A short and cryptic tweet sent X circles into a frenzy late Tuesday night when leading global exchange Coinbase hinted at plans to enter the packaged Bitcoin market. The initial speculation was quickly validated by senior employees WHO confirmed their enthusiasm for further integrating the Bitcoin asset into the company’s on-chain ecosystem.
Other observers have highlighted the strategic nature of the decision following a tumultuous week for current market darling, BitGo’s wBTC. The latter has long been considered the easiest and most popular method for Bitcoin investors to gain exposure to DeFi products.
As the industry focuses on Bitcoin-native alternatives, the announcement is seen by many as a decisive step towards maintaining Ethereum’s dominant position as the de facto Bitcoin DeFi layer.
The Origin of Wrapped Bitcoin
To better understand the rise of and interest in wrapped Bitcoin products, we need to go back in time to 2018, when the idea of DeFi was just beginning to emerge on Ethereum.
In order to attract liquidity to their protocols, a collection of projects decided to focus on the most liquid asset on the market: Bitcoin. Loi Luu, one of the original contributors of wBTC, shared his perspective about the ordeal:
“We realized that to really grow DeFi, we needed to bring Bitcoin liquidity into the ecosystem.”
As the old saying goes, the rest is history. In mid-2020, “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 are still locked in the Ethereum contract, overseen by institutional provider BitGo.
This custody, and the responsibility 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 aims to expand the wBTC product to a “multi-jurisdictional custody” setup. Behind BiT Global is notorious cryptocurrency founder Justin Sun.
The announcement was met with widespread criticism from users who felt that introducing new actors into the custody arrangement was a miscalculated risk.
The next day, the dominoes began to fall as members of the community of the popular algorithmic stablecoin Maker began to advocate for to remove wBTC from the protocol’s collateral assets list as a safety measure. On Tuesday, BitGo founder Mike Belshe and representatives from Bit Global defended the decision in a public X-space.
While concerns raised on social media haven’t made a material dent in wBTC deposits, they have opened the door for challengers. Despite BitGo’s long track record in the space, it’s safe to wonder if they’ve worn down market participant confidence.
Earlier this year, a lawsuit filed by the company after a failed takeover of Galaxy Digital resurfaced when the Delaware Supreme Court ruled that the case should proceed.
A Challenge for Programmable Bitcoin Layers
For Coinbase, this move into the wrapped asset business may be more than just opportunism. Analysts see potential for the company to breathe new life into a aging product by tapping into the popular Bitcoin DeFi narrative.
Based on research According to BitcoinLayers, over 60% of new proposed Bitcoin scaling protocols are being touted as replacements for Ethereum’s EVM (Ethereum Virtual Machine). Over the past year, the excitement surrounding those proposals has led many to suggest that they could push users off Ethereum and onto Bitcoin, but most projects haven’t made much progress so far. Coinbase may see an opportunity to nip any 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 they waited so long to compete with BitGo’s packaged product, the ability to immediately capitalize on the growing demand for on-chain Bitcoin speculation is likely the driving force behind the decision.
Coinbase recently reported nearly $20 million in revenue from their BASE product in the last quarter alone.
Despite touts for more Bitcoin-native, trust-minimized solutions, market participants have thus far favored established institutional custodians like BitGo over more complex and economically volatile alternatives. Coinbase looks set to double down on this approach by leveraging its existing moat in the custody business.
Given that the company is already responsible for the custody of assets of large institutional investors such as Blackrock’s IBIT ETF, the proposed cbBTC product is expected to instill even more trust among larger players than its predecessors.
The impact this could have on future Bitcoin layers is significant. Coinbase is uniquely positioned to attract liquidity that will be difficult for smaller projects to match. Their strongest argument will rest on the security of their bridging mechanism, which is still a work in progress.
If noticed This week’s announcement by analyst Jacob Brown follows a series of moves by Coinbase that signal growing interest in the Bitcoin ecosystem.
Of course, the security trade-offs that come with storage products are still heavily criticized by technologists and proponents of more decentralized solutions. The question remains whether market participants adhere to these principles.