Behind the WBTC FUD: How to safely unlock 1.2 trillion Bitcoin liquidity

Have you heard of WBTC?

Old guns who have experienced DeFi Summer must be familiar with it. As one of the earliest stablecoins born in 2018, WBTC played the role of a standard-bearer in bringing Bitcoin liquidity into DeFi and Ethereum ecosystems in 2022.

However, WBTC has recently encountered a crisis of trust-On August 9, BitGo officially announced a joint venture with Hong Kong company BiT Global, and plans to migrate WBTC's BTC management address to the multi-signature of this joint venture. Behind this Hong Kong company BiT Global is Justin Sun.
This has also triggered discussions in the market about the security of the subsequent actual control of WBTC. At the same time, Justin Sun responded that WBTC has not changed at all compared to before, and the audit is conducted in real time, and is completely managed by the custodians Bit Global and BitGo according to the same procedures as before.
However, in the past 6 days after the news was exposed, Crypto.com and Galaxy alone redeemed more than 27 million US dollars of Bitcoin, which also shows that the market is still skeptical. This article will explore the operating mechanism of WBTC and take a peek at the development status of decentralized Bitcoin stablecoins.

1. The reason for the stability mechanism behind the WBTC storm

We can first briefly review WBTC's stability mechanism to understand the core controversial point of this trust crisis.
As an ERC20 Token based on Ethereum and fully collateralized with Bitcoin at a 1:1 ratio,WBTC’s operation relies on a consortium model, which is a bit like the existing second-tier banking operating system, where there is also the role of “acceptor” (which requires qualification certification and multiple companies) between the custodian (previously only BitGo) and ordinary users.

Among them, the custodian is responsible for accepting and keeping a certain amount of Bitcoin sent, and after receiving the Bitcoin, it will issue a corresponding number of WBTC Tokens in proportion and release them to the specified Ethereum address, and vice versa for the burning process;

And the acceptor plays the role of retail. They directly face ordinary users, perform the necessary KYC/AML process, verify the user's identity, and ultimately provide users with services to obtain and exchange WBTC, Therefore, it plays a bridge role in this process, which can greatly promote the circulation and trading of WBTC in the market;

Source: WBTC official website

This means that, in essence, the custodian directly determines the credibility of the minting, burning and custody of WBTC, and is absolutely centralized - users need to fully trust that the custodian will not engage in any fraudulent behavior and will strictly follow the regulations to mint and burn WBTC.
For example, if the custodian receives 100 BTC, but actually issues 120 WBTC, or misappropriates the 100 BTC in custody by re-mortgaging, etc., it will destroy the balance and trust foundation of the entire system.
In particular, potential over-issuance will cause the value of WBTC to decouple from the actual value of the pledged Bitcoin, causing market chaos and investor panic, and may lead to the collapse of the entire stablecoin operating mechanism at any time.
Previously, WBTC has always had only BitGo as the only custodian. As a veteran crypto custody service provider, BitGo has also withstood the test of the market and time to some extent, providing a relatively stable guarantee for the development of WBTC. From the data dimension, the entire network has issued more than 154,200 WBTC, with a total value of more than 9 billion US dollars, which also shows the market's trust in BitGo.

Source: WBTC official website

So in the final analysis, it is because the multi-signature authority of WBTC's reserve assets will be transferred from BitGo to the joint venture controlled by Justin Sun.
This actually reflects the centralization concerns about WBTC's own operating mechanism. Therefore, the market is also calling for the exploration of decentralized solutions to reduce over-reliance on centralized custodians, especially through blockchain technology to reduce the risk of single point failure and human manipulation, and improve the security and reliability of the BTC stablecoin operating mechanism.

2. The decentralized BTC track that has experienced ups and downs

In fact, since the last bull market cycle, various decentralized BTC stablecoin solutions have been an important innovation track. For example, renBTC and sBTC have exploded one after another, becoming an important channel for Bitcoin to enter the DeFi ecosystem, and attracting a large amount of BTC funds to Ethereum, and also revitalizing the diversified income channels of many BTC Holders.
It's just that after a round of bull and bear cycles, most of the former star projects have failed one after another.
First is renBTC, which had the most voice before. At that time, it and WBTC almost represented decentralized and centralized BTC stablecoin solutions-its entire issuance process is relatively decentralized, that is, users deposit native BTC into the designated RenBridge gateway as collateral, and RenVM issues the corresponding renBTC in the Ethereum network through smart contracts.
And the project has a close relationship with Alameda Research (yes, Alameda actually acquired the Ren team), which once became its biggest bright spot. But fortune and disaster are interdependent. After the FTX crisis, Ren was not surprisingly affected. Not only did the operating funds break, but also the funds fled on a large scale.
Although it also tried to save itself later, as of the time of posting, the latest progress disclosed to the public was still the announcement of the Ren Foundation in September 2023. Now it seems to be almost brain dead.

Secondly, sBTC launched by Synthetix is ​​a Bitcoin synthetic asset generated by SNX staking, and was once one of the main decentralized Bitcoin anchor coins, but in the first half of this year, Synthetix completely abolished non-USD spot synthetic assets on Ethereum, including sETH and sBTC, and has never been widely promoted in the DeFi ecosystem.
The most interesting project practice that is still running should be the tBTC product of Threshold Network. Yes, it is actually in the same vein as the previously well-known tBTC of Keep Network - Threshold Network is the new project that Keep Network later merged with NuCypher.
Among them, tBTC replaces centralized intermediaries with a randomly selected group of operators who run nodes on the network. These operators jointly use Threshold encryption technology to protect the Bitcoin deposited by users. In short, user funds are controlled by the majority consensus of operators.
As of the time of writing, the total supply of tBTC exceeds 10,000, with a total value of nearly $600 million, while six months ago there were less than 1,500, and the growth is still quite rapid.

Source: Threshold Network

In short, the competition among various solutions is essentially centered around the core of asset security, and with this turmoil WBTC has unveiled the market demand for decentralized stablecoins. In the future, whether it is tBTC or other similar projects, they need to continuously improve their decentralized design on the basis of ensuring asset security to meet the needs of the market and users.

3. A new solution for Bitcoin L2?

In fact, whether it is today's WBTC, tBTC, or the former renBTC and sBTC, they all have one thing in common, that is, they are all ERC20-format Tokens.
The reason is also very simple and helpless. Only by bridging to the Ethereum ecosystem and relying on its rich DeFi scenarios can the liquidity of Bitcoin assets be effectively released. In a sense, the $1.16 trillion Bitcoin (the latest CoinGecko data on August 15, 2024) is the largest "sleeping fund pool" in the crypto world.
Therefore, after the start of DeFi Summer in 2020, WBTC, renBTC, etc. have become the main attempts to release the liquidity of Bitcoin assets: users can pledge BTC and obtain the corresponding packaged Tokens, thereby bridging to the Ethereum ecosystem as liquidity, and participating in DeFi and other on-chain scenarios by coupling with the Ethereum ecosystem.
This dilemma of relying on Ethereum was not solved until the Bitcoin ecosystem exploded in 2023 due to the Ordinals craze - Bitcoin L2 provides users with new possibilities, enabling everyone to directly participate in various smart contract applications based on Bitcoin L2, such as staking, DeFi, social networking, and even more complex financial derivatives markets, greatly expanding the scope and value of Bitcoin assets.
Take sBTC launched by Stacks (same name as Synthetix's sBTC mentioned above) as an example. As a decentralized 1:1 Bitcoin-backed asset, sBTC can deploy and move BTC between Bitcoin and Stacks L2, and use it as Gas in transactions without the need for additional other cryptocurrencies.
And the security of sBTC is theoretically higher than that of the traditional Ethereum packaged Token, because its security is guaranteed to a certain extent by Bitcoin computing power, and to reverse the transaction, Bitcoin itself must be attacked.
From this perspective, the design purpose of Stacks, a Bitcoin L2, to launch sBTC, to some extent replaces the traditional "packaged Token + Ethereum" form, introduces smart contracts into the Bitcoin ecosystem, and then brings Bitcoin into the DeFi world in a decentralized way.
In the future, with the continuous evolution and technological innovation of Bitcoin L2, new solutions like sBTC may erode the market of packaged Tokens such as WBTC, further improving the liquidity and application scenarios of Bitcoin assets.

4. Summary

Looking back, in fact, the form of packaged Token + Ethereum has not grown since 2020, and the overall BTC capital inflow attracted is limited, which can only be regarded as the 1.0 mode of Bitcoin releasing liquidity.

But to be honest, if we only regard Bitcoin as a trillion-dollar high-quality asset pool, there is no need to reinvent the wheel and create another Bitcoin L2. The on-chain ecology and DeFi use cases of "packaged tokens + Ethereum" are enough - In fact, the logic of most of the Bitcoin L2 today is essentially the same as the introduction of BTC into the EVM ecosystem with ERC20 packaged tokens such as tBTC and renBTC.
From the perspective of native security and the activation of the Bitcoin ecological value, the emergence of Bitcoin L2 is of great significance, that is, to better protect the security of Bitcoin assets and prevent it from falling into the Ethereum ecosystem, so that the meat will rot in its own pot.

The crisis of WBTC this time has caused considerable fluctuations. What do you think about the future development of Bitcoin stablecoins? Comments and exchanges are welcome.