The controversy surrounding WBTC appears to be having real impact.
Following Sky Protocol (formerly MakerDAO)’s approval of a proposal to divest $200 million of WBTC collateral exposure (to be implemented from October 3), the community of another major lending protocol, Aave, also launched a proposal today to completely divest WBTC. Measures include reducing the WBTC LTV on all Aave V3 instances (Ethereum, Arbitrum, Avalanche, Harmony, Optimism, and Polygon) to 0, preventing additional lending with WBTC collateral without affecting the positions of existing users.
Why is WBTC unpopular?
WBTC, or Wrapped Bitcoin, is a type of wrapped Bitcoin that is pegged to Bitcoin at a 1:1 ratio. It is also one of the earliest wrapped Bitcoins. According to data, the current number of WBTC is approximately 152,000, with a value of approximately US$9.7 billion.
WBTC does not have the decentralized nature of Bitcoin. The project was previously created by BitGo, and when a user wishes to create WBTC, they send BTC to a custodial address, and BitGo will issue an equal amount of WBTC tokens on the Ethereum blockchain. When a user wishes to redeem BTC, they can do so by sending WBTC back to the same custodial address.
WBTC has actually promoted the adoption of Bitcoin in the DeFi field, introducing Bitcoin into the Ethereum ecosystem, with more than 40% of Bitcoin used for lending, becoming an important asset in the decentralized lending market. Major lending platforms including Maker (now renamed Sky) and Aave support WBTC as collateral assets. In the past few years, tens of billions of dollars worth of Bitcoin have flowed into the DeFi ecosystem.
However, this pattern has now been broken. On August 11 this year, BitGo announced a unique partnership and joint venture with BiT Global, and its WBTC business will be transformed into the world's first cross-jurisdictional and cross-institutional custody business. This seems to be an ordinary business development. However, due to the connection between the affiliated company BiT Global and Justin Sun, some users have been uneasy. Some people speculate that Justin Sun will control the multi-signature of Bitcoins held by BitGo, and that these held Bitcoins will be misappropriated. For a time, rumors that "Justin Sun will control WBTC" were spread.
Although BitGo and Justin Sun have since clarified and explained this, the dominoes have already been touched.
Maker proposal passed, will abandon WBTC
Soon after, Block Analitica Labs, the risk management team of Maker DAO, proposed in Maker’s governance forum to prevent new borrowing against WBTC collateral. “Overall, we find that Justin Sun role as a controlling shareholder in the newly formed WBTC venture presents an unacceptable risk,” BA Labs co-founder Monetsupply wrote at the time.
The core elements of the proposal include:
- The core vault reduced WBTC-A DC-IAM (maximum collateral amount) from 500 million to 0;
- WBTC-B DC-IAM (maximum collateral amount) reduced from 250 million to 0;
- WBTC-C DC-IAM (maximum collateral amount) reduced from 500 million to 0;
- Disable WBTC lending in SparkLend;
- Reduce WBTC LTV from 74% to 0%.
The proposal stated that due to the potential risks of changes in WBTC custody rights, the integration of WBTC collateral on Maker and SparkLend would bring higher risks, and the above actions were taken to limit the growth of WBTC exposure.
On September 20, Sky (MakerDAO) passed a proposal to divest $200 million of WBTC collateral asset exposure, which is divided into five stages. The first step will be implemented on October 3 and the final stage will end on November 28.
Is Aave also going to abandon WBTC?
On the same day, Aave community member LlamaRisk initiated a proposal to divest WBTC. The specific proposals include: reducing the WBTC LTV on all V3 instances (Ethereum, Arbitrum, Avalanche, Harmony, Optimism and Polygon) to 0, preventing additional borrowing with WBTC collateral without affecting the positions of existing users; reducing the supply and borrowing limits to 5-10% higher than the current utilization rate, limiting the additional risks of WBTC while allowing users to flexibly adjust their positions.
WBTC Competitors Are Already Taking Action
Just as WBTC was embroiled in controversy, on August 14, Coinbase announced that it would launch its own wrapped Bitcoin cbBTC. On September 14, cbBTC was officially launched on Ethereum and Base chains. The Aave community then proposed to launch cbBTC in the v3 version and planned to deploy it on the Base chain and Ethereum mainnet. As of September 19, the circulating supply of cbBTC reached 1,969 pieces, with a market value of $124 million. However, some people do not like cbBTC, believing that cbBTC is more centralized, "cbBTC can be frozen, but WBTC cannot."
WBTC has taken a step forward in development, and we will have to continue to observe what the future holds. However, judging from the number of WBTC, there has been no significant impact so far.
