- DeFi protocols abandon Wrapped Bitcoin after controversial partnership.
- This provides an opportunity for competitors to enter the market.
Wrapped Bitcoin ownership drama reignites interest in bringing Bitcoin to DeFi.
On August 9, BitGo announced plans to transfer control of Wrapped Bitcoin – or WBTC – to a joint venture with cryptocurrency custody platform BiT Global and Tron founder Justin Sun.
Competitors are now in the running after the move sparked concerns among some of the largest DeFi protocols.
Lending protocol MakerDAO has voted to block new users from borrowing against WBTC. The other major lending protocol, Aave, is also considering limiting its exposure.
This is a major blow for BitGo, which issues just over $9 billion worth of Bitcoin-backed WBTC on Ethereum, Tron and several other blockchains.
Competitors say this represents a market opening for them.
“This is perhaps the biggest untapped opportunity in DeFi right now,” said Jacob Phillips, co-founder of Lombard Finance, a company that plans to issue its own DeFi-compatible version of Bitcoin. DL News.
“Bitcoin is a great asset that everyone loves. We should find a way to get it more adoption,” Phillips said. “The only thing missing, in my opinion, is the catalyst.”
Join the community to receive our latest stories and updates
Lombard, along with several other competitors, is betting that the abandonment of WBTC, combined with other innovations, could be the catalyst they’ve been waiting for.
The reward for any asset that can outperform WBTC is not limited to its current market value.
Allowing Bitcoin users to leverage their holdings has the potential to inject a large chunk of the asset’s $1.2 trillion market cap into DeFi, giving the sector a much-needed capital boost after years of decline.
Decentralized alternatives
The change in ownership of WBTC is not the only cause for concern, however.
As Bitcoin is technically incompatible with DeFi on Ethereum, investors and traders are turning to WBTC as a workaround.
But this alternative is not decentralized like Bitcoin itself, fueling concerns about who controls and exerts influence over it.
The issuance and operation of WBTC depends on BitGo, the ideological opposite of the permissionless decentralized financial infrastructure that many crypto players are building.
“This is the opposite of the plan,” said Daniel Fogg, CEO of Rootstock Labs, the company behind the Rootstock Bitcoin sidechain. DL News.
“We’re talking about institutions, opaque processes, individuals 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’s a return to the norm.”
In contrast, many of WBTC’s competitors position themselves as decentralized, not relying on a single entity to issue or hold their Bitcoin-equivalent tokens.
This, they say, makes them more secure and more consistent with the underlying ideology of cryptography.
BitGo is trying to reassure users that while it doesn’t claim decentralization, its custody methods are still secure.
At a recent X Spaces, CEO Mike Belshe reiterated that even after the ownership change, the Bitcoin backing WBTC will be locked behind a two-of-three multi-signature security model, with BitGo retaining two of the three keys needed to access the funds.
However, depository issuers like WBTC have encountered problems in other respects.
In 2021, Ren, the company that issues renBTC, a rival to WBTC using a similar custody model, was acquired by Sam Bankman-Fried’s trading firm Alameda Research.
When the Bankman-Fried fraud was exposed in late 2022, Ren lost its funding and chose to liquidate renBTC.
Pathways to adoption
Simply creating a more decentralized product might not be enough.
“Something that works well, but is decentralized, is not a sufficient value proposition for most users,” said Matt Luongo, CEO of Thesis, which issues WBTC competitor tBTC. DL News.
For a WBTC alternative to have a chance of competing, users must be able to use it in their favorite DeFi protocols.
To that end, Luongo said he’s focusing on getting tBTC onboarded by major protocols like Aave or the GMX trading platform. After all, the more things users can do with an asset, the more likely they are to use it.
Fogg said he’s taking a similar approach with RBTC, the Rootstock network’s DeFi-friendly version of Bitcoin. “We’re working with as many institutions as possible, with as many protocols as possible on Rootstock,” he said.
Lombard’s Phillips, however, said he believes the key to adoption is Babylon — a protocol that will allow users to stake Bitcoin to secure other blockchain networks.
“If you’ve been following all the Eigenlayer fun, that’s all about to run its course again, but this time with a new asset, a much bigger asset: Bitcoin,” Phillips said.
Eigenlayer was the first re-staking protocol to launch on Ethereum. Over the past year, its deposits have ballooned to $12 billion, making it the second-largest DeFi protocol behind liquid staking protocol Lido.
Some previous attempts to introduce Bitcoin into DeFi have ended badly.
In 2021, Badger DAO, a cooperative that runs a protocol that allows users to use Bitcoin as collateral on DeFi, suffered a $120 million hack.
The Badger DAO website was compromised, allowing thieves to install malware that stole users’ assets after using the protocol.
It is also possible that DeFi users are less interested in using Bitcoin in DeFi – or at least on Ethereum.
Although the price of Bitcoin hit an all-time high in March, the amount of WBTC in circulation is still well below the level reached during the 2021 bull run.
“Do people want Bitcoin on Ethereum?” asked Thesis’ Luongo. “Obviously, I bet they will, but they might not.”
Tim Craig is DL News DeFi correspondent based in Edinburgh. Feel free to share your tips with us at tim@dlnews.com.
