Author: Terry, Plain Language Blockchain

Have you heard of WBTC?

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

However, WBTC has recently encountered a crisis of trust. On August 9, BitGo officially announced a joint venture with the Hong Kong company BiT Global, and planned 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, the audit is conducted in real time, and it 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 still has doubts. This article will explore the operating mechanism of WBTC and take a look at the development status of decentralized Bitcoin stablecoins.

The reason behind the stability mechanism of WBTC

We can first briefly review the stability mechanism of WBTC 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, the operation of WBTC relies on a consortium model, which is a bit like the existing second-tier banking operating system. There is also the role of "acceptor" (requires qualification certification and multiple companies) between the custodian (previously only BitGo) and ordinary users.

The custodian is responsible for accepting and keeping a certain amount of Bitcoin sent to it. After receiving the Bitcoin, it will issue a corresponding number of WBTC Tokens in proportion and release them to the designated Ethereum address. The burning process is also the same;

The acceptors play the role of retail. They directly face ordinary users, perform the necessary KYC/AML process, verify the identity of users, and ultimately provide users with services to obtain and redeem WBTC. Therefore, they play the role of a bridge in this process, which can greatly promote the circulation and trading of WBTC in the market.

This means that the custodian essentially 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 fraud 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 them, it will undermine 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, triggering 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 BitGo as the only custodian. As a long-established crypto custody service provider, BitGo has to some extent withstood the test of the market and time, providing relatively stable guarantees for the development of WBTC. From a data perspective, a total of more than 154,200 WBTC have been issued on the entire network, with a total value of more than US$9 billion, which also shows the market's trust in BitGo.

So in the final analysis, it is because the multi-signature authority of WBTC’s reserve assets needs to be transferred from BitGo to the joint venture controlled by Justin Sun.

This actually also reflects the concerns about the centralization of WBTC's own operating mechanism. Therefore, the market is also calling for the exploration of decentralized solutions to reduce excessive reliance on centralized custodians, especially through blockchain technology to reduce the risks of single point failures and human manipulation, and improve the security and reliability of the BTC stablecoin operating mechanism.

The decentralized BTC track has experienced ups and downs

In fact, since the last bull market cycle, various decentralized BTC stablecoin solutions have been an important innovation track. Solutions such as renBTC and sBTC have exploded one after another, becoming an important channel for Bitcoin to enter the DeFi ecosystem, and bringing large amounts of BTC funds to Ethereum, which has also activated the diversified income channels of many BTC Holders.

However, after a series of bull and bear cycles, most of the former star projects have failed.

The first is renBTC, which had the most voice before. At that time, it and WBTC almost represented decentralized and centralized BTC stablecoin solutions respectively. 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.

Moreover, the project has a close relationship with Alameda Research (yes, Alameda actually acquired the Ren team), which once became its most eye-catching label. However, fortune and disaster go hand in hand. After the FTX crisis, Ren was unsurprisingly affected. Not only was its operating capital cut off, but it also suffered from large-scale capital flight.

Although it tried to save itself later, as of the time of writing, the latest progress disclosed to the public was the Ren Foundation’s announcement in September 2023. From the current perspective, it is almost brain dead.

Secondly, sBTC launched by Synthetix is ​​a Bitcoin synthetic asset generated through SNX staking. It was once one of the main decentralized Bitcoin anchor coins. However, 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 in operation is probably the tBTC product of Threshold Network. Yes, it is actually a continuation of the well-known tBTC of Keep Network before - Threshold Network is the new project that was later merged with NuCypher by Keep Network.

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 bitcoins deposited by users. In short, user funds are controlled by the majority consensus of the operators.

As of the time of writing, the total supply of tBTC exceeds 10,000, with a total value of nearly US$600 million. Six months ago, there were less than 1,500, so the growth is still quite rapid.

In short, the competition among various solutions is essentially centered around the core of asset security. With this turmoil, WBTC has unveiled the market demand for decentralized stablecoins. 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 today's WBTC, tBTC, or the former renBTC and sBTC, they all have one thing in common, that is, they are all ERC20 tokens.

The reason is very simple and helpless. 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, Bitcoin with a volume of 1.16 trillion US dollars (the latest CoinGecko data as of August 15, 2024) is the largest "sleeping capital 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, which can then be bridged to the Ethereum ecosystem as liquidity, and participate in DeFi and other on-chain scenarios by coupling with the Ethereum ecosystem.

This dilemma of dependence on Ethereum finally saw a new solution until the Bitcoin ecosystem exploded in 2023 due to the Ordinals craze - Bitcoin L2 provided users with new possibilities, allowing everyone to directly participate in various smart contract applications based on Bitcoin's 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 (the 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.

In theory, the security of sBTC is higher than that of traditional Ethereum-based wrapped tokens, because its security is guaranteed to a certain extent by Bitcoin computing power. To reverse a transaction, Bitcoin itself must be attacked.

From this perspective, the design purpose of Stacks, a Bitcoin L2, to launch sBTC is to replace the traditional "packaged Token + Ethereum" form to some extent, introduce smart contracts into the Bitcoin ecosystem, and then bring 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.

summary

Looking back, the form of packaged Token + Ethereum has not expanded since 2020, and the overall BTC capital inflow it has attracted is limited. It can only be regarded as the 1.0 model of Bitcoin's liquidity release.

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 ecosystem and DeFi use cases of "packaged Token + Ethereum" are sufficient. In fact, the logic of most of the Bitcoin L2 today is essentially no different from the introduction of BTC into the EVM ecosystem using ERC20 packaged tokens such as tBTC and renBTC.

From the perspective of native security and revitalizing the value of the Bitcoin ecosystem, the emergence of Bitcoin L2 is of great significance, that is, to better protect the security of Bitcoin assets and prevent them from falling into the Ethereum ecosystem, so that the meat will rot in their own pot.