One thing that I have learned and probably most of the users that are in crypto for more than five years is how important is to manage your risk while managing your assets. Not your keys, not your coins! This is a must if you hold any significant amount of crypto and furthermore as the sum increases so should the security around it.
Security should never be underestimated by anyone. It is something that is up to you, it’s in your hands only and you are the one that should take care of it. A hardware wallet is a basic first step, but for any amount above 100k you should be probably be thinking of multi signature setup.
Avoiding a third-party risk is something to think about. Even when using a hardware wallet you should be well informed about the company that you are buying the wallet from. Is there software open source? How do they store your personal info? How do they perform their upgrades on the software?
By now you should probably know that leaving a lot of funds on centralized exchanges is an absolute no go.
Now about WBTC. WBTC is a wrapped Bitcoin on the Ethereum network. How does this work? Well there is a centralized entity, a company that users sends Bitcoin to, they locked into a wallet and mint WBTC on the Ethereum network. Because crypto is transparent, users can see both of the wallets for the native BTC on the Bitcoin network and WBTC on the Ethereum network at any time and make sure the balances matches.
WBTC allows users to use Bitcoin in a defi protocols like AAVE and MakerDAO. In most cases WBTC is provided as colateral and then users borrow against it. It’s a beautiful thing as long as you manage your position and don’t overleverage and get liquidated. The company that was managing WBTC up until now was BitGo situated in the US. Now they are partnering with BitGlobal is a Honkong/Singapure company under the umbrella of Justin Sun.
You can read the official announcement post from Aug 9th by BitGo on their blog here. It points out that they are going multijurisdictional while they will keep the same setup for multisignature cold wallet.
MakerDAO removes WBTC as collateral for minitng DAI
Just a day after the announcement from BitGo the MakerDAO community started discussing WBTC and make a proposal that passed on August 14th. In the proposal MakerDAO is basically removing WBTC as a collateral for future borrows while limiting some of the old vaults. That was a very fast action from the MakerDAO team!
A citation about the risk from Justin Sun:
We have also seen other Sun affiliated projects show worrying signs of possible misappropriation, such as the substitution of Huobi’s USDT reserves with stUSDT, a Sun controlled RWA project that purports to hold a reserve of US treasury bills but has not provided clear audits or evidence that the backing exists. On the whole, we find that Sun’s involvement as a controlling interest in the new WBTC joint venture presents an unacceptable level of risk.
They are referring to multiple cases in the past, including the TUSD stablecoin that was under Sun management and that was hard to give a proof of reserves. This indicates that they believe it will be hard to get a proof of reserves for WBTC going forward. The transition of WBTC will take place in 60 days.
AAVE discusses risk management but takes no actions for now
The other big dApp that is using WBTC, AAVE has opened a discussion on their forum . Their current stance is like this:
Given the limited public information available about the upcoming event in approximately 60 days, issuing a risk-off recommendation at this stage would be premature and could have substantial long-term negative implications for the Aave Protocol. Currently, there are no observable fundamental changes to custody or proof of reserves, and the legal framework appears solid in preventing rehypothecation or tampering with user-minted WBTC. The existing debt against WBTC generates approximately $6 million in annualized revenues from the reserve factor alone, with demand continuing to grow at a notable pace.
Basically, they are saying that there is no proof for tampering and everything is the same on chain now.
In the recommended actions they are noting that they will continue to do active monitoring on the situation and take actions if necessary.
Coinbase Teasing with cbBTC
Coinbase is obviously taking an advantage of the situation and they are now teasing their version of wrapped Bitcoin in the form of cbBTC.
https://x.com/coinbase/status/1823501582006411614
Coming soon I do hope so.
My Personal Approach on the Situation
I hold WBTC and I use AAVE to borrow against WBTC. It is one of my biggest positions in crypto. After the TerraLuna collapse and me losing significant funds there I have become very vigilant about my security. I have examinate all of the possible third-party risk and while some of them cannot be avoided I have taken steps to diversify. For example, I have multiple cold wallets now, from different companies, while before I only had Ledger.
The position of WBTC in AAVE has been one of the riskiest position for the size so to speak, because I’m taking on multiple third-party risks. I take a risk on the cold wallet, then on the WBTC custodian and then on the AAVE app. Well now one of the third parties’ risks has increased even more!
I’m absolutely not taking any additional risks on WBTC!
Having the option to borrow against BTC is a beautiful thing, but security triumphs all and I will be doing it only in a secure environment. As soon as any other option emerges I will switch immediately. If Coinbase provides cbWBTC I’m switching very quickly. I totally understand that Coinbase is also a third-party risk, but I’m glad to have Coinbase as a third party risk over Justin Sun at any time. If I don’t see an acceptable level of option with a third party risk, I will wind down the position of WBTC on AAVE to a smaller one that is acceptable for me.
The way WBTC operated until now was very clear. Lock BTC in a multisig on the BTC network, mint WBTC on the ETH network. The BTC on the Bitcoin network stays idle! You see the temptation here. Is the same as for the banks. It goes like this: Why leave idle BTC?! Maybe I can use that BTC (users BTC) somewhere else? Give it as a loan to other party and generate yield. The other party should return it immediately if I ask. I will generate additional revenue out of nothing….. and so it goes up until the first crisis and everything unwinds, except in crypto there is no bailouts. If you give your BTC to someone else an that entity looses it, its game over.
I bet we will start to see some shenanigans from Justin Sun as he tries and do the above. And it will always be with the promise that users funds are safe and in a cold mutisig.
The most preferred option is obviously to have a more native like BTC for borrowing option. I know Thorchain was providing some option, but I haven’t looked very deeply at that and to be honest I’m still not ready to put a significant amount of BTC in Thorchain custody. I have a vague understanding of their system, nodes that are running their chain must provide collateral etc. but they had their hacks in the past and that is a PSTD for me. I’m ready to get my feet wet so to speak and try the system with smaller amounts. I’ll tag @khaleelkazi here as I know he has some experience with Thorchain and can provide some on chain discussion.
There are other option for smart contracts on Bitcoin under development, but they are still early and far from proven in there operation.
What are your thoughts?
All the best
@dalz