Original author: Crypto KOL Small Cap Scientist
Original translation: 0x214, BlockBeats
Over the past 24 hours, I have been researching wBTC. I recommend avoiding any “wrapped assets” for now. In this post, I will highlight the reasons for my concerns and hopefully dispel some of the concerns regarding “wrapped asset custody and liquidity”.
First of all, I am not an expert on wBTC or other wrapped assets, so please take this article with a grain of salt and do not trust it completely. I welcome any corrections.
When I saw that the wBTC/BTC trading pair deviated by 2% from the 1:1 peg, this on-chain movement aroused my vigilance.
Normally, this would be a free arbitrage opportunity for players with sufficient funds. Why is this happening now?
After carefully browsing the official website of wBTC and its proof of over-collateralized assets, no flaws were found. So where exactly is the problem?
Asset Custody
After studying wBTC, the following two key roles are very important:
Custodian: Holds the BTC used to support wBTC and has the private key for minting Tokens
Merchants: Send or receive BTC to mint/destroy wBTC
In this case, BitGo acts as the custodian, while wBTC’s 60+ partners can act as brokers.
When browsing BitGo related information, the latest news is that BitGO CEO Mike Belshe stated: BitGo has no risk exposure to Alameda or FTX, however, BitGo is now raising funds. I would have liked to send a private message to either party, but they have closed private messages to the public.
BitGo has BTC custody. In fact, as early as 2020, BitGo launched a $150 million loan business for institutional clients. Although BitGo claims to have no exposure to FTX/Alameda, this does not mean that BitG has not provided loans to other companies implicated, and these loans are likely not repaid.
Just four days after the FTX flash crash, BitGo announced a $1.2 billion funding round… This looks like a red flag. After all, BitGo claims to have no exposure and does not need funding, so if it is true that it is seeking funding, the timing does not look good. Of course, this is also speculation, and you can have your own opinion.
My concern is this: If BitGo is truly insolvent, I don’t think wBTC holders will be considered creditors of BitGo. If the BTC held in custody by BitGo is worth billions of dollars, what happens when BitGo or its co-custodians file for bankruptcy?
Market Maker Risk
In addition, you need to pay attention to the brokers responsible for destroying/minting wBTC for customers. Currently, there are more than 60 partners who have the ability to mint/destroy wBTC, including 3AC, Nexo, Ren Protocol, Crypto. com, and Coinlist.
As we all know, some of these companies have filed for bankruptcy, and there are market rumors that others are about to go bankrupt. Alameda is the only company that has been removed from the list of partners.
Note that these are just the minters/destroyers of wBTC, not BTC custodians like BitGo, which means that the minters have the authority to mint and destroy, but do not hold a large amount of BTC. So I think the problem is that once they file for bankruptcy, their assets may be confiscated.
Since the FTX incident, multiple issuers have been working to resolve the burning/minting issue. In a healthy market, market makers are minting/burning at a fast enough rate to keep wBTC/BTC 1:1 pegged. Obviously, this is not happening, and users are unable to redeem wBTC back to BTC.
Another thing worth highlighting is that FTX allows users to mint BTC into wBTC directly on its platform. This is also a bit worrying because Alameda has been removed from the list of wBTC partners.
FTX US stated in its official documentation that most customer assets are stored in BitGo Trust and are backed by a $100 million insurance policy. This article was written before the FTX collapse.
Ideally, we would be able to verify that all 235,000 BTC “held in custody” are held in wallets controlled by BitGo. On-chain proof of assets would help, but we cannot tell if these would be relevant to legal proceedings. On-chain analysts should look further into their custodial wallets.
My thought is, if Alameda issues these wBTC and they are held by BitGo, then these BTC end up being held by FTX US creditors instead of backing wBTC?
That is, once these underlying BTC are involved in Alameda's bankruptcy, then ultimately wBTC holders may be responsible for these debts.
The troubled Ren Protocol
Another user also mentioned Ren Protocol and its REN Token, as well as renBTC.
REN is a native BTC cross-chain bridge, and has recently been affected by the FTX crash and has been in turmoil.
REN is actually also owned by Alameda, so its development team only has enough funds to support them until the end of this year. The team is currently raising funds and accelerating the launch of the Ren 2.0 bridge. Ren v1 will also be decommissioned in 30 days.
SOL, which is backed by Alameda, plummeted after losing support. According to official information from Ren Protocol, its assets are now well-collateralized and it is hoped that there will be no more crises.
If the Ren network is not burned within the next 30 days, this will put a large amount of assets on the chain at risk. The goal is to transition from Alameda and migrate to Ren 2.0, but this is premised on them being able to raise funds to continue to maintain operations.
Liquidity of renBTC is also a big issue, as the address believed to be the “FTX hacker” has been swapping ETH > wBTC > renBTC > BTC. This is depleting renBTC’s bridge assets, and the team has stated that they will not be replenishing them.
The “hacker” still has over 8 figures and is trying to move assets to the bridge without liquidity. If the “FTX hacker” is an FTX insider, would they further intensify the liquidity crunch knowing that wrapped assets will be affected?
As I write this, the image of Alameda, which owns Ren, filing for bankruptcy comes to mind. I’m not sure if there is a similar precedent for Ren 1.0. To be safe, don’t trust third parties yet.
From the perspective of REN, I think bridge liquidity and FTX hacking are the two main risk factors. I have not used Ren Protocol, and I welcome your comments.
Many people are shorting ETH as they feel the “FTX hacker” may take further action. However, due to liquidity constraints, the ETH in the hands of the “hacker” may not be sold. As the “hacker” continues to find ways to exchange assets for BTC, this may cause other problems for wrapped assets.
My advice is to hold on to the native assets as much as possible and don’t trust other third parties. Now, I will sell all the wrapped assets such as renBTC, wBTC, wETH, etc. until they are confirmed to be safe.
If users are unable to redeem wBTC, it is recommended to use THOR or Kraken to redeem it for native BTC for safety.
This is actually very troublesome, because once there is a problem with wBTC, both centralized exchanges and oracles will be affected, and the wBTC held by users may become a bad debt.
If these assets are severely decoupled from the 1:1 exchange, then the DeFi protocols that store wrapped assets may also be unlucky. So, in this market, please always be cautious. There is a lot of DeFi liquidity in wrapped tokens, please pay attention to the security of these protocols.
It looks like there has been a big uptick in wBTC usage on Aave recently. This could be due to Avraham Eisenberg shorting CRV or possibly users shorting wBTC. So far this feels largely like a market maker failure, which is why the price of wBTC is always trading at a negative premium of around 1% instead of being fully redeemable 1:1.
I personally believe that where there is smoke there is fire, especially in crypto markets. I do suspect that the vast majority of wBTC/renBTC price support is at risk. Hopefully there will be legal professionals who can shed further light.
Please remember that in any case, without private keys, there are no assets! Please pay attention to asset security and once again make a request to third parties: asset transparency.