DeFi Protocols Drops Wrapped Bitcoin After Controversial Partnership It provides an opportunity for competitors to enter the market.
Wrapped Bitcoin ownership drama sparks interest in bringing Bitcoin to Defy.
On August 9, BitGo Plans announced To transfer control of wrapped bitcoin — or WBTC — to crypto custody platform BiT Global and a joint venture with Tran founder Justin Sun.
Competitors are now circling after the move caused concern among some of DeFi's biggest protocols.
The lending protocol is MakerDAO Voted To stop new users from borrowing from WBTC. Another top lending protocol, Aave, is also considering limiting its exposure.
This is a blow to BitGo, which issues just over $9 billion of bitcoin-backed WBTC on Ethereum, Tron and several other blockchains.
Competitors say this gives them an opening in the market.
“[It’s] Maybe the biggest untapped opportunity in DeFi right now,” said Jacob Phillips, co-founder of Lombard Finance, a firm that plans to issue its own DeFi-friendly version of bitcoin. News.
“Bitcoin is this big asset that everyone loves. We have to find a way to embrace it more,” Phillips said. “The only thing missing in my mind is a catalyst.”
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Lombard, as well as many other contenders, are betting that the withdrawal from WBTC, combined with other innovations, could be the long-awaited catalyst.
The reward for any asset that can replace WBTC is not limited to its current market value.
Letting Bitcoin users leverage their holdings could inject more of the asset's $1.2 trillion market value into DeFi, giving the sector a much-needed capital boost after years of decline.
Total deposits for DeFi protocols are well below the all-time high achieved in 2021.
Decentralized alternatives
WBTC's change in ownership is not the only concern.
As Bitcoin is technically not compatible with DeFi on Ethereum, investors and traders turn to WBTC as an alternative.
But that alternative is not as decentralized as bitcoin, fueling concerns about who has control and influence over it.
The issuance and performance of WBTC depends on BitGo, the theoretical opposite of the permissionless decentralized financial infrastructure that many in crypto are building.
“It's the opposite of the plan,” said Daniel Fogg, CEO of Rootstack Labs, the company behind the Rootstack Bitcoin sidechain. News.
“You're talking about institutions, opaque processes, people making decisions for their own good, for their own needs,” Fogg said. “That's not the plan, that's not what we're trying to build here. It is a retreat from the norm.”
In contrast, most WBTC competitors position themselves as decentralized – not relying on a single entity to issue or control their Bitcoin equivalent tokens.
This makes them more secure and consistent with the underlying ideology of crypto.
Although there is no claim to decentralization, BitGo is making efforts to reassure users that its control methods are still secure.
In recent times X spacesCEO Mike Belshey reiterated that even after the change in ownership, Bitcoin backing WBTC will remain locked behind a two-by-three multi-signature security model, with BitGo holding two of the three keys needed to access funds.
However, custodial issuers such as WBTC faced difficulties in other ways.
In 2021, ren, the issuer of WBTC's rival renBTC using a similar custodial model, was acquired by Sam Bankman-Fried's business firm Alameda Research.
When the Bankman-Fried fraud was exposed in late 2022, Ren lost his funds and chose Wind down renBTC.
Pathways to Adoption
Creating a more decentralized product may not be enough.
Matt Luongo, CEO of Thesis, which issues WBTC competitor tBTC, said, “A well-functioning, but decentralized, value proposition is not enough for most users. News.
For any WBTC alternative to have a chance to compete, users need to be able to use it in their favorite DeFi protocols.
To that end, Luongo said he is focusing on getting top protocols like Aave or trading platform GMX to integrate tBTC. After all, the more things users can do with an asset, the more likely they are to use it.
Fogg says he's taking a similar approach with RBTC, the rootstack network's own DeFi-friendly version of Bitcoin. “We're working through as many organizations as we can talk to, to get as many protocols into the rootstock as possible,” he said.
Lombard's Phillips, however, said he believes the key to adoption will be Babylon — a protocol that allows users to stake bitcoin to secure other blockchain networks.
“If you've been following all the Eigenlayer fun, it's all going to run its course again, but this time with a new asset, a much bigger asset — Bitcoin,” Phillips said.
Eigenlayer was the first restaking protocol launched on Ethereum. In the past year, its deposits reached $12 billion, making it the second largest DeFi protocol behind the liquid staking protocol Lido.
Some previous attempts to bring Bitcoin into DeFi have ended badly.
In 2021, Badger DAO, a cooperative that runs a protocol to allow users to use Bitcoin as collateral across DeFi, He was hurt The $120 million hack.
The Badger DAO website was compromised, allowing thieves to install malicious software that stole user assets after using the protocol.
It's also possible that DeFi users are less interested in using Bitcoin in DeFi – or at least in Ethereum.
Although the price of Bitcoin hit an all-time high in March, BTC's total circulation is well below the level reached during the 2021 bull run.
“Do People Want Bitcoin on Ethereum?” thesis' Luongo said. “Of course I bet they won't.”
There is Tim Craig News' Edinburgh-based DeFi correspondent. Reach out with tips at [email protected].
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