WBTC event

In the article "Layered Bitcoin", I introduced three types of Cross-Chain Interaction bridges: trustless chain bridges, trust-minimized chain bridges, and custodial chain bridges. These Cross-Chain Interaction bridges form the backbone of Cross-Chain Interaction asset transfers, especially for Bitcoin. Before diving into today's content, let's quickly review the concepts of these Cross-Chain Interaction bridges:

Trustless chain bridges act as gateways between chains, offering the highest level of security as they do not rely on any central authority. However, they are currently not practical mainly because BTC, as the source chain, cannot verify events happening outside its network. For example, BTC cannot natively verify events happening on the ETH network, which limits the feasibility of trustless chain bridges.

In contrast, custody chain bridges use centralized providers to manage asset transfers. These providers hold users' BTC (BTC) on the BTC network and on-chainmint synthetic Tokens or wrap assets on Ethereum, etc. Although the setup and maintenance are relatively simple, custody chain bridges bring significant risks because they rely on a single trusted party, which becomes a potential point of failure.

Trust minimized chain bridges attempt to combine the advantages of these two models. They do not rely on a single entity to hold users' BTC, but instead utilize multiple reputable entities to store and manage assets, balancing security and usability. These chain bridges use Decentralization mechanism to mitigate the risk of any single entity failure or malicious behavior.

This article mainly focuses on BitGo, the custodian of Wrapped Bitcoin (WBTC). WBTC is one of the most widely used BTC wrapped assets, especially on-chain compatible with Ethereum Virtual Machine (EVM). It has been the mainstream BTC wrapping form on Ethereum, allowing BTC holders to participate in the Decentralized Finance ecosystem of Ethereum. In addition to WBTC, there are other forms of BTC wrapped assets, such as tBTC, renBTC, HBTC, and imBTC, which are also used in various ecosystems, but none can compare with the scale of WBTC.

Make a deal with the devil?

On August 9th, 2024, BitGo, the main custodian of WBTC, announced a partnership with BiT Global (https://blog.bitgo.com/bitgo-to-move-wbtc-to-multi-jurisdictional-custody-to-accelerate-global-expansion-plan-2ea0623fa2c8). This is not just a routine business collaboration, but a significant shift in control of WBTC multi-signature wallet, which has raised major concerns in the encryption community.

According to the new arrangement, BiT Global should control two of the three Secret Keys in the WBTC 2-of-3 multisig Wallet for protection. In simple terms, BitGo will become redundant in practical operations as BiT Global will have the majority control over WBTC-held assets. Concerns about centralization and security vulnerabilities have been raised, especially considering Justin Sun's relationship with BiT Global. After strong opposition from the community, a new proposal has emerged stating that BitGo will retain control over the two Secret Keys. However, concerns related to Justin Sun's involvement still remain.

BiT Global defends this move on the basis of Hong Kong's legal requirements, claiming that no single shareholder can hold more than 20% control in the company. The corporate registry shows that all five named shareholders share the same Address in the British Virgin Islands. This has raised suspicions that Justin Sun, while not formally named, still exerts a disproportionate influence on BiT Global. Despite no direct evidence, indirect evidence has sparked serious doubts in the community about the true level of Decentralization in the new structure.

Centralization is a serious issue in the encryption field, especially when the asset involved is BTC, because BTC symbolizes financial sovereignty and Decentralization. After transferring control to BiT Global, WBTC faces increased regulatory risks. If any legal issues arise related to Justin Sun or BiT Global, the assets of WBTC holders will be locked, seized, or subjected to other forms of damage.

BitGo's Motivation: Market Dominance Is Not Enough to Make a Difference

At first glance, BitGo's decision to relinquish control may seem confusing, especially when WBTC dominates over 95% of the BTC wrapped Token market on the ETH network. Faced with such a significant market dominance, why give up control?

The answer lies in BitGo's revenue model for WBTC, which relies on the fees generated from minting and redeeming Tokens. Simply holding WBTC does not incur any fees for users. However, minting and redeeming activities have stagnated in the past few years. Despite WBTC still being widely held, the lack of Liquidity may drop the revenue that BitGo receives from this service.

This situation highlights an important issue: market dominance does not always translate into profitability. BitGo's control of the WBTC market does not necessarily mean it is flourishing in terms of revenue. With a decrease in minting and redemption, BitGo's income from WBTC is shrinking, which is likely one of the reasons it decided to collaborate with BiT Global - perhaps to alleviate some operational burden and seek other sources of income.

This also sounds the alarm for other projects: controlling a large market share does not guarantee continued success unless the model itself is profitable. To ensure long-term sustainability, the monetization strategy must constantly align with user engagement.

New players try to seize the opportunity

As BitGo collaborates with BiT Global, a new player has emerged in the wrapped BTC market. It is worth noting that,[Coinbase]21Shares announced plans to launch its own packaged BTC, while (https://x.com/21co__/status/1831027001836101978) Has deployed a version on Ethereum. These institutional participants are entering the field with a revenue model similar to BitGo's, relying on fees for minting and redeeming packaged BTC.

However, there is a key distinction here. Companies like Coinbase and 21Shares have existing revenue streams that can subsidize these operations. Minting and redemption of wrapped BTC can serve as additional services to their core business, rather than a primary source of income. Unlike BitGo, they do not need to prioritize immediate profitability when entering this field, while BitGo heavily relies on WBTC for revenue.

These new entrants also signal a shift in the market. With the participation of institutional players, they bring greater credibility to the concept of packaging BTC. However, despite their custodial model being more similar to TradFi, they may still bring centralized risks similar to WBTC.

tBTC Alternative Solutions

Unlike these custodial models, tBTC developed by Threshold Network provides a trust-minimized Decentralization alternative. tBTC ensures the security of BTC deposits through encryption technology, requiring a majority of threshold operators to manage these wrapped assets. This model is more resistant to centralization risks than WBTC. New participants like Botanix also adopt similar designs.

The operation of tBTC is as follows: a group of randomly selected operators are responsible for managing BTC deposits, ensuring that no single entity has too much control. These operators must reach Consensus to take any action, and the selection process is regularly rotated to ensure that no single group can control the funds. This structure contrasts sharply with WBTC, where BiT Global can technically transfer users' BTC through two signatures, both controlled by the same organization.

The trust-minimized model adopted by tBTC has several significant advantages:

Decentralization：There is no single entity controlling the system, which reduces the risk of review or asset seizure.
Transparency: All minting and redemption activities are conducted on-chain, and users can fully observe the process.
Ecological Support: Such [Mezo]Acre and (https://acre.fi/) and other projects are building on tBTC to expand its applications in the DeFi ecosystem.

Unlike WBTC, tBTC does not generate revenue through minting and redemption fees. Instead, the Threshold Network provides financial sustainability to tBTC without subjecting it to ongoing protocol monetization pressure.

The reason for saying this is because Mezo is similar to Ethereum's L2. Users need to pay fees to access products on Mezo, and these fees will be allocated to MEZO and BTC stakers. This mechanism not only incentivizes network participation, but also creates a sustainable income model linked to the usage of Mezo products, which is one of the revenue sources of the Thesis ecosystem.

Similarly, another source of income comes from the stake earnings generated by Acre. The mint/redemption feature provided by Threshold Network for tBTC represents vertical integration in the Thesis service. This integration allows Thesis to capture value at multiple stages, from the initial minting to the use of Decentralized Finance products, creating a stronger and more sustainable business model.

Unleashing the potential of Bitcoin in Decentralized Finance

In the debate about custody and Decentralization solutions, user experience (UX) is often overlooked. Decentralization is crucial for long-term sustainability, but if Decentralization solutions like tBTC are too complex or time-consuming in use, users may turn to simpler custody models like WBTC.

A smoother user experience can:

Improve adoption by dropping the technical barriers for users.
With more users participating in minting and redemption, liquidity is improved.
Attract institutional investors who value the easy integration of the system.

For Decentralization solutions like tBTC, improving user experience is crucial. The goal is to provide the advantages of Decentralization without making users feel overwhelmed. If a solution that strikes this balance is found, we will see the widest adoption and rise in Liquidity in the future.

The acceptance of tBTC is rising

Despite the challenges, the influence of tBTC in the Decentralized Finance field is steadily rising. A significant milestone is Aave, one of the largest Decentralization lending protocols, accepting tBTC as collateral. This move demonstrates the trust in Decentralization and trust-minimized solutions in the Decentralized Finance ecosystem.

In addition, MakerDAO, the pioneer of Decentralized Finance, has removed WBTC as Collateral due to concerns about its increasing centralization. Currently, there is a proposal to use tBTC as Collateral for DAI (stablecoin), further solidifying its position as a Decentralization alternative for custodied BTC. Curve has also integrated tBTC as Collateral for crvUSD, further expanding the utility of tBTC in the Decentralized Finance ecosystem.

To further drive this transition, Threshold Network is sponsoring the migration from WBTC to tBTC on wbtc.party. Anyone who signs a commitment and switches to tBTC can not only receive compensation for gas fees and slippage during the currency exchange process, but also share rewards from a total prize pool of $150,000 in tBTC. In other words, you can earn rewards by switching to Decentralization BTC-wrapped tokens! For more information about the reward program, please visit this link.

As more and more protocols use tBTC as Collateral, network effects begin to form. The rise in Collateral acceptance brings more opportunities for profit, encouraging users to mint tBTC and participate in a wider Decentralized Finance ecosystem. Especially when users prioritize Decentralization and security over convenience, such a feedback loop may ultimately lead to exponential growth in tBTC's Liquidity and usage.

PvP or PvE?

While various BTC wrapping product solutions are competing for incentives, from a larger perspective, there is a huge untapped opportunity behind it. Currently, all BTC wrapping tokens together account for less than 1% of the total BTC supply, which means that over 99% of BTC (worth over $1.1 trillion) has not yet been introduced into the Decentralized Finance ecosystem.

The real opportunity lies not in competing for the market share of WBTC, but in unlocking this massive untapped BTC pool. The ultimate winner is the one who can provide the best user experience for BTC holder to participate in the Decentralized Finance protocol.

Projects like Thesis, with its Mezo and Acre initiatives, have simplified the use of Bitcoin in finance. You can learn more about it here.

If you are developing solutions that can enable BTC to function or help achieve this goal, please contact us.

Ultimately, the future of BTC packaging products will no longer be determined by the current market share, but by whether the solution can successfully develop the 99% of BTC that has not yet been utilized, and the protocol that can achieve this expansion is likely to lead the market.

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