What happened to wBTC?

January 20, 2023 Stan

GM. There’s been a lot of fear around wrap, and I’m not talking about those weird burrito looking things. Let’s talk about the mechanics of WBTC and if we should be worried.

Today We’ll Be Covering:

WBTC Depegging. WBTC should be 1:1 with BTC. What happened this week?
BlockFi for Bankruptcy. It was a matter of time with FTX gone.
Around the Web. An interview with SBF, FTM’s financials, Metamask collecting IP addresses, and more.

Let’s dive in!

📈 THE MARKETS

Total Crypto Market Cap: $889B
BTC Price: $16,878.46 (+4.4%, 7 days)
ETH Price: $1,268.72 (+11.8%, 7 days)
TVL in DeFi: $42.35B (+1.64%, 7days)
Fear & Greed: 29 (FEAR)

“The Chinese do not have a word for crisis. What they do have, however, is a two-word idiom: crisis equals danger and opportunity.” Bennett Goodspeed

Understanding the WBTC Depegging

WBTC came off its peg a few days ago, and people have started to panic.

Remember, 1 WBTC should always = 1 BTC.

So, this seems like a great opportunity to explain what exactly happened as well as the basics of what it means to wrap a token.

What is WBTC? Wrapped Bitcoin. Essentially, wrapping a coin allows for it to be used on a non-native blockchain.

For example, Bitcoin wasn’t designed to be transacted on DeFi. However, you can “wrap” your Bitcoin into WBTC and then use it on the Ethereum chain. Wrapping a coin gives it additional utility.

Why would anyone do this? Money, baby! People want to put their BTC to work to earn yield.

Option 1: Bitcoin remain in cold storage. Earn 0%.
Option 2: Bitcoin are put into CeFi like Celsius or BlockFi. Get wrecked.
Option 3: Bitcoin are turned into WBTC and used in DeFi. For example, you can put WBTC – ETH – USDT on Tripool on Curve and earn 6.5%.

There are different ways to wrap a coin. For WBTC, a centralized entity called BitGo handles the wrapping.

For every WBTC in circulation, there’s a BTC equivalent amount that BitGo hold in cold storage.

Here’s how it works:

One of BitGo’s merchants (around 60 partners) sends their BTC to BitGo to hold in custody.
In return, BitGo allows them to mint WBTC.
Those merchants can also burn BitGo’s WBTC in circulation.
Now, you can use WBTC on DeFi.

Also, BitGo has a Proof of Reserve available for anyone to check.

Source: WBTC Network

There shouldn’t be any issues if it’s all on-chain, right?

Well…

On November 7, a few days before FTX collapsed, WBTC started to de-peg from BTC.
On November 25, it reached a low of 0.98 BTC.

You might be wondering, “What does FTX have to do with WBTC? WHEN WILL THE CONTAGION STOP?!?”

The answer is that FTX operated a large WBTC/BTC marketplace – this disappeared overnight when FTX shut down.

Alameda Research was the largest WBTC minter by far.

Source: Dune

FUD starts to take over the crypto Twitter sphere, especially around BitGo also being in the Lending Game.

BitGo’s loan book keeps growing and has experienced zero losses of customer funds.

We continue to operate as a leader in lending and borrowing digital assets.

Our lending is founded in:
–Reduced risk
–Stable rates
–Flexible deal structure

Learn more: https://t.co/8o7Vw7ng3D pic.twitter.com/PDZnKthzbT

— BitGo (@BitGo) November 7, 2022

If BitGo becomes insolvent, what happens to all their BTC in custody?

Chen Fang, BitGo’s COO, has the answer.

Every WBTC is 1:1 backed with a BTC, that is held in segregated, insured, cold storage BitGo wallets — real custody.

Simply put, if you hold 1 WBTC, you always will be able to redeem exactly 1 BTC (less trade fees) via one of the merchants in the WBTC network. Period.

— 🍟 Chen Fang (@chenbfang) November 24, 2022

This is, in fact, true. You can check all transactions involving WBTC on-chain.

What about Alameda? Well, they don’t really matter in this. WBTC is double-entry accounting. It’s not possible to claim on both the assets and liabilities.

So, why was WBTC still depegged from BTC?

BitGo takes time (a really long time) to burn tokens effectively. It might take as long as 24 hours. (That’s long in Crypto Twitter time)

But Alameda’s bankruptcy doesn’t help much as there are now fewer merchants to assist with the burn process.

With burns taking hours > days from market makers, and liquidations onchain happening nearly instantly, it becomes a risk vector.

On top of this, many of the most active $wBTC market makers like @AlamedaResearch are now bankrupt. Now less active MMs to pick up the excess slack

— Small Cap Scientist 👨‍🔬🧪🥼 (@SmallCapScience) November 25, 2022

What’s the deal with WETH? There aren’t any issues. We’re in a bear market right now and people are feeling bored over on Crypto Twitter. So, some people are trolling that WETH is having issues.

WETH is safe because it’s all handled through smart contracts.

In conclusion:

WBTC is not in danger for now.
Assets are fully backed.
All transactions can be verified on-chain.

BlockFi Files for Bankruptcy

BlockFi halted all withdrawals two weeks ago due to continuing confusion around the FTX situation. On Monday, they filed for Chapter 11 bankruptcy.

Here’s what’s going on.

What’s BlockFi? It’s a centralized finance platform where users could earn yield by depositing their crypto assets. BlockFi also had their own a credit card which, when used to pay, would reward users with Bitcoin.

You deposited your Bitcoin, they lent it out, and you earned around ~6% APY.

What Went Wrong?

BlockFi has already sustained losses earlier this year from 3AC exposure. There were around $80MM in losses.
FTX comes in and offers to rescue them by extending a $250MM credit facility.

Well, what happens when your sugar daddy goes bankrupt? With FTX collapsing, the writing was on the wall for BlockFi.

The Numbers:

BlockFi has a total of $256.9MM cash on hand.
It has liabilities between $1B to $10B (oh wow, thanks for narrowing it down).
BlockFi has 100,000+ creditors.
In February 2021, BlockFi raised a Series D round that valued them at over $3B.

Final Note:

You don’t have to earn yield on everything. My Bitcoin sits on a Ledger earning 0% yield. It was tempting to put it on CeFi earlier this year, but it felt like I was violating the entire reason why I wanted Crypto in the first place.

DeFi Bites

SBF Talks. Tiffany Fong interviews SBF. What’s great about this interview is she grills him harder than any mainstream journalists have.
FTM financials. Andre Cronje shared a peek inside FTM’s financials. They have a runway of ~30 years without having to sell FTM tokens.
ConsenSys got tangled in a privacy scandal. Their new privacy policy states that they’re collecting IP addresses, wallet addresses, etc. of MetaMask users relying on Infura.
Alexey Pertsev, Tornado Cash developer, will be detained until 20th February 2022. Dutch authorities determined this by claiming flight risk. The proceedings have also given some insight into how prosecution is viewing the case.
Horizon Labs, the team behind Apecoin staking, prohibited access to their staking feature for people from several countries, USA and Canada including. This geoblocking applies only to the frontend developed by the team, third-party frontends can still provide access to staking by directly connecting to smart contracts.
Paradigm, a major crypto VC firm, is accused of copying open-source code. Allegedly, they’ve copied code from Akula, a Rust implementation of OpenEthereum.
Curve, the second largest DEX, released its whitepaper for its upcoming stablecoin, crvUSD. It will use a novel lending-liquidating AMM algorithm, or LLAMMA, to protect borrowers whose collateral drops below the liquidation price.
RBI, the central bank of India, started pilot testing its CBDC, Digital Rupee. There are significant concerns around the potential totalitarian implications of CBDCs.
Terraform Labs, the team behind the LUNA collapse, launched Enterprise, a platform for building DAOs on its blockchain. The platform will allow users to create multi-signature wallets, new tokens, and NFT communities on Terra’s blockchain with only a handful of clicks.