Over the past 24 hours, I have been researching wBTC. My recommendation is to temporarily avoid any wrapped assets.
(Translator’s note: Wrapped assets, also known as wrapped tokens, are tokenized versions of another cryptocurrency. They are pegged to the value of a specific asset and typically support redemption (unwrapping) of the underlying asset at any time. The asset represented by a wrapped token is usually not issued on the blockchain where the wrapped token exists.) In the following thread, I will share my own concerns about wrapped assets, while also hoping to address some of the confusion surrounding asset custody and liquidity. I am not an expert on wBTC or wrapped assets, so please take this with a grain of salt. I am simply sharing my recent findings, and I welcome any corrections. Speaking of my research, it all started after the wBTC/BTC depeg. I noticed that they had depegged by 2%, which is an unusual phenomenon. This trading pair is typically used by whales for arbitrage at no cost. Why is a depeg occurring now? The wBTC website and its proof of assets show that it is overcollateralized. So where is the problem? Let us take a deeper look at asset custody below. Asset Custody When researching wBTC, you will encounter two roles: Custodian — holds the BTC that backs the value of wBTC and possesses the keys to mint tokens; Merchant — the primary party that sends or receives BTC to mint or burn wBTC. In this case, BitGo is the custodian, while the merchants consist of more than 60 partners. While investigating BitGo, the first thing I saw was a tweet from Mike Belshe (CEO of BitGo). Although he stated that BitGo has “no exposure to Alameda or FTX,” they are now busy raising capital, which is surprising! I initially wanted to send them a direct message to inquire about the situation, but unfortunately, they have disabled direct messages. The investigation into BitGo is because they hold custody of the BTC. It turns out that they launched a $150 million lending business for institutional clients as early as 2020. Although they claim to have zero exposure to FTX or Alameda, this does not mean they have not provided loans to other companies, such as those that now appear to be insolvent.Just four days after the FTX collapse, they sought funding at a $1.2 billion valuation, which looks like a red flag. They claimed they did not need the money, but if that were true, going out to raise funds now seems like a poor move.
My concern is that if BitGo becomes insolvent, wBTC holders may not be treated as BitGo creditors. Of course, this is only my own opinion. They custody billions of dollars in BTC. If BitGo or the merchants were to go bankrupt, what would happen? Market Maker Risks In addition to the custodian BitGo, there are merchants responsible for burning and minting wBTC for clients, and they are usually market makers. Currently, more than 60 partners have the ability to mint and burn wBTC. These partners include 3AC, Nexo, Ren Protocol, Crypto.com, Coinlist, and other institutions. As you know, some of these institutions have already filed for bankruptcy, while others are subject to widespread speculation. Alameda is the only institution that has been removed from the list. (Translator’s note: Since Alameda’s bankruptcy is already a foregone conclusion, its removal from the partner list is beyond doubt.) Please remember that these are only merchants that burn and mint wBTC, not custodians like BitGo. This means they can burn and mint, but they may also hold extremely small amounts of native BTC, if any. I believe the problem here will be bankruptcy filings and possible asset recovery. Since the FTX collapse, multiple issuers have been struggling to address the burning and minting issues. In a healthy market, market makers would mint and burn tokens fast enough to keep the wBTC-to-BTC exchange rate at 1:1. However, the current depeg makes it clear that market makers are not doing their job. wBTC Minted by FTX Another point highlighted by Sheriff is that FTX was able to mint wBTC directly on its own exchange. With Alameda removed from the partner list, this is also a matter of concern. FTX US stated in its documentation that most customer assets are held in BitGo Trust and are backed by a $100 million insurance policy.Ideally, I would like to verify that all 235,000 BTC in “custody” are held in wallets controlled by BitGo. However, on-chain asset proofs are only helpful; we still cannot determine whether these assets are tied to legal proceedings.
On-chain analysts should further analyze their custody wallets. If Alameda issued these wBTC and they ultimately ended up in BitGo’s custody, then these BTC are ultimately held by FTX US creditors, not backing wBTC. Is that not the case? In other words, once these underlying BTC go bankrupt along with Alameda, wBTC holders may ultimately be responsible for these debts. The Plight of Ren Protocol Another user also mentioned Ren Protocol. If you are not familiar with this protocol, you must have heard of the REN token and renBTC. REN is a native BTC bridge that has recently appeared in headlines frequently due to its involvement in the FTX collapse. REN is actually also owned by Alameda. Because of this relationship with Alameda, the development team’s funds can only last until the end of this year. The team is currently raising new funds while accelerating plans for the new Ren 2.0 bridge, and Ren v1 will be decommissioned after 30 days. A pile of tokens on Solana whose value was supported by Alameda have already fallen off their pegs. However, according to public information from Ren Protocol, their assets are currently properly collateralized. Hopefully they will be fine. If the above assets are not burned or handled within the next 30 days, they will face significant risks. Ren Protocol’s current goal is to break away from Alameda and transition to Ren 2.0, but before that, they must raise sufficient funds to sustain operations. The liquidity of renBTC is also a major issue, as some addresses on-chain have been continuously swapping ETH > wBTC > renBTC > native BTC. This is consuming renBTC’s bridged assets, but the team has stated that they will not replenish these assets. The hackers still have more than eight figures in funds, and they are trying to transfer these assets to the bridge without liquidity.If the hackers are FTX insiders, would they intensify the liquidity squeeze knowing that wrapped assets would be affected? With that in mind, the image of Alameda filing for Chapter 11 bankruptcy protection comes to mind again. I am not sure whether there is a clear analogous case on Ren 1.0 to guide our next steps. For safety, it is better not to trust any third party. From REN’s perspective, bridge liquidity and the FTX hacker are the two main risk factors I have been monitoring. I have not used Ren Protocol before, so any friends familiar with Ren are welcome to provide further input. Many people are shorting ETH in the expectation that the FTX hacker will act, but due to liquidity constraints, they will largely remain stuck in ETH. As the hacker continues to seek a way to convert back to native BTC, this could cause additional problems for wrapped assets. My advice is as follows: Hold native assets as much as possible and do not trust any third party. For now, I will sell all wrapped assets such as renBTC, wBTC, and wETH until I confirm they are safe. If you are stuck in wBTC, I recommend using THOR or Kraken to convert it into native BTC to ensure safety. This is indeed troublesome. If wBTC has problems, centralized exchanges and oracles will be affected, and the wBTC you hold will become bad debt. If these assets cannot be redeemed 1:1 and become severely depegged, DeFi protocols holding wrapped assets may also be adversely affected. Therefore, please pay attention to the security of these protocols. Recently, the utilization rate of wBTC on Aave has risen significantly. This may be due to Avraham Eisenberg’s attack on CRV, or users shorting wBTC. (Translator’s note: Avraham Eisenberg is the trader who extracted $100 million from Mango Market last time. In this attack, he collateralized 63.6 million USDC and borrowed 92 million CRV to go short. The attack ultimately failed and he was liquidated.) So far, this largely feels like a market-making failure, which is why wBTC’s price has continued to trade at a negative premium of about 1% rather than at a full 1:1 conversion.
Conclusion
Personally, I believe that where there is smoke, there is fire, especially in the cryptocurrency space. I genuinely suspect that the vast majority of wBTC and renBTC are on the brink of danger. At all times, remember: no private key, no assets! I hope everyone pays attention to asset safety, and I also hope this article will spark new discoveries and discussions. Finally, I strongly urge third parties to be transparent and open! Disclaimer: This article only represents the author’s personal views and opinions, and does not represent the position or stance of this website. All content and opinions are for reference only and do not constitute investment advice. Investors should make their own decisions and transactions. The author and this website shall not bear any responsibility for direct or indirect losses arising from investors’ transactions. Disclaimer: This article is solely for providing market information. All content and opinions are for reference only and do not constitute investment advice, nor do they represent the position or stance of this website. Investors should make their own decisions and transactions. The author and this website shall not bear any responsibility for direct or indirect losses arising from investors’ transactions.
