The Bitcoin-based DeFi industry is heading for a shakeup following news that BitGo, creator of the “Wrapped Bitcoin” or wBTC token that’s used to represent BTC on the Ethereum blockchain, is working with new custodians in Hong Kong and Singapore.
As experienced DeFi stalwarts will know, wBTC provides users with an easy way to utilize Bitcoin, the world’s most popular cryptocurrency, in various DeFi protocols. It enables investors to borrow, lend and stake the asset to earn yield, just as they can do with other kinds of crypto.
Since launching in 2019, wBTC has been a huge hit among investors who are keen to put their idle BTC tokens to work, earning some kind of interest rather than just sitting in their wallets doing nothing. While Bitcoin always has the potential to appreciate in value, that’s not enough for some smart investors, who want the ability to put their BTC to work in the same way as they do with the rest of their crypto assets.
wBTC brings Bitcoin to Ethereum, the blockchain that’s home to the vast majority of the crypto industry’s DeFi applications, and it has proven to be hugely popular. At one point in 2021, the market capitalization of wBTC had grown to around $16 billion, and today the total wBTC in circulation is still valued at over $9 billion, making it a top-twenty cryptocurrency.
However, the problem with wBTC is that it means having to trust the custodian, which is the coin’s creator BitGo. That company recently said that it’s moving away from its sole custodian model, utilizing the services of third-parties to try and provide greater trust in the asset. It said it will be working with a company called BiT Global, which is based in Hong Kong and Singapore. That company, which is ran by the Tron network founder Justin Sun, will be tasked with storing the BTC that’s used to mint wBTC tokens on a 1:1 basis.
But rather than improving trust, the news seems to have had the opposite effect, despite BitGo CEO Mike Belshe’s insistence that “there is no single party that has the ability to mint or steal from the underlying treasury”.
The news prompted MakerDAO, one of the most prominent DeFi platforms on Ethereum, to pass a proposal that led to it abandoning wBTC. According to the proposal, the community was worried that the new setup would result in “too much control” centered in the hands of BiT Global. While other protocols, such as Aave, continue to use wBTC, the transition has once again brought the risks of using custodians into the spotlight.
wBTC Is Not The Only Game In Town
Investors who are concerned about the reliance of centralized custodians do have some alternatives, for wBTC is far from the only way to utilize BTC in DeFi. In actual fact, Bitcoin DeFi has emerged as a hot topic of late, thanks to recent programmability changes in Bitcoin’s underlying code that have opened the door for dozens of new projects.
First, there are plenty of permissionless alternatives to wBTC, including DLC.Link’s “trust-minimized” dlcBTC, which uses a Taproot-based Bitcoin multisig to let institutions mint dlcBTC without the need for custodians. Aki Balogh, co-founder and CEO of DLC.Link, told Blockworks that dlcBTC is designed in such a way that the BTC that’s used to mint the alternative token can only be returned to the same wallet address that it originally came from.
“It’s literally a theft-proof protocol,” he insisted. Balogh explained that DLC.Link utilizes a set of trusted node operators known as “attestors” that run both a Bitcoin node, plus one on the destination chain.
A more intriguing alternative comes from Zeus Network, which has come up with a clever protocol that enables BTC to be moved to the Solana DeFi ecosystem in a bridgeless way. The project has created a decentralized “bridgeless communication layer” that sits above the Bitcoin and Solana blockchains to facilitate the transfer of value from one to the other. It relies on the Solana Virtual Machine, and paves the way for Bitcoin liquidity to be used in Solana’s extensive DeFi ecosystem.
The key component of Zeus’s platform is the Zeus Program Library, which is an intermediary between the two networks that makes use of decentralized nodes to maintain custody of BTC, and innovative fraud proofs to prevent malicious activity. To make use of this capability, Zeus has also created a dApp known as APOLLO that Bitcoin holders can use to wrap their BTC into an alternative asset called zBTC that can be used on Solana. APOLLO launched its final testnet phase on August 8 via its Muses upgrade, and it has proven to be extremely popular so far, engaging with more than 30,000 unique wallet addresses already.
Bitcoin holders can also opt to go with the more familiar Stacks sidechain, which has been around for some years already, employing a decentralized mechanism to integrate with Bitcoin’s underlying blockchain. By using the Proof-of-Transfer consensus mechanism, Stacks makes it easy to bridge BTC to its blockchain, where users can mint sBTC tokens and engage with its ecosystem of DeFi dApps. Alongside Stacks, there’s also Rootstock, which allows users to mint rBTC.
Babylon is another interesting option for BTC holders, utilizing a novel mechanism to enhance the security of Proof-of-Stake blockchains. While this isn’t true DeFi per se, it paves the way for users to stake their BTC tokens on a variety of PoS chains and earn yield for securing those networks.
Users might have another way to utilize BTC soon, if the crypto exchange Coinbase makes good on its promises. The exchange recently teased a new asset it’s calling “cbBTC” that’s said to be “coming soon”. It’s designed to bring BTC to Coinbase’s Base blockchain, which hosts a small but growing ecosystem of DeFi applications.
Is Bitcoin DeFi The Next Big Thing?
BitGo’s decision to bring more custodians to wBTC as a way to ensure greater trust in the asset could well end up backfiring, as it appears to have given impetus to dozens of emerging projects that are fast executing on alternative, and in many cases, superior ways of putting BTC to use in DeFi.
Bitcoin DeFi is fast becoming one of the most important narratives in the crypto industry right now, and it’s hoped that as the ecosystem grows, it might kickstart yet another bull run for the world’s most valuable digital asset. With the vast majority of BTC sitting idle in the wallets of “hodlers” who are simply hoping and praying for its value to go up, it’s clear that there’s a lot of potential for these wBTC alternatives, many of which appear to be more secure.
