Behind WBTC FUD, how to safely unlock 1.2 trillion Bitcoin liquidity?

Author: Terry, Plain Language Blockchain

Have you heard of WBTC?

Those who have experienced the DeFi Summer must be familiar with it. As one of the earliest stablecoins born in 2018, WBTC played a leading role in bringing Bitcoin liquidity into the DeFi and Ethereum ecosystem in 2022.

However, WBTC has recently encountered a trust crisis ------ On August 9, BitGo announced a joint venture with the Hong Kong company BiT Global and plans to transfer the BTC management address of WBTC to the multi-signature of this joint venture, which is backed by Sun Yuchen.

This has sparked discussions in the market about the safety of WBTC's actual control rights, while Sun Yuchen responded that there has been no change in WBTC compared to before, and audits are conducted in real-time, managed entirely by the custodians Bit Global and BitGo according to the same procedures as before.

However, in the six days following this news, only Crypto.com and Galaxy redeemed over $27 million worth of Bitcoin, indicating that market doubts have not dissipated. This article will explore the operational mechanism of WBTC and take a glimpse at the current state of decentralized Bitcoin stablecoins.

The Stability Mechanism Behind the WBTC Turmoil

We can first briefly review the stability mechanism of WBTC to understand the core controversy of this trust crisis.

As an ERC20 Token that is fully collateralized 1:1 with Bitcoin based on Ethereum, the operation of WBTC relies on a consortium model, somewhat similar to the existing banking layer operation system, where there exists a role of "acquirer" (which requires qualification certification and involves multiple parties) between custodians (previously only BitGo) and ordinary users.

The custodian is responsible for accepting and safeguarding a certain amount of Bitcoin sent over, and upon receiving the Bitcoin, issues a corresponding amount of WBTC Token proportionally, releasing it to a designated Ethereum address; the burning process works in reverse.

The acquirer plays a retail role, directly facing ordinary users, executing necessary KYC/AML processes, verifying user identities, and ultimately providing users with services to acquire and exchange WBTC. Thus, it acts as a bridge in this process, greatly facilitating the circulation and trading of WBTC in the market.

Source: WBTC Official Website

This means that, essentially, the custodian directly determines the credibility of the minting, burning, and custody of WBTC, making it an absolutely centralized existence ------ users must fully trust that the custodian will not engage in any fraudulent activities and will strictly follow the regulations for minting and burning WBTC.

For example, if the custodian receives 100 BTC but actually issues 120 WBTC, or misappropriates the 100 BTC held in custody through re-collateralization, it would undermine the balance and trust of the entire system.

Especially potential over-issuance could decouple the value of WBTC from the actual value of the collateralized Bitcoin, leading to market chaos and investor panic, which could potentially cause the collapse of the entire stablecoin operating mechanism.

Previously, WBTC only had BitGo as the sole custodian, and as a well-established crypto custody service provider, BitGo has, to some extent, withstood the test of the market and time, providing relatively stable support for the development of WBTC ------ from a data perspective, over 154,200 WBTC have been issued across the network, with a total value exceeding $9 billion, indicating the market's trust in BitGo.

Source: WBTC Official Website

So ultimately, it comes down to the fact that the multi-signature authority of WBTC's reserve assets is being transferred from BitGo to a joint venture controlled by Sun Yuchen.

This actually reflects the centralization concerns regarding WBTC's own operational mechanism, and the market is thus calling for the exploration of decentralized solutions to reduce excessive reliance on centralized custodians, especially through blockchain technology to mitigate single points of failure and risks of human manipulation, enhancing the security and reliability of the BTC stablecoin operating mechanism.

The Turbulent Decentralized BTC Track

In fact, since the last bull market cycle, various decentralized BTC stablecoin solutions have become an important innovation track, with projects like renBTC and sBTC emerging one after another, becoming significant conduits for Bitcoin to enter the DeFi ecosystem and activating diverse revenue channels for many BTC holders.

However, after several bull and bear cycles, most of the once-prominent projects have faltered.

First, the previously most talked-about renBTC, which almost represented the decentralized and centralized BTC stablecoin solutions, ------ its entire issuance process was relatively decentralized, where users would deposit native BTC into a designated RenBridge gateway as collateral, and RenVM would issue corresponding renBTC on the Ethereum network through smart contracts.

Moreover, the project had a close relationship with Alameda Research (yes, Alameda actually acquired the Ren team), which became its most notable feature. However, fortune and misfortune are intertwined; after the FTX crisis, Ren was unsurprisingly affected, suffering not only a rupture in operational funding but also a massive outflow of funds.

Although attempts at self-rescue were made later, as of the time of writing, the latest publicly disclosed progress remains at the Ren Foundation's announcement from September 2023, which now appears to be almost brain dead.

Secondly, Synthetix's sBTC, which is a synthetic asset for Bitcoin generated through SNX staking, was also one of the main decentralized Bitcoin pegged coins. However, in the first half of this year, Synthetix completely abolished non-USD synthetic assets on Ethereum, including sETH and sBTC, and has not been able to significantly promote itself within the DeFi ecosystem.

Currently, the most interesting ongoing project practice is the tBTC product from Threshold Network. Indeed, it is a continuation of the well-known tBTC from the previous Keep Network ------ Threshold Network is the new project that emerged from the merger of Keep Network and NuCypher.

In this case, tBTC replaces centralized intermediaries with a randomly selected group of operators running nodes on the network, and these operators collectively use Threshold cryptography to protect the Bitcoin deposited by users. In simple terms, user funds are controlled by the consensus of the majority of operators.

As of the time of writing, the total supply of tBTC exceeds 10,000, with a total value of nearly $600 million, compared to less than 1,500 six months ago, showing rapid growth.

Source: Threshold Network

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

A New Solution for Bitcoin L2?

In fact, whether it is the current WBTC, tBTC, or the former renBTC and sBTC, they all share a common point, which is that they are all in the form of ERC20 Tokens.

The reason is simple and somewhat unfortunate: only by bridging to the Ethereum ecosystem and leveraging its rich DeFi scenarios can the liquidity of Bitcoin assets be effectively released ------ from a certain perspective, the $1.16 trillion worth of Bitcoin (latest CoinGecko data as of August 15, 2024), is the largest "sleeping capital pool" in the crypto world.

Therefore, since the start of DeFi Summer in 2020, WBTC, renBTC, and others have become the primary attempts to release Bitcoin asset liquidity: users can pledge BTC to obtain corresponding wrapped Tokens, thereby bridging liquidity to the Ethereum ecosystem and participating in on-chain scenarios like DeFi through coupling with the Ethereum ecosystem.

This reliance on Ethereum's predicament was only resolved in 2023 with the explosive growth of the Bitcoin ecosystem driven by the Ordinals craze ------ Bitcoin L2 provides users with new possibilities, allowing them to directly participate in various smart contract applications based on Bitcoin L2, such as staking, DeFi, social interactions, and even more complex financial derivatives markets, greatly expanding the scope and value of Bitcoin assets.

Taking sBTC launched by Stacks as an example (which shares the same name as Synthetix's sBTC mentioned above), as a decentralized 1:1 Bitcoin-backed asset, sBTC can deploy and move BTC between Bitcoin and Stacks L2, and can be used as Gas in transactions without needing additional cryptocurrencies.

**Moreover, the security of sBTC is theoretically higher than that of traditional wrapped *Tokens* on Ethereum, as its security is partly guaranteed by Bitcoin's hash power; to reverse a transaction, one must attack Bitcoin itself.**

**From this perspective, the design purpose of Stacks launching sBTC as a Bitcoin L2 somewhat replaces the traditional "wrapped *Token* + Ethereum" model,** bringing smart contracts into the Bitcoin ecosystem and, in a decentralized manner, introducing Bitcoin into the DeFi world.

In the future, with the continuous evolution and technological innovation of Bitcoin L2, new solutions like sBTC may erode the market for wrapped Tokens like WBTC, further enhancing the liquidity and application scenarios of Bitcoin assets.

Conclusion

Looking back, since 2020, the model of wrapped Tokens + Ethereum has not significantly expanded, and the overall inflow of BTC funds has been limited, only representing a 1.0 model for releasing Bitcoin liquidity.

However, to be frank, if we merely regard Bitcoin as a trillion-dollar quality asset pool, there is no need to reinvent the wheel to create a Bitcoin L2; the "wrapped Token + Ethereum" on-chain ecosystem and DeFi use cases are quite sufficient ------ in fact, the logic of most Bitcoin L2s today is not fundamentally different from the past attempts to bring BTC into the EVM ecosystem using wrapped Tokens like tBTC and renBTC.

It is just that from the perspective of native security and revitalizing the value of the Bitcoin ecosystem, the emergence of Bitcoin L2 holds significant importance, as it better ensures the security of Bitcoin assets and prevents them from falling into the Ethereum ecosystem, keeping the meat in one's own pot.