A brief, cryptic tweet sparked a frenzy in X-circles on Tuesday evening as major global exchange Coinbase hinted at plans to enter the wrapped Bitcoin market. The initial speculation was quickly validated by senior employees WHO corroborated his enthusiasm for further integration of the Bitcoin asset into the company's on-chain ecosystem.
Other observers have highlighted the strategic nature of the move following a tumultuous week for current market darling, BitGo’s wBTC. The latter has long been regarded as the easiest and most popular method for Bitcoin investors to gain exposure to DeFi products.
With the industry's attention focused on native Bitcoin alternatives, many see the announcement as a decisive step toward preserving Ethereum's dominance as Bitcoin's de facto DeFi layer.
The origins of wrapped Bitcoin
To better understand the rise and interest in wrapped Bitcoin products, one needs to go back in time to 2018, when the idea of DeFi was just beginning to take off on Ethereum.
Looking to attract liquidity to their protocols, a group of projects decided to focus on the most liquid asset on the market: Bitcoin. Loi Luu, one of the original contributors to wBTC, shared his perspective About the terrible experience:
“We realized that to really help DeFi grow, we needed to bring Bitcoin liquidity into the ecosystem.”
As the old saying goes, the rest is history. In mid-2020, the “DeFi summer” sparked a speculative frenzy that would push the total value of wBTC deposits to over $10 billion. Today, just over 150,000 bitcoins remain locked in their Ethereum contract, under the custody of institutional provider BitGo.
This custody, and the liability it entails, is the subject of the current controversy surrounding wBTC. Late last week, for example, BitGo revealed a new strategic partnership with Hong Kong-based BiT Global, which seeks to expand the wBTC product to a “multi-jurisdictional custody” setup. Behind BiT Global is the infamous cryptocurrency founder, Justin Sun.
The announcement sparked a backlash from users, who claim that introducing new players into the escrow arrangement is a miscalculated risk.
The dominoes began to fall the next day as community members of the popular algorithmic stablecoin Maker began advocating wBTC being removed from the protocol's list of collateral assets as a safety precaution. On Tuesday, BitGo founder Mike Belshe and representatives from Bit Global defended the decision in a Public space X.
While the concerns expressed on social media have yet to significantly impact wBTC deposits, they have opened the door for new competitors. Despite BitGo’s long history in the sector, it is safe to wonder if they have worn out the trust of market participants.
Earlier this year, a lawsuit by the company, sparked by a failed acquisition of Galaxy Digital, resurfaced when the Delaware Supreme Court ruled that the case should go forward.
A challenge for Bitcoin's programmable layers
For Coinbase, this foray into the wrapped asset business could be more than just opportunism. Analysts see potential for the company to revitalize an outdated product by jumping on the popular Bitcoin DeFi narrative.
based on investigation According to BitcoinLayers, over 60% of proposed new Bitcoin scaling protocols are being touted as replacements for Ethereum’s EVM (Ethereum Virtual Machine). Over the past year, the excitement around such proposals has led many to suggest that they could draw users away from Ethereum and towards Bitcoin, but most projects have failed to make much progress so far. Coinbase may be seeing an opportunity to nip future competition in the bud.
The company's stake in Ethereum's success has increased significantly since the launch of its native rollup implementation, BASElate last year. While it’s fair to wonder why it took them so long to compete with BitGo’s wrapped product, the ability to directly profit from the growing demand for Bitcoin on-chain speculation is likely the driving force behind the decision.
Coinbase recently reported revenue of nearly $20 million from its BASE product in the last quarter alone.
Despite announcements of more Bitcoin-native and trust-minimizing solutions, market participants have so far favored established institutional custodians like BitGo over more complex and economically volatile alternatives. Coinbase appears intent on doubling down on this approach by leveraging its current lead in the custody business.
Given that the firm is already responsible for safeguarding the assets of major institutional shareholders, such as Blackrock’s IBIT ETF, the proposed cbBTC product is expected to inspire even more confidence from larger players than its predecessors.
The impact this could have on Bitcoin’s next layers is significant. Coinbase is uniquely positioned to attract liquidity, which will be difficult for smaller projects to rival. Its strongest argument will be based on the security of its pegging mechanism, which remains a work in progress.
As noted According to industry analyst Jacob Brown, this week's announcement follows a series of moves by Coinbase that show growing interest in the Bitcoin ecosystem.
Of course, the security trade-offs that custodial products introduce remain heavily criticized by technologists and proponents of more decentralized solutions, but the question remains whether or not market participants adhere to those principles.
