A short and cryptic tweet sparked a frenzy in X circles late Tuesday night when leading global exchange Coinbase hinted at plans to enter the wrapped Bitcoin market. The initial speculation was quickly validated by senior employees who corroborated their excitement for further integration of the Bitcoin asset into the company’s on-chain ecosystem.
Other observers have highlighted the strategic nature of the decision following a tumultuous week for current market favorite, BitGo’s wBTC. The latter has long been regarded as the easiest and most popular method for Bitcoin investors to gain exposure to DeFi products.
With the industry’s attention on Bitcoin-native alternatives, the announcement is seen by many as a decisive move toward preserving Ethereum’s dominance as the de-facto Bitcoin DeFi layer.
The Origins Of Wrapped Bitcoin
To better understand the emergence and interest in wrapped Bitcoin products, one needs to rewind the clock to 2018 when the idea of DeFi was just starting to take off on Ethereum.
Looking to attract liquidity to their protocols, a collection of projects decided to set their focus on the most liquid asset on the market: Bitcoin. Loi Luu, one of wBTC’s original contributors, shared his perspective on the ordeal:
“We realized that to really help DeFi grow, we needed to bring Bitcoin liquidity into the ecosystem.”
wBTC’s TVL (Total Value Locked) over the years
As the old saying goes, the rest is history. In the middle of 2020, “DeFi summer” sparked a speculative craze that would lead the total value of deposits into wBTC north of $10 billion dollars. Today, a little over 150,000 bitcoins remain locked into its Ethereum contract, under institutional provider BitGo’s custody.
This custody, and the responsibility it necessitates, is the subject of the current controversy surrounding wBTC. Late last week, for example, BitGo revealed a new strategic partnership with Hong Kong-based BiT Global, looking to extend the wBTC product to a “multi-jurisdictional custody” setup. Behind BiT Global is infamous cryptocurrency founder Justin Sun.
The announcement saw blowback from users who claim the introduction of new actors into the custody arrangement is a miscalculated risk.
Dominos started falling the following day as community members from popular algorithmic stablecoin Maker began advocating for wBTC to be removed from the protocol’s collateral assets list as a safety measure. On Tuesday, BitGo founder Mike Belshe and representatives from Bit Global defended the decision on a public X Space.
While concerns voiced on social media have yet to put a material dent into wBTC’s deposits, they have opened the door for challengers. Despite BitGo’s long tenure in the space, it’s safe to wonder whether they’ve exhausted market participant’s confidence.
Earlier this year, a lawsuit from the company, spawned by a failed acquisition from Galaxy Digital, resurfaced as Delaware’s Supreme Court ruled the case should move forward.
A Challenge For Programmable Bitcoin Layers
For Coinbase, this foray into the wrapped asset business might be more than sheer opportunism. Analysts see a potential for the company to reinvigorate a stale product by hitching onto the popular Bitcoin DeFi narrative.
Based on research from BitcoinLayers, over 60% of the new proposed Bitcoin scaling protocols are advertised as replacements for Ethereum’s EVM (Ethereum Virtual Machine). Over the last year, excitement around those proposals has invited many to suggest they could steer users away from Ethereum towards Bitcoin, but most projects have failed to deliver much progress so far. Coinbase could be looking at an opportunity to nip future competition in the bud.
The company’s stake in the success of Ethereum has significantly increased since the launch of its native rollup implementation, BASE, late last year. While it’s fair to question what took them so long to compete with BitGo’s wrapped product, the ability to directly profit from the growing demand for on-chain Bitcoin speculation is likely the driving force behind the decision.
Coinbase recently reported revenues of nearly 20 million dollars from their BASE product in the last quarter alone.
Despite advertisements for more Bitcoin-native, trust-minimized, solutions, market participants have so far favored established institutional custodians like BitGo over more complex and economically volatile alternatives. Coinbase appears intent to double down on this approach by leveraging their existing moat in the custody business.
With the company already responsible for safekeeping the assets of major institutional holders such as Blackrock’s IBIT ETF, the proposed cbBTC product is expected to inspire even more trust from larger players than its predecessors.
The impact this could have on upcoming Bitcoin layers is significant. Coinbase is in a unique position to attract liquidity that will be challenging for smaller projects to rival. Their strongest argument will rest on the security of their bridging mechanism which remains a work-in-progress.
As noted by industry analyst Jacob Brown, this week’s announcement follows a series of moves by Coinbase showing a growing interest in the Bitcoin ecosystem.
Of course, the security trade-offs introduced by custodial products remain strongly criticized by technologists and promoters of more decentralized solutions, but the question remains as to whether or not market participants adhere to those principles.
