Written by Chaos Labs
Compiled by: TechFlow
It’s been a week since BitGo announced that it would transfer management of WBTC to a new joint venture with BiT Global within 60 days. Since then, a lot has happened:
- BitGo announced its preliminary WBTC custody plan and provided clarifications following widespread concerns expressed in the industry.
- MakerDAO has decided to suspend new lending for WBTC.
- Coinbase announced the launch of cbBTC, a competing WBTC product.
Let’s take a deeper look at what’s happening, why it matters, and the potential risks.
First, some context: WBTC is an important bridge between the Bitcoin and DeFi ecosystems.
BitGo has been the primary custodian and token issuer of WBTC since 2019.
Supply: 154.4K BTC
Value: $9.2 billion
WBTC is widely used as collateral in major DeFi protocols.
WBTC accounts for about 15% of total aave capital
Aave V3 (Ethereum):
Supply: $2.2B, Borrowed: $900M - Aave V3 (Arbitrum):
Supply: $213 million, Loans: $90 million
→ Any changes to WBTC could have a significant impact on the stability of DeFi.
Trigger: BitGo announced plans to transfer legal custody of WBTC to a joint venture with BiT Global, with partners including JustinSunTron and the TronDAO ecosystem.
The announcement caused immediate alarm in the crypto community. Why?
Let’s analyze the original proposal and the concerns it raised.
BitGo’s original custody proposal (August 9, 2024):
- 3 jurisdictions: United States, Hong Kong, Singapore
- 2 institutions: BitGo Inc. and BiT Global
- 2-of-3 Cold Storage Multi-Signature
- BitGo Inc.: 1 key, BiT Global: 2 keys
BitGo Moves WBTC Custody to Multiple Jurisdictions to Accelerate Global Expansion Plans
What are the main concerns?
BiT Global, which is associated with the TronDAO ecosystem, will control two keys in a multi-signature setup. This introduces several risks.
Risk #1: Centralization
Having one entity (BiT Global) control two keys actually centralizes the power of WBTC.
This goes against the decentralization principle that underpins DeFi.
Risk #2: Regulatory uncertainty
Justin Sun’s status in the crypto world and potential regulatory issues could put WBTC at risk.
If BiT Global encounters regulatory action, it could jeopardize the entire WBTC ecosystem.
Risk #3: Trust Issues
The crypto community’s trust in WBTC is critical to its continued use in DeFi.
Being associated with a controversial figure could erode that trust, potentially leading to a massive exodus of WBTC.
These concerns are not limited to theory. We are already seeing real-world impacts.
chaos_labs has made modest recommendations to reduce risk exposure while we obtain more information.
- Aave
- Additional proposals for partnership agreements with Jupiter, GMX, Radiant, Venus, Seamless, Zerolend, and more will be forthcoming soon.
Note that the secondary impact of delisting an asset with such a wide distribution cannot be underestimated, so we take a modest approach: measure once more, intend to cut only once.
MakerDAO voted to stop new lending of WBTC.
More than $30 million worth of WBTC was destroyed in one week.
Interest in competing products like tBTC and Coinbase’s new product, cbBTC, has increased.
In response to strong community response, BitGo revised its proposal (August 14, 2024).
Let's take a look at the details of the new model.
BitGo’s Revised Custody Model (August 14, 2024):
- Still 3 jurisdictions: US, Hong Kong, Singapore
- There are currently three organizations: (1) BitGo Inc., (2) BiT Global, and (3) BitGo Singapore Ltd.
- 2-of-3 Cold Storage Multi-Signature
- Each institution maintains a key at a different location.
Key improvement: Introducing BitGo Singapore Ltd. as the third key holder.
This eliminates the situation where one institution holds multiple keys, addressing immediate centralization concerns.
But does this solve all the problems? Not entirely.
Several unanswered questions and potential risks remain.
Unanswered Question #1: The Role of BiT Global
Although they no longer hold both keys, BiT Global still plays an important role in the custody of WBTC.
What assurances do we have about their operations and intentions?
Unanswered Question #2: Regulatory Compliance
What is the status of each entity (particularly BiT Global and BitGo Singapore) in terms of regulatory compliance?
Are they subject to strict supervision in their respective jurisdictions?
Unanswered Question #3: Auditing and Transparency
How will the community and DeFi projects audit this new setup?
What measures are in place to ensure ongoing transparency of custody arrangements?
Unanswered Question #4: Emergency Procedures
In the event of a security breach or regulatory action against a key holder, what is the process for ensuring the security of the wrapped BTC?
The WBTC situation highlights a key aspect of DeFi: the delicate balance between centralized custody and decentralized finance.
This is a reminder that even in DeFi, we often rely on centralized entities as a fulcrum of trust.
BitGo’s proposal has broader implications for the DeFi ecosystem:
- May accelerate the development of more decentralized BTC wrapper solutions.
- May lead to greater community scrutiny of custody arrangements for all packaged assets.
- May prompt DeFi protocols to diversify their BTC-based collateral options.
Looking ahead, the crypto community will be watching closely:
- How will BitGo implement and demonstrate the effectiveness of this new custody model?
- Will confidence in WBTC ever fully return, or will we see a shift toward alternative solutions?
- How will major DeFi protocols adjust their risk models in response to this event?
In summary, while BitGo deserves praise for its responsiveness to community feedback, the WBTC situation is a reminder that custody is critical in the world of crypto and DeFi.
Security, transparency, and decentralization of asset custody can make or break the entire ecosystem.
As users, developers, and investors in the DeFi space, it is our responsibility to remain vigilant, ask tough questions, and hold projects accountable. The future of finance is being built on these foundations.
What do you think about the WBTC situation? How do you think this will affect the future of BTC in DeFi?
