Hotcoin Research | Why did Sun Ge's involvement in WBTC spark controversy? An analysis of BTC-backed tokens and their security
Introduction
Recently, the market attention on the transfer of control over the WBTC project has been very high. The announcement by Sun Yuchen (founder of Tron) to participate in the WBTC project quickly sparked widespread controversy in the crypto community, with the main discussion focusing on the security of WBTC, its degree of decentralization, and the potential impact of Sun Yuchen's personal influence on the project.
Since its launch in 2019, WBTC has become an important bridge for Bitcoin cross-chain applications. By anchoring Bitcoin as an ERC-20 token, WBTC has brought broader DeFi applications to Bitcoin. However, the centralized custody model of WBTC has also been controversial for a long time. Sun Yuchen's involvement has reignited discussions on this issue, particularly regarding the security of cross-chain assets and the importance of decentralized governance.
This article will explore the roots of the controversy sparked by Sun Yuchen's entry into WBTC through an overview of BTC-pegged tokens, the mechanisms behind them, and an in-depth analysis of representative projects, while looking ahead to the future development direction of BTC-pegged tokens.
I. Overview of BTC-Pegged Tokens
1.1 Definition and Basic Principles
BTC-pegged tokens are digital assets that map Bitcoin onto other blockchain networks through specific technical means. These tokens are typically pegged to Bitcoin on a 1:1 basis, meaning that for every BTC-pegged token issued, there is an equivalent amount of Bitcoin held as collateral. This mechanism allows BTC-pegged tokens to possess the value attributes of Bitcoin on other blockchains (such as Ethereum) while participating in decentralized applications (DApps) on these blockchains.
The creation of BTC-pegged tokens primarily aims to compensate for Bitcoin's own network limitations in smart contract functionality, enabling Bitcoin to play a role in a more complex financial ecosystem. Although Bitcoin is the earliest and most consensus-driven cryptocurrency, its network lacks Turing completeness and cannot directly support smart contracts and other complex decentralized financial operations. For example, ERC-20 standard tokens on Ethereum can easily integrate into DeFi protocols, and by mapping Bitcoin as ERC-20 or other standard token forms, it can be used on smart contract platforms like Ethereum to participate in various DeFi scenarios such as lending, liquidity mining, and derivatives trading, greatly expanding the application scope of Bitcoin.
1.2 Demand and Significance of BTC-Pegged Tokens
(1) Demand for Cross-Chain Liquidity
As the highest market capitalization and most liquid cryptocurrency globally, Bitcoin's user base and holdings far exceed those of other crypto assets. If Bitcoin could flow seamlessly onto other blockchains, especially those with smart contract capabilities, it would greatly enhance its use cases and value creation potential. BTC-pegged tokens are designed to meet this demand for cross-chain liquidity. Through BTC-pegged tokens, Bitcoin can leverage its asset advantages on other blockchains and participate in a more diverse range of decentralized applications, such as lending, liquidity mining, and derivatives trading.
(2) Driving Force for Decentralized Finance (DeFi) Development
As "digital gold," Bitcoin has immense potential in DeFi. However, due to the technical limitations of the Bitcoin network itself (such as the lack of smart contract functionality), developing DeFi applications directly on the Bitcoin network poses significant challenges. Therefore, "relocating" Bitcoin to blockchains with smart contract capabilities (like Ethereum) has become a key pathway to achieving this goal. BTC-pegged tokens allow Bitcoin to be mapped onto blockchains like Ethereum, enabling it to participate in the DeFi ecosystem. This not only enhances the utilization of Bitcoin but also injects more liquidity and stability into DeFi applications.
(3) Asset Appreciation and Risk Management Tools
Through BTC-pegged tokens, holders can participate in the DeFi ecosystem to earn additional income without giving up their long-term holdings of Bitcoin. For example, users holding WBTC can collateralize it on DeFi platforms to borrow stablecoins for other investments or participate in liquidity mining to earn rewards. Additionally, some decentralized exchanges offer trading pairs between BTC-pegged tokens and other assets, providing investors with more arbitrage opportunities. Furthermore, BTC-pegged tokens can serve as a risk management tool; using BTC-pegged tokens as collateral can effectively reduce the risk of investment portfolios, acting as a stabilizer.
(4) Enhancing the Practical Utility of the Bitcoin Network
The Bitcoin network is the earliest blockchain, characterized by high security and consensus strength. However, its technical limitations mean that Bitcoin's application scenarios are relatively limited, primarily focused on value storage and simple payment transfers. Over time, the market's demand for Bitcoin has expanded beyond these basic functions, seeking to use Bitcoin in a broader range of financial services. The emergence of BTC-pegged tokens provides Bitcoin with a broader application stage. By issuing pegged tokens on other blockchains, Bitcoin can participate in more complex financial operations on these chains, not only enhancing its practical utility but also solidifying its position as the preferred digital asset globally.
II. Mechanism Principles of BTC-Pegged Tokens
2.1 Centralized vs. Decentralized Pegging
The core of BTC-pegged tokens lies in how Bitcoin is locked on its native chain and how cross-chain technology generates equivalent tokens. Based on this core mechanism, the working mechanisms of BTC-pegged tokens can be divided into centralized and decentralized categories.
- Centralized Pegging Mechanism relies on trusted third-party custodians, which are responsible for holding the locked Bitcoin and minting corresponding pegged tokens based on the amount of Bitcoin locked. For example, WBTC is a typical centralized pegged token. Users send Bitcoin to a custodian (such as BitGo), which manages these Bitcoins while minting an equivalent amount of WBTC tokens on the Ethereum network. When users wish to redeem their Bitcoin, the custodian destroys the corresponding amount of WBTC and returns the Bitcoin to the users. The advantage of this model is its simplicity and speed of transactions, but it carries trust risks and potential security vulnerabilities due to reliance on centralized entities.
- Decentralized Pegging Mechanism achieves cross-chain transfer and tokenization of Bitcoin through distributed networks and cryptographic techniques. For instance, renBTC does not rely on a single entity but uses a distributed node network of the Ren Protocol to manage and verify the locking and minting of Bitcoin. The Ren Protocol employs secure multi-party computation (MPC) technology to distribute the custody process of Bitcoin across multiple independent nodes, ensuring that no single node can control the private keys of Bitcoin. This mechanism significantly reduces centralized risks and enhances the system's security and transparency. However, due to higher technical complexity, the minting and redemption processes of decentralized pegged tokens are usually more complicated and time-consuming.
2.2 Minting and Destruction Processes
The minting and destruction processes of BTC-pegged tokens are core components of their working mechanism, representing the conversion between Bitcoin and pegged tokens.
- Minting Process: The process of minting BTC-pegged tokens typically involves locking the native Bitcoin in a multi-signature address or smart contract and generating an equivalent amount of pegged tokens on the target blockchain (such as Ethereum). For WBTC, when users wish to obtain WBTC, they need to send an equivalent amount of Bitcoin to the custodian address managed by BitGo. Once the Bitcoin transaction is confirmed by the network, BitGo will mint an equivalent amount of WBTC on Ethereum through a smart contract and send it to the user's Ethereum address, which can be verified by the user through a block explorer.
- Destruction Process: When users wish to exchange BTC-pegged tokens back for Bitcoin, they need to trigger the destruction process. Users first send the pegged token (such as WBTC) to the corresponding smart contract for destruction while requesting the custodian to redeem their Bitcoin. Once the destruction transaction is confirmed, the custodian releases the originally locked Bitcoin and sends it to the user's specified Bitcoin address.
In the decentralized model, the minting and destruction processes of renBTC are more complex, involving consensus and collaboration among distributed network nodes. After users send Bitcoin to the Ren Protocol's custodian address, multiple independent nodes will verify and jointly generate renBTC through secure multi-party computation. The destruction process involves reversing the operation, destroying renBTC, and having multiple nodes collectively decide to release the corresponding Bitcoin.
2.3 Decentralized Custody and Trust Models
Unlike centralized custody, decentralized custody ensures the secure management of Bitcoin through distributed networks and cryptographic techniques, avoiding excessive reliance on a single entity.
- Multi-Party Signature Mechanism: For example, tBTC uses a multi-party signature (threshold signature) mechanism, randomly selecting multiple signers to jointly manage the private keys of Bitcoin. These signers provide collateral (such as ETH) to ensure the legitimacy of their actions; if a signer attempts malicious actions, they will face economic losses. This mechanism theoretically achieves higher security and decentralization.
- Secure Multi-Party Computation (MPC): The Ren Protocol employs MPC technology, allowing multiple nodes to participate in the management of Bitcoin without revealing the private keys. This technology ensures that even if individual nodes are attacked, the overall security of the network remains unaffected. Through this method, the Ren Protocol achieves decentralized management of BTC-pegged tokens.
2.4 Cross-Chain Communication and Smart Contract Execution
The cross-chain operations of BTC-pegged tokens rely on cross-chain communication protocols and the execution of smart contracts. Cross-chain communication protocols are responsible for transmitting information between the Bitcoin network and the target blockchain (such as Ethereum), while smart contracts are used to automate the management of minting, destruction, and other operations.
- Cross-Chain Communication: Cross-chain communication typically relies on relayers or observers, which monitor transaction conditions on the Bitcoin network and transmit relevant information to the target blockchain. For example, in the Ren Protocol, the Darknodes nodes are responsible for listening to transactions on the Bitcoin network and broadcasting this information to the Ethereum network, triggering corresponding smart contract operations.
- Smart Contract Execution: Smart contracts are the automated core of the operation of BTC-pegged tokens. Whether in the centralized minting process of WBTC or the decentralized minting process of renBTC, the execution of smart contracts is essential. These contracts ensure that every minting and destruction operation of tokens is transparent and immutable while automatically handling user requests, verifying transactions, and updating on-chain data.
III. Analysis of Representative BTC-Pegged Token Projects and Current Status
The earliest attempts at BTC pegging primarily focused on exploring cross-chain technology. Early attempts included the concept of Bitcoin sidechains, such as Rootstock (RSK), which aimed to achieve interoperability between Bitcoin and other blockchains through sidechains. However, these early projects did not achieve widespread market application due to their technical complexity and implementation difficulties.
3.1 The Birth and Market Application of WBTC
In 2018, the WBTC (Wrapped Bitcoin) project was officially launched, marking an important milestone in the development of BTC-pegged tokens. WBTC was initiated by several institutions, including BitGo, Kyber Network, and Ren Protocol, and is the first ERC-20 token to achieve a 1:1 Bitcoin peg on Ethereum. WBTC uses a centralized custody model to lock Bitcoin in BitGo's custody account and mint an equivalent amount of WBTC tokens on Ethereum. The emergence of WBTC opened the door for Bitcoin's application in the Ethereum ecosystem, allowing Bitcoin to participate in DeFi applications. Due to its transparency and high market acceptance, WBTC quickly became one of the most popular BTC-pegged tokens in the market.
According to data from the WBTC official website, the current issuance of WBTC has reached 150,000, valued at approximately $9 billion. Among them, 40.6% is used for lending, 32.6% for buying and holding, and 11.3% for cross-chain interoperability.
3.2 The Rise of Decentralized BTC-Pegged Tokens
With the rapid development of the DeFi market, the demand for decentralization and security among users has been increasing. Some decentralized BTC-pegged token projects have emerged to avoid the trust risks associated with centralized custody.
- renBTC: RenBTC, launched by Ren Protocol, is a decentralized BTC-pegged token. Ren Protocol achieves cross-chain transfer and custody of Bitcoin through secure multi-party computation (MPC) technology. Ren's network consists of a series of decentralized nodes (called Darknodes) that collectively manage the custody of Bitcoin and the minting of renBTC. The main advantage of renBTC lies in its high degree of decentralization, reducing reliance on a single entity, but its technical complexity is relatively high.
- tBTC: tBTC is another decentralized BTC-pegged token launched by Keep Network. tBTC employs a unique multi-party signature (threshold signature) scheme, randomly selecting multiple signers to jointly manage the cross-chain transfer of Bitcoin. The design goal of tBTC is to minimize reliance on centralized entities and ensure that users have complete control over their Bitcoin. However, tBTC also faces certain challenges in promotion due to its complex mechanism and high technical barriers.
3.3 Diversification and Ecological Expansion of BTC-Pegged Tokens
With the emergence of more blockchain platforms and the diversification of market demand, BTC-pegged tokens have begun to develop towards diversification and multi-chain support. Not only on Ethereum, but other blockchain platforms such as Binance Smart Chain, Tron, and Polygon have also started to support the issuance and application of BTC-pegged tokens.
- sBTC (Synthetix BTC): Issued by the Synthetix platform, sBTC is a synthetic asset that simulates Bitcoin's price changes through over-collateralization. sBTC provides users with more flexibility, especially in synthetic asset trading and DeFi applications.
- BBTC (Binance Wrapped BTC): Launched by Binance, BBTC strictly adheres to the 1:1 asset collateral principle, achieving seamless flow of BTC on both Ethereum and Binance Smart Chain.
3.4 Current Status Analysis of BTC-Pegged Tokens
Dominance of WBTC: As of August 2024, WBTC remains the dominant BTC-pegged token in the market, accounting for as much as 94.7%. This data indicates that despite the existence of various BTC-pegged tokens in the market, WBTC, with its early market entry, extensive DeFi support, and high trust level, remains the preferred choice for users.
Performance of Other BTC-Pegged Tokens: tBTC, BBTC, and HBTC also hold a certain market share, but their total volume is relatively small. Among them, tBTC accounts for 1.9%, and BBTC accounts for 1.8%. These BTC-pegged tokens are mainly used in specific application scenarios or supported by specific communities.
IV. The Rise of BTC LSD Tokens
The emergence of staking and re-staking concepts has brought new development directions for BTC-pegged tokens. Babylon has launched a non-custodial Bitcoin staking solution that uses cryptographic methods to achieve Bitcoin staking and generate liquid staking tokens. This project opens up a new track for BTC staking by improving the capital efficiency of staked assets.
4.1 stBTC
stBTC is an important representative among BTC LSD tokens, launched by the Lorenzo Protocol. The minting process of stBTC involves staking native Bitcoin in the custody contract of the Lorenzo Protocol and then generating corresponding stBTC tokens based on the amount of Bitcoin staked. Users can use stBTC for other financial activities and redeem native Bitcoin by destroying stBTC tokens when needed. stBTC not only improves the capital utilization of Bitcoin but also allows holders to freely flow and appreciate their assets within the DeFi ecosystem.
4.2 LBTC
LBTC is a BTC LSD token launched by Lombard, aiming to provide Bitcoin holders with safer and more transparent staking returns through decentralized staking management. Similar to stBTC, users can participate in the DeFi ecosystem by minting LBTC and utilize LBTC to earn returns on decentralized exchanges, lending protocols, and yield strategy platforms. Users can also delegate LBTC to Babylon to earn staking rewards with proof of stake (PoS) security. Additionally, Babylon offers extra incentive rewards for deposited BTC, including potential yields and other incentives.
4.3 SolvBTC
SolvBTC is a BTC LSD token launched by Solv, aiming to provide an efficient liquid staking solution by integrating staking yields from multiple chains such as Bitcoin and Ethereum. SolvBTC offers users more flexible staking and liquidity management services through an innovative decentralized asset management architecture. By integrating multi-chain staking yields, SolvBTC provides users with broader investment and arbitrage opportunities. Users can use SolvBTC across various DeFi protocols, such as decentralized exchanges, lending protocols, and yield farms, and redeem corresponding assets by destroying SolvBTC when needed.
V. Risk and Opportunity Analysis of BTC-Pegged Tokens
As an innovative tool that brings Bitcoin into other blockchain ecosystems, BTC-pegged tokens demonstrate great potential in enhancing Bitcoin's liquidity and expanding its application scope. However, like other financial innovations, the development of BTC-pegged tokens is accompanied by a series of risks and challenges.
5.1 Risk Analysis of BTC-Pegged Tokens
(1) Centralization Risk: The security of custodians is crucial. If a custodian suffers a hack or mismanagement, it could lead to the loss or theft of Bitcoin, severely impacting the value of pegged tokens and market confidence. Centralized custody also means that if the custodian encounters operational issues, such as bankruptcy, regulatory intervention, or other forms of failure, users may be unable to redeem their Bitcoin, facing the risk of financial loss.
(2) Technical Risk: Decentralized protocols often involve complex technologies such as multi-party signatures and MPC (secure multi-party computation). The implementation of these technologies requires highly precise code and meticulous management; any vulnerabilities or design flaws could lead to system crashes or security incidents. Decentralized pegged tokens rely on consensus among multiple nodes. If these nodes are attacked, malfunction, or engage in malicious behavior, it could affect the stability and security of the pegged tokens.
(3) Smart Contract Vulnerabilities: BTC-pegged tokens are typically managed through smart contracts for minting and destruction processes. Once smart contract code is deployed, it is difficult to change; any undiscovered vulnerabilities could be exploited maliciously, leading to financial losses. There have been numerous large-scale attacks in history due to smart contract vulnerabilities, and BTC-pegged token projects are no exception. BTC-pegged tokens often interact with other DeFi protocols, and this dependency may introduce additional risks. If the interacting protocol fails or is attacked, it could affect the normal operation of the pegged tokens.
(4) Regulatory Uncertainty: As the cryptocurrency market evolves, regulatory authorities in various countries are increasingly tightening their oversight of crypto assets. BTC-pegged tokens may face compliance pressures, particularly concerning KYC and AML regulations. Strict regulations could limit the liquidity of pegged tokens or increase operational costs.
5.2 Opportunity Analysis of BTC-Pegged Tokens
(1) Cross-Chain Liquidity and Expansion of DeFi Applications: The greatest opportunity for BTC-pegged tokens lies in their ability to bring cross-chain liquidity to Bitcoin, enabling it to participate in the DeFi ecosystem of smart contract platforms like Ethereum. This capability transforms Bitcoin from being limited to storage and simple payments to a dynamic asset that can engage in complex financial activities such as lending, liquidity provision, and derivatives trading.
(2) The Rise of Multi-Chain Ecosystems: With the development of cross-chain technology, the application of BTC-pegged tokens is no longer limited to Ethereum but is gradually expanding to multiple blockchain platforms such as BSC and Solana. This emergence of multi-chain ecosystems opens up new application scenarios and market spaces for BTC-pegged tokens, from DeFi to NFT markets and decentralized governance, continuously broadening the potential application range of BTC-pegged tokens.
(3) Development of BTC LSD: BTC LSD tokens allow Bitcoin holders to maintain asset liquidity while staking, achieving higher capital efficiency within the DeFi ecosystem. The emergence of LSD tokens makes Bitcoin staking more flexible and efficient, attracting more Bitcoin holders to participate in staking and DeFi activities, further driving the market development of BTC-pegged tokens.
(4) Participation of Institutional Investors: As the cryptocurrency market matures and infrastructure improves, more institutional investors are beginning to engage in the BTC-pegged token market. The entry of institutional investors not only brings substantial capital but also enhances market trust and stability. The demand from institutional investors drives project teams to improve technical security and regulatory compliance, raising the standards and credibility of the entire industry.
Conclusion
Sun Yuchen's involvement in WBTC has sparked controversy primarily because WBTC holds an absolute dominant position in the BTC-pegged token market, with nearly 95% market share, and is widely used in the DeFi ecosystem. As a core asset of decentralized finance, the security and custody transparency of WBTC are crucial. Sun Yuchen's participation has raised community concerns about increased centralized control and potential conflicts of interest, especially against the backdrop of the transfer of BitGo's custody rights, which has heightened doubts about the management of WBTC and the security of underlying assets, fearing it may affect the stability and trust of the DeFi market.
However, it is undeniable that BTC-pegged tokens have opened up new application scenarios and value spaces for Bitcoin. How to fully leverage the potential of BTC-pegged tokens while ensuring security will be key to future development. The rise of BTC LSD tokens reflects an important trend in Bitcoin's application in the DeFi field: transforming static assets into dynamic assets with liquidity and yield attributes. This trend not only enhances the capital efficiency of Bitcoin but also provides users with more diversified investment opportunities. The success of BTC LSD tokens depends not only on their technical implementation and market application but also on achieving a balance between security, decentralization, and user experience. As cross-chain technology, DeFi ecosystems, and liquid staking derivatives continue to mature, BTC-pegged tokens are expected to play a more important role in the future cryptocurrency market, providing Bitcoin holders with richer and more flexible asset management tools.
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