WBTC caused a huge shock

Overnight, BTC continued to slightly recover to the 61-62k range. Hey, the dawn here is quiet. The bears have no illusions, and the bulls have no temper. Maybe five years later, there will be a joke circulating in the industry: I have a friend who is still waiting for 20,000 dollars of BTC.

Jiaolian saw on the Internet that quite a few netizens firmly believe that BTC will fall back to 20,000 dollars, or even 10,000 dollars. In fact, if you can see 10,000 dollars, you can see 1,000 dollars; if you can see 1,000 dollars, you can see 100 dollars, 10 dollars, 1 dollar... On the road of bearishness, you are not alone, and there is no end.

Yesterday, the community of the well-known DeFi project MakerDAO launched a proposal to clear the WBTC in the Maker collateral warehouse. As soon as the proposal came out, it caused a huge shock in the industry. After all, Maker is the largest collateral lending protocol in the industry, and currently manages nearly 5 billion US dollars of various digital assets on the chain. WBTC is the largest BTC cross-chain asset on the Ethereum chain, currently managing more than 150,000 BTC with a total value of nearly US$10 billion.

Let's read the original text of this proposal first:

Translation:

WBTC Changes and Risk Mitigation - August 10, 2024

Background

Yesterday, August 9, Bitgo announced plans to transfer control of the WBTC product to a joint venture with BiT Global. Compared with the current custody in the United States, this will result in custody rights being dispersed across multiple jurisdictions, including Hong Kong and Singapore. Bitgo disclosed that this change implements a partnership with Justin Sun and the Tron ecosystem; therefore, we can infer that Justin Sun will have significant influence or control over the joint venture that manages WBTC. This change of control is expected to be completed within 60 days.

This is somewhat similar to a previous situation regarding control of the TUSD stablecoin, which was discussed in the Maker forum. Since TUSD was placed under Justin Sun's control, market operating processes and transparency have deteriorated, including the resignation of the previous management team, the suspension of real-time reserve proofs, and several major decouplings caused by the interruption of redemption services. We have also seen other Justin Sun-related projects show worrying signs of possible misappropriation, such as replacing Huobi's USDT reserves with stUSDT, a Justin Sun-controlled RWA project that claims to hold US Treasury reserves but has not provided clear audits or evidence to prove the existence of backing. Overall, we find that Justin Sun's participation as a controlling interest in the new WBTC joint venture carries unacceptable risks.

We also note that Bitgo itself appears to have had some negative developments recently, including the failed acquisition by Galaxy Digital, which Galaxy withdrew for undisclosed reasons. This, coupled with the unexpected decision to divest the WBTC product, could be a sign of financial distress within Bitgo and negatively impact Bitgo’s counterparty risk. While some of the risk factors are purely speculative, it is reasonable to exercise caution given the critical role WBTC collateral plays in DeFi.

Recommended Actions

BA Labs believes that WBTC collateral integration on Maker and SparkLend carries a higher risk given the impending change of control. BA Labs recommends that stablecoin promoters propose the following immediate actions to limit the growth of WBTC risk, which will be included in the next executive vote on Monday, August 12:

Core Vault:

WBTC-A DC-IAM Line (max DC): Reduce 500 million from 500 million to 0

WBTC-B DC-IAM Line (max DC): Reduce 250 million from 250 million to 0

WBTC-C DC-IAM Line (max DC): Reduce 500 million from 500 million to 0

SparkLend:

Disable WBTC lending

Reduce WBTC LTV from 74% to 0%

If Bitgo or other responsible persons cannot convincingly demonstrate that it is safe to maintain the current collateral integration, we will consider further proposed parameter changes to protect the protocol and reduce counterparty risk, up to and including the possible complete cancellation of all Maker and Spark WBTC collateral integrations. ”

Friends who are not familiar with the complex relationships and development history of the crypto industry may be confused by these terms and concepts. Teachchain will briefly explain it to readers:

First of all, everyone needs to understand a question: Under what circumstances does your BTC really belong to you?

The answer is that the BTC in the Bitcoin address corresponding to and controlled by the private key that you and only you control is the BTC that truly belongs to you.

For example, the "address" is the number of the safe and the "private key" is the key to open the safe.

Test question: You have 3 BTC in an exchange account. How many BTC do you have? The correct answer is: 0.

The situation of WBTC is more complicated than that of the exchange account.

WBTC is also a so-called "digital asset", which is also placed in a "safe" (address) and is also controlled by your own "key" (private key). However, it is different from the situation of BTC above:

1. The safes containing WBTC are not the same batch of safes as those containing BTC. The safes containing BTC are orange, while the safes containing WBTC are blue. This batch of blue safes has another name called "Ethereum".

2. There is no real BTC in WBTC. It is just a "white note", a white note locked in a blue safe.

For example, if BTC is electronic gold, then WBTC is electronic paper gold.

It can be seen that even assets that are personally owned through private keys and addresses may not be the real underlying assets.

Quiz: You have 1,000 USDT in your Ethereum address. How many dollars do you have? The correct answer is: 0 dollars.

The crypto industry is full of confusing concepts. For example, the term "cross-chain". A common narrative is this: you cross-chain 1 BTC to Ethereum, so you have 1 WBTC in your Ethereum address.

The truth is: BTC can only exist in the orange safe of Bitcoin. BTC can never be "crossed" or "transferred" to other blockchains (safes of other colors), such as Ethereum.

The so-called "cross-chain BTC to Ethereum" is actually happening as follows:

1. You take out the BTC that you actually own from your own orange safe and give it to another orange safe managed by a company (such as BitGo mentioned above). After this step is completed, you lose your BTC.

2. This company, also known as the custodian, will issue a "white note" on Ethereum, namely WBTC, which is roughly equal to the amount of BTC you gave to the company in the previous step (minus the handling fee), and then put the "white note" WBTC into your blue safe on Ethereum. After this step is completed, you get the "white note Bitcoin" - WBTC.

It can be seen that whether the WBTC in your hand can be exchanged for BTC depends entirely on whether the custodian is honest and reliable. Obviously, holding and using WBTC must always face third-party risks. This is an unavoidable cost.

WBTC’s design mechanism is to use (1) reliable custodians; (2) multiple custodian strategies to reduce third-party risks.

Some smart friends may say that by using technical means to automate custody and completely eliminate the involvement of custodians, can’t third-party risks be avoided? Unfortunately, the tortuous road of industry development has taught people a bitter lesson: the so-called automated code that eliminates the involvement of custodians cannot escape the clutches of hackers after all.

Code loopholes, hackers steal coins. The fourth-party risk has become the sword of Damocles hanging over everyone’s head. Its risk is far greater than the third-party risk. As a result, to date, WBTC is still the most popular and largest-capacity (the largest number of custodial BTC) cross-chain protocol for BTC to Ethereum.

Jiaolian even pessimistically speculates that the difficulty of designing and implementing a fully automated, 100% reliable decentralized cross-chain protocol may be no less than reinventing a BTC. In other words, the probability of success is close to 0.

Okay, now everyone understands how BitGo, as an important custodian behind WBTC, will affect the security of WBTC, which is actually the security of BTC behind it.

What's more, the object of its proposed transfer is suspected to be controlled by Sun Ge, who has a controversial reputation in the industry, which has caused great concern in the community about the security of assets.

What was Satoshi Nakamoto's original intention in inventing BTC? To eliminate dependence on trusted third parties.

Don't believe in human nature. Don't believe in promises made with red lips and white teeth. Don't trust anyone.

Only the real BTC held on the chain can eliminate all trusted third parties.

Jiaolian once cross-chained some WBTC into Maker as collateral during the bull market in 2021, but then all positions were closed and withdrawn at the end of 2021. Currently, no WBTC is held.

There is a saying that a gentleman does not stand under a dangerous wall. Let us encourage each other.