Regulation and trust, the clouds of doubt surrounding WBTC
In the world of cryptocurrency and DeFi, custody is crucial.Original source: Chaos Labs X account
Author: Chaos Labs
Compiled by: Shenchao TechFlow
It has been a week since BitGo announced it would transfer the management of WBTC to a new joint venture with BiT Global within 60 days. Since then, many events have unfolded:
→ BitGo announced an initial WBTC custody plan and clarified it after widespread concerns in the industry.
→ MakerDAO decided to pause new lending against WBTC.
→ Coinbase announced the launch of cbBTC, a competing WBTC product.
Let’s delve into what is happening, its significance, and the potential risks.
First, some background information: WBTC is an important bridge between Bitcoin and the DeFi ecosystem.
Since 2019, BitGo has been the primary custodian and token issuer of WBTC.
Supply: 154.4K BTC
Value: $9.2 billion
WBTC is widely used as collateral in major DeFi protocols.
WBTC accounts for about 15% of total aaveaave capital.
Aave V3 (Ethereum):
Supply: $2.2 billion, Borrowing: $900 million - Aave V3 (Arbitrum):
Supply: $213 million, Borrowing: $90 million
→ Any changes to WBTC could have significant implications for the stability of DeFi.
Incentive: BitGo announced plans to transfer the legal custody of WBTC to a joint venture with BiT Global, partners including JustinSunTron and the TronDAO ecosystem.
This announcement triggered immediate alarms in the crypto community. Why?
Let’s analyze the original proposal and the concerns it raised.
BitGo's original custody proposal (August 9, 2024):
3 jurisdictions: United States, Hong Kong, Singapore
2 entities: BitGo Inc. and BiT Global
2-of-3 cold storage multi-signature
BitGo Inc.: 1 key, BiT Global: 2 keys
BitGo moves WBTC to multi-jurisdictional custody to accelerate global expansion plans
What are the main concerns?
BiT Global, associated with the TronDAO ecosystem, will control two keys in the multi-signature setup. This introduces several risks.
Risk #1: Centralization
Having one entity (BiT Global) control two keys effectively centralizes the power over WBTC.
This contradicts the decentralized principles that underpin DeFi.
Risk #2: Regulatory Uncertainty
Justin Sun's standing in the crypto world and potential regulatory issues could pose risks to WBTC.
If BiT Global faces regulatory actions, it could jeopardize the entire WBTC ecosystem.
Risk #3: Trust Issues
Trust in WBTC within the crypto community is crucial for its continued use in DeFi.
Association with controversial figures could erode this trust, potentially leading to a mass exodus from WBTC.
These concerns are not merely theoretical. We have already seen real-world impacts:
chaos_labs has proposed moderate recommendations to reduce risk exposure while we gather more information.
Additional recommendations will soon be made to partner protocols like Jupiter, GMX, Radiant, Venus, Seamless, Zerolend, etc.
Please note that the secondary effects of delisting an asset with such widespread distribution should not be underestimated, hence we are taking a moderate approach: measure twice, cut once.
MakerDAO voted to stop new lending against WBTC.
Over $30 million worth of WBTC was burned within a week.
Interest in competing products like tBTC and Coinbase's new product cbBTC has increased.
In response to the strong community backlash, BitGo revised its proposal (August 14, 2024).
Let’s look at the details of the new model.
BitGo's revised custody model (August 14, 2024):
Still 3 jurisdictions: United States, Hong Kong, Singapore
Now 3 entities: (1) BitGo Inc., (2) BiT Global, (3) BitGo Singapore Ltd.
2-of-3 cold storage multi-signature
Each entity holds one key in different locations.
Key improvement: Introduction of BitGo Singapore Ltd. as the third key holder.
This eliminates the situation where one entity holds multiple keys, addressing immediate centralization concerns.
But does this solve all the problems? Not entirely.
Several unresolved issues and potential risks remain.
Unresolved Issue #1: The Role of BiT Global
Even though they no longer hold two keys, BiT Global still plays a significant role in the custody of WBTC.
What guarantees do we have regarding their operations and intentions?
Unresolved Issue #2: Regulatory Compliance
What is the status of each entity (especially BiT Global and BitGo Singapore) regarding regulatory compliance?
Are they under strict scrutiny in their respective jurisdictions?
Unresolved Issue #3: Auditing and Transparency
How will the community and DeFi projects audit this new setup?
What measures are in place to ensure ongoing transparency regarding the custody arrangements?
Unresolved Issue #4: Contingency Procedures
What are the procedures to ensure the safety of BTC in the event of a security breach or regulatory action against a key holder?
The situation with WBTC highlights a key aspect of DeFi: the delicate balance between centralized custody and decentralized finance.
It reminds us that even in DeFi, we often rely on centralized entities as points of trust.
BitGo 's proposal has broader implications for the DeFi ecosystem:
→ It may accelerate the development of more decentralized BTC wrapping solutions.
→ It could lead to stricter community scrutiny of custody arrangements for all wrapped assets.
→ It may prompt DeFi protocols to diversify their BTC-based collateral options.
Looking ahead, the crypto community will closely monitor:
BitGo how it implements and proves the effectiveness of this new custody model?
Will confidence in WBTC fully recover, or will we see a shift towards alternative solutions?
How will major DeFi protocols adjust their risk models in response to this event?
In summary, while BitGo deserves praise for its response to community feedback, the situation with WBTC serves as a reminder: in the world of crypto and DeFi, custody is paramount.
The security, transparency, and decentralization of asset custody can make or break an entire ecosystem.
As users, developers, and investors in the DeFi space, we have a responsibility to remain vigilant, ask tough questions, and hold projects accountable. The future of finance is built on these foundations.
What are your thoughts on the WBTC situation? How do you think this will impact the future of BTC in DeFi?
