What's bubbling today:

• MakerDAO votes to off board WBTC
• Aave reviews BitGo
• Coinbase announces cbBTC
• dlcBTC and tBTC grasp at market share
• Babylon announces Mainnet Launch Phase 1

Is WBTC Compromised?

Last week, BitGo announced that they were transitioning to the “world’s first multi-jurisdictional and multi-institutional custody via a unique partnership and joint-venture with BiT Global.”

Normally this would just be a minor PR announcement, but tucked away halfway into their blog post, BitGo casually dropped that this move was "a strategic partnership between BitGo, Justin Sun, and the Tron ecosystem.”

Uh Oh.

His Excellency is one of the most controversial figures in crypto. His reputation precedes him... Cunning whale, incessant scammer, Asian crypto king, grifter; ask 10 people and you'll get ten different opinions.

The BitGo partnership would have Justin take ownership of Ethereum's largest ERC20 store of value pegged 1:1 to Bitcoin. BitGo claimed that the new custody setup remain secure, but several major players in DeFi took umbrage, going nuclear by removing WBTC from their protocols.

MakerDAO fires the first shot

Monet Supply, Co-founder and Principal Risk Analyst at BA Labs Pte Ltd (dba Block Analitica) immediately took to the MakerDAO forums and proposed to limit all new WBTC debt, preventing new DAI loans, and also recommended off boarding WBTC in the future.

Monet said that the addition of Justin was a massive red flag and would potentially threaten the operational processes and transparency of WBTC.

Justin previously had acquired TUSD, which subsequently saw the management team resign, real time proof of reserves stopped and several depegs occur due to interruptions in redemption service.

Furthermore, he said that other projects Sun controlled showed "“worrying signs of possible misappropriation, such as the substitution of Huobi’s USDT reserves with stUSDT, a Sun controlled RWA project that purports to hold a reserve of US treasury bills but has not provided clear audits or evidence that the backing exists.”

He finished by writing Sun's involvement “presents an unacceptable level of risk” to MakerDAO.

And so.. WBTC should be removed from the platform.

In response, BitGo's CEO Mike Belshe wrote a long reply writing:

“This seems to be more a reaction to the Justin Sun name than to facts.”

Continuing he said:

“The underlying security is the same as what you have today, with https://wbtc.network 30 continuing to provide near-real-time proof of reserves. If that ever changes, you’ll know in real time. Further, BitGo is still co-signing all transactions using the same technology it always had; BitGo simply will not sign a transaction that does not have the corresponding mint (BTC deposit) or burn (token ownership).”

This leaves the remaining risk of the underlying treasury itself, with keys now being separated across parties in a way they never were before. It is true that if BiTGlobal is fully compromised (just like if BitGo had ever been compromised) the treasury could be at risk; however this is being safeguarded by a regulated entity and again the same cold-storage technology with keys offline.

WBTC founder weremeow also joined the conversation on X.

He refrained from an ultimate judgment on the situation, but asked 5 questions on its future operations:

1. Who exactly is part of the multisig that holds the BTC?
2. Will the BTC ever be used for any purpose?
3. What’s the upside for either party, is it for TRON adoption of WBTC? If so, surely there is no need to acquire the entire setup. 
4. How exactly does going multi jurisdiction help?
5. Is it possible to get a very respected independent party to be in the multisigning group to act as both communication and signer?

Belshe invited weremeow to an open forum to be scheduled for next week, but WBTC's reputation was tainted in the MakerDAO leadership community.

On August 15, MakerDAO passed the proposal to limit WBTC debt, and further plans to off board the wrapped Bitcoin token in the future.

LTV was reduced to 0%, meaning that all new WBTC deposits are now blocked. If you have WBTC collateralizing a position on Maker and the price of BTC drops, you cannot add more collateral to improve your health factor.

Aave the Kingmaker

Unchained reported the same day that Aave was also reviewing WBTC, but they were taking a conservative approach and were not rushing to judgement.

While WBTC only represents 3% of all MakerDAO debt, for Aave it constitutes 15% of all total deposits. Aave holds 41,000 WBTC ($2.46B), which is 27% of its total supply. If Aave follows MakerDAO's path, WBTC will effectively be delisted from DeFi.

In an interview with Leviathan News today, Marc Zeller said that several members of the Aave risk team including Llama Risk, ACI, and others had already entered into an NDA with BitGo and were actively reviewing the new operational structure.

Only after a complete and thorough legal review would Aave propose reccomendations for WBTC if they find red flags.

After the Aave news, Wintermute transferred $339m WBTC to Binance, potentially unwrapping it. They now hold only $9m worth of WBTC.

The Alternatives

WBTC currently enjoys a 95%+ market share of wrapped Bitcoin across all EVM networks. Their dominance is unmatched, partly due to the poor business economics.

BitGo only earns fees when WBTC is minted or unwrapped, with fees ranging from .1-.25%. Since 2022, the velocity of mints and total supply cratered. As BitGo is prevented from rehypothecating custodied assets, we can assume their revenues are in the gutter.

One day after BitGo's announcement, Coinbase tweeted "cbBTC" alluding to a new wrapped Bitcoin varient they would issue using Coinbase Custody. While not much is known about the new product, Dan Elitzer guessed that it would be issued on Base with 0 fees, essentially undercutting all other wrapped Bitcoin issuers and potentially setting themselves up to become the new market leader.

Threshold Network's tBTC is the fastest growing competitor to WBTC currently.

Threshold's tBTC is a decentralized version of WBTC, that uses a system of signers and cryptographic proofs to ensure security.

Another variant is dlcBTC, a self-custodial wrapped Bitcoin token that uses Discreet Log Contracts (DLCs) to lock Bitcoin in a multisig UTXO, where users retain one key and a network of attestors holds the other. This approach allows Bitcoin holders to maintain full ownership of their assets.

Additionally, wrapped bitcoin variants have been teased or announced by Telegram's TON, SolvProtocol, pStake, and Frax.

Babylon Mainnet Launch Phase 1 Announced

Babylon's Bitcoin restaking potentially will be a major competitor to all the previously named wrapped variants.

Babylon is launching its Bitcoin staking protocol in three phases, with Phase-1 set to begin on August 16, 2024. This initial phase, called "Bitcoin Locking," allows Bitcoin holders to initiate the staking process by submitting transactions that lock their bitcoins in a secure, self-custodial staking script on the Bitcoin blockchain. Stakers can delegate their Proof-of-Stake (PoS) voting power to finality providers while retaining ownership of their assets. The launch includes key features such as a maximum staking time of approximately 15 months, on-demand unbonding, and an initial total staking cap of 1,000 bitcoins.

Phase-1 introduces a point system to measure staker activities, as there are no direct staking rewards yet. Points are allocated proportionally among active stakes, with both stakers and finality providers earning points based on their contributions. The system includes limits per staking transaction to encourage broad participation, and a covenant committee using a 6-out-of-9 multi-signature scheme to secure the unbonding process. Babylon offers multiple ways to stake, including an official web application, third-party services, and CLI tools.

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