Will wBTC crash?

Original Author: Crypto KOL Small Cap Scientist

Original Translation: 0x214, BlockBeats

In the past 24 hours, I have been researching wBTC. I recommend temporarily avoiding any "wrapped assets." In this article, I will emphasize the reasons for my concerns and hope to alleviate some worries regarding "wrapped asset custody and its 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 take it at face value; corrections are welcome.

When I saw the wBTC / BTC trading pair deviate from its 1:1 peg by 2%, this on-chain anomaly raised my alert.

Typically, for players with ample funds, this is a free arbitrage opportunity. Why is this happening now?

After carefully browsing the official wBTC website and its proof of over-collateralization, I found no flaws. So where exactly is the problem?

Asset Custody

After researching wBTC, the following two key roles are very important:

Custodian: Holds the BTC that backs wBTC and possesses the private keys to mint tokens.

Merchants: Send or receive BTC to mint/burn wBTC.

In this case, BitGo acts as the custodian, while over 60 partners of wBTC can serve as merchants.

When browsing information related to BitGo, the latest news is that BitGo CEO Mike Belshe stated: BitGo has no risk exposure to Alameda or FTX; however, BitGo is currently raising funds. I would have liked to DM either party, but they have both closed DMs to the public.

BitGo has custody of BTC. In fact, as early as 2020, BitGo launched a $150 million loan service for institutional clients. Although BitGo claims to have no exposure to FTX/Alameda, this does not mean that BitGo has not lent to other companies affected by the fallout, and these loans may not have been repaid.

Just four days after the FTX flash crash, BitGo announced it was raising funds at a $12 billion valuation… this looks like a dangerous signal. After all, BitGo claims to have no exposure and does not need funds, so if they are seeking financing, it does not seem like a good time. Of course, this is speculation, and you may have your own views.

What I am concerned about is: if BitGo is indeed insolvent, I believe wBTC holders will not be considered creditors of BitGo. If the BTC held by BitGo is worth billions of dollars, what will happen when BitGo or its partner merchants file for bankruptcy?

Market Maker Risks

Additionally, it is important to note the merchants responsible for burning/minting wBTC for customers. Currently, there are over 60 partners capable of minting/burning wBTC, including 3AC, Nexo, Ren Protocol, Crypto.com, and Coinlist.

As we all know, some of these companies have already filed for bankruptcy, and there are many market rumors about others nearing bankruptcy. Alameda is the only company removed from the partner list.

Note that these are just the merchants minting/burning wBTC, not custodians like BitGo, which means that the merchants have the authority to mint and burn but do not hold large amounts of BTC. So I believe the problem is: once they file for bankruptcy, their assets may be seized.

Since the FTX incident, several issuers have been struggling to resolve the minting/burning issues. In a healthy market, market makers are minting/burning at a fast enough pace to maintain the 1:1 peg of wBTC/BTC. Clearly, this has not happened, and users are unable to redeem wBTC back into BTC.

Another point to emphasize is that FTX allowed users to mint wBTC directly from BTC on its platform. Since Alameda has been removed from the wBTC partner list, this is also somewhat concerning.

FTX US stated in its official documentation that most customer assets are stored in BitGo Trust and are backed by a $100 million policy. This article was written before the FTX collapse.

Ideally, we would be able to verify that all 235,000 BTC "under custody" are stored in wallets controlled by BitGo. On-chain asset proof would help, but we cannot determine whether this will be tied to legal proceedings. On-chain analysts should further examine their custody wallets.

My thought is that if Alameda issued these wBTC and they are held by BitGo, then these BTC would ultimately be held by the creditors of FTX US, rather than backing wBTC?

In other words, once these underlying BTC are caught up in Alameda's bankruptcy, the wBTC holders may ultimately be liable for these debts.

Troubled Ren Protocol

Another user mentioned Ren Protocol and its REN Token as well as renBTC.

REN is a native BTC cross-chain bridge, which has also been affected by the FTX collapse.

REN is actually owned by Alameda, so the funding for its development team is only enough to sustain them until the end of this year. The team is currently raising funds while accelerating the launch of the Ren 2.0 bridge, with Ren v1 set to be deprecated in 30 days.

SOL, supported by Alameda, plummeted after losing support. According to official information from Ren Protocol, its assets are currently well-collateralized, and they hope to avoid further crises.

If they do not burn on the Ren network within the next 30 days, this will put a large amount of on-chain assets at risk. Their goal is to transition from Alameda and migrate to Ren 2.0, but this is contingent on their ability to raise funds to continue operations.

The liquidity of renBTC is also a major issue, as the address believed to be the "FTX hacker" has been exchanging ETH > wBTC > renBTC > BTC. This is depleting the bridging assets of renBTC, and the team has stated they will not replenish it.

The "hacker" still has over eight figures in funds and is trying to transfer assets to the bridge without liquidity. If the "FTX hacker" is an insider from FTX, will they further tighten liquidity 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 am not sure if there is a similar precedent for Ren 1.0. For safety's sake, do not trust third parties.

From the perspective of REN, I believe bridging liquidity and the FTX hacker are two major risk factors. I have not used Ren Protocol, and I welcome everyone to contribute further.

Many people feel that the "FTX hacker" may take further action, so they are shorting ETH. However, due to liquidity constraints, the ETH in the "hacker's" hands may also be unsellable. As the "hacker" continues to look for ways to exchange assets for BTC, this may lead to other issues with wrapped assets.

My advice is to hold native assets as much as possible and not to trust other third parties. Right now, I would sell all wrapped assets like renBTC, wBTC, wETH, etc., until they are confirmed to be safe.

If users cannot redeem wBTC, it is recommended to use THOR or Kraken to exchange it for native BTC to ensure safety.

This is actually quite troublesome because once wBTC encounters problems, centralized exchanges and oracles will also be affected, and the wBTC held by users may turn into a bad debt.

If these assets severely decouple from the 1:1 exchange, then DeFi protocols that store wrapped assets may also face misfortune. So, please remain cautious in this market. There is a lot of DeFi liquidity in wrapped tokens, so pay attention to the security of these protocols.

It seems that recently, the usage rate of Aave's wBTC has significantly increased. This may be due to Avraham Eisenberg shorting CRV or users shorting wBTC. So far, this largely feels like a market maker failure, which is why the price of wBTC has consistently been at a negative premium of around 1%, rather than a complete 1:1 exchange.

Personally, I believe that there is no smoke without fire, especially in the crypto market. I do suspect that the price support for the vast majority of wBTC / renBTC is in danger. I hope there will be legal professionals who can elaborate further.

Remember, in any case, without private keys, there are no assets! Please pay attention to asset security and once again demand transparency from third parties.