custodian. If anything, this change has kind of made that slightly better by de-risking custodians. It's just we don't really trust the custodians that they're partnering with.
00:16:05
Speaker
um But here's why I think this is now really interesting. We talked about how significant that is. like Just under 1% of the ah circulating Bitcoin supply is is wrapped into wrapped BTC. That is that is huge.
00:16:22
Speaker
um you know obviously representing ah Depending on Bitcoin price, fluctuating between $9 billion billion worth of value.
00:16:33
Speaker
um This is going to create a huge shift in the wrapped Bitcoin space and the ecosystem as a whole. We just saw yesterday, very timely, Coinbase sent out a tweet just saying CBBTC.
Coinbase Enters Wrapped BTC Market
00:16:49
Speaker
They're going to be launching their own wrapped BTC.
00:16:51
Speaker
There is a plethora of Bitcoin layer twos that are kind of trying to seize upon and trying to solve this problem from a different angle here and bringing quote unquote native BTC to other chains. And I think, you know,
00:17:10
Speaker
this This could be seen as a negative for Bitcoin layer 2s. It could be seen as a positive. It's hard to tell right now. um But they will certainly be pushing towards helping solve this problem. And then there are actually a number of real up and coming ah challenges that are building
Emerging Non-Custodial Alternatives
00:17:30
Speaker
alternatives here. We had Aki, the founder of DLC, um which which issued DLC BTC relatively new and their whole focus has been basically offering a ah non-custodial um version of wrapped Bitcoin that uses discrete log contracts native on Bitcoin to to custody and collateralize.
00:17:56
Speaker
So there's there's a lot of interesting stuff. The MakerDAO governance forum has been full of alternative solutions coming in and putting their pitch forward. So we'll see how it shakes out. But I really wouldn't underestimate what a shift in the the DeFi landscape this could make, actually.
00:18:18
Speaker
And personally I don't think it's a bad thing. I would much rather we have much greater competition and we stressed this out. um Assets like this and more than anything I think anywhere where we have like central points of failure and where those central points of failure are potentially being interfered with by individuals that aren't always the most trustworthy. I think we we do have to scrutinize some of this. So it'll be interesting to see how this shakes out.
00:18:58
Speaker
um I'm going to be paying close attention to a lot of the other lending markets and we'll see if Aave changes its tune. I'm sure there's going to be a lot of discussion with the BitGo team. they have They've already made the change now, so this is done.
00:19:14
Speaker
um ah We'll see how if this plays any any role in in the DAI stablecoin. So far saw that I think Maker's token was down a relatively small amount. Let me have a little look and see if that's if that's changed anymore. So let's have a look at the Maker token.
00:19:35
Speaker
um Yeah, it's not really played a big role I think seven seven days essentially up so like in the past 24 hours. It's down Yeah What is that? Yeah, half a point. So it's not really played a big role to be honest, but time will tell It's definitely an interesting um situation to to be coming
Future of Wrapped Bitcoin Market
00:20:04
Speaker
up. And one thing I guarantee is that there is going to be no shortage of players entering the wrapped Bitcoin market. And I think it's kind of perfect timing with everything that's coming around Bitcoin layer 2s. All right, slightly shorter episode this week. We'll be back early next week with ah myself and Austin to to give a bit of a roundup of everything that's going on. So we'll see you then.
00:20:47
Speaker
The contents of the Decrypting Crypto podcast should not be used and are not intended as investment advice. Please do your own due diligence before making any investment, cryptocurrency or otherwise.