- DeFi protocols are dropping Wrapped Bitcoin after a controversial partnership.
- That presents an opportunity for competitors to break into the market.
Wrapped Bitcoin’s ownership drama is reigniting 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 crypto custody platform BiT Global and Tron founder Justin Sun.
Now competitors are circling after the move caused concern among some of DeFi’s biggest protocols.
Lending protocol MakerDAO has voted to stop new users from borrowing against WBTC. Other top lending protocol Aave is also considering limiting its exposure.
It’s a blow to BitGo, which issues just over $9 billion of Bitcoin-backed WBTC on Ethereum, Tron, and several other blockchains.
Competitors say it presents an opening in the market for them.
“[It’s] maybe the biggest untapped opportunity in DeFi right now,” Jacob Phillips, co-founder of Lombard Finance, a firm that plans to issue its own DeFi compatible version of Bitcoin, told DL News.
“Bitcoin is this big asset everybody loves. We should find a way to get it more adopted,” Phillips said. “The only thing that’s been missing, in my mind, is the catalyst.”
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Lombard, as well as several other competitors, are betting that the shift away from WBTC, combined with other innovations, could be that long-awaited catalyst.
The reward for any asset that can supplant WBTC, isn’t limited to its current market value.
Letting Bitcoin users leverage their holdings has the potential to inject a big portion of the asset’s $1.2 trillion market value into DeFi, giving the sector a much needed capital boost after years of decline.
Decentralised alternatives
WBTC’s change in ownership isn’t the only point of concern, though.
As Bitcoin is technically incompatible with DeFi on Ethereum, investors and traders turn to WBTC as a workaround.
But that alternative isn’t decentralised like Bitcoin itself, fuelling concerns about who holds control and exerts influence over it.
WBTC’s issuance and workings are dependent on BitGo, the ideological opposite of the permissionless decentralised financial infrastructure many in crypto are building.
“It’s the opposite of the plan,” Daniel Fogg, CEO of Rootstock Labs, the company behind the Rootstock Bitcoin sidechain, told DL News.
“You’re talking about institutions, opaque processes, individuals making decisions for their own good, for their own needs,” Fogg said. “That is not the plan, that is not what we are trying to build here. That’s a reversion to the norm.”
In contrast, many WBTC competitors position themselves as being decentralised — not relying on a single entity to issue or custody their Bitcoin equivalent tokens.
This, they say, makes them more secure, and more in line with crypto’s underlying ideology.
BitGo is making efforts to reassure users that despite having no claim to decentralisation, its custody methods are still secure.
In a recent X Spaces, CEO Mike Belshe reiterated that even after the change in ownership, 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 funds.
Still, custodial issuers like WBTC have encountered trouble in other ways.
In 2021, Ren, the company that issues renBTC, a WBTC rival using a similar custodial model, was acquired by Sam Bankman-Fried’s trading firm Alameda Research.
When Bankman-Fried’s fraud was exposed in late 2022, Ren lost its funding and chose to wind down renBTC.
Routes to adoption
Simply creating a more decentralised product may not be enough.
“A thing that works well, but decentralised, is not enough of a value proposition for most users,” Matt Luongo, CEO of Thesis, which issues WBTC competitor tBTC, told DL News.
For any WBTC alternative to have a chance at competing, users need to be able to use it in their favourite DeFi protocols.
To that end, Luongo said he’s 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 said he’s taking a similar tack with RBTC, the Rootstock network’s own DeFi compatible version of Bitcoin. “We’re working through as many institutions as we can talk to, as many protocols as we can get onto Rootstock as possible,” he said.
Lombard’s Phillips, though, said he believes the key to adoption is Babylon — a protocol that will let users stake Bitcoin to secure other blockchain networks.
“If you’ve been following all the Eigenlayer fun, all of this is about 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 to launch on Ethereum. Over the past year, its deposits ballooned to $12 billion, making it the second-biggest DeFi protocol behind liquid staking protocol Lido.
Some previous attempts at bringing Bitcoin into DeFi have ended badly.
In 2021, Badger DAO, a cooperative that runs a protocol enabling users to leverage Bitcoin as collateral across DeFi, suffered a $120 million hack.
The Badger DAO website was compromised, letting thieves install malicious software that stole user’s assets after they used the protocol.
There’s also the possibility that DeFi users become less interested in using Bitcoin in DeFi — or at least on Ethereum.
Despite Bitcoin’s price hitting an all-time high in March, the amount of WBTC in circulation is still well below the level it reached during the 2021 bull run.
“Do people want Bitcoin on Ethereum?” Thesis’ Luongo said. “Obviously I’ve taken the bet that they will, but they might not.”
Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.