Bitcoin on Ethereum is growing at an explosive rate despite the price drops in both coins. What exactly is WBTC and how does it work?
This is a quick rundown of this new trend and some of the concerns involved.
BTC to Ethereum is up 37% this month alone topping up at over $750 millie. BTC on Huobi is up 22%
HBTC, Wrapped Bitcoin, and renBTC are among the most popular transfer protocols being used, however, there are many more jumping on this trend. Total value of Wrapped BTC is more than 2% of Ethereums total market cap according to a blockchain analysis group called Dune Analytics.
We are currently seeing more volatility in the markets and according to Decrypt this signifies a strong appetite for Defi protocols.
These cross-chain transfer protocols such as WBTC, HBTC and renBTC use "trusted" third-party custodians or smart contract-controlled hot wallets to hold one digital coin, like BTC and mint a replica token like an ERC20 token on Ethereum. The minted token (wrapped tokens) are pegged to the value of the original token.
HBTC is a large gainer in the minting/transfer protocol game. These "protocols" are literally changing the financial industry, kind of rewriting the way we as a society have been doing things, creating liquidy in a whole new way. At this moment there are about 4,800 BTC pegged to Huobi creating HBTC.
The BTC to Ethereum protocol is what we refer to as Wrapped Bitcoin, with about 55,000 Bitcoin locked into the system. This the largest amount out of the three most popular protocols.
Taking this all in, and a serious question comes into play. Where in tarnation is this Bitcoin being held?!! Well, Huobi is a centralized crypto exchange in Asia, Singapore. Huobi was launched on Ethereum back in February of this year.
Wrapped BTC is a collaboration between a few Defi protocols such as Maker and Aave specifically. In this scenario they use a system of "trusted third party custodians" whatever that means, to hold the native Bitcoin that eventually mint the WBTC. Trusted third parties in a trustless industry. So, who decides who gets trusted? There is no community governance here.
In a nutshell this is far from the claimed decentralizaion, and I write this to raise awareness because after all these protocols are supposed to be trustless meaning that there are mechanisms in place by which all parties in the system can reach a consensus on what the canonical truth is. These protocols are in fact controlled by members of their development team.
You be the judge, do the rewards out weigh the risk? Or do the risks out weigh the rewards? We have to decide this for ourselves.