The Protocol: Now Everyone's Putting a Wrapper on Bitcoin

In this week's issue of CoinDesk's newsletter on blockchain technology, we're covering the drama surrounding "wrapped bitcoin" as Tron founder Justin Sun assumes a custody role, signs of upheaval in the Urbit ecosystem and the rise of dark pools on Ethereum.

CoinDesk's Tech & Protocols team brings you the latest in blockchain technology each Wednesday in our newsletter, The Protocol. This week, we're covering the drama surrounding "wrapped bitcoin" as Tron founder Justin Sun assumes a role in its custody, signs of upheaval in the Urbit ecosystem and the rise of dark pools on Ethereum.

Tron founder Justin Sun – described on a recent podcast episode as "shameless" but "very shrewd" and "one of the smartest on-chain users, period" – is in the headlines this week, and not just because of the new self-referentially named memecoin launchpad, SunPump. His move to take a role alongside BitGo in the custody of the $9 billion-plus wrapped bitcoin (WBTC) project has made waves in the highly competitive arena of tokenizing bitcoin for use in decentralized finance (DeFi) protocols on Ethereum and other chains. Read on.

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The supply of wrapped bitcoin (orange) has fluctuated, as has the market capitalization, since the price of the WBTC token trades in sync with notoriously volatile bitcoin (Dune Analytics)

WRAPPERS DELIGHT: A shakeup is afoot in the business of tokenizing bitcoin for use on the Ethereum blockchain.

Back in 2019, the crypto custodian BitGo and two partner firms conceived of "wrapped bitcoin" – a way of locking up bitcoin and minting an equivalent token, WBTC, that could be used on Ethereum, a crucial destination for many crypto traders since it's home to the biggest decentralized finance (DeFi) protocols. The WBTC project saw rapid uptake, its market capitalization surging by late 2021 to about $16 billion, before eventually settling back to the current level around $9 billion, still a top-20 cryptocurrency. Of note, however, was that BitGo served as the sole custodian for the locked-up bitcoin, seen as a potential risk.

So it would seem that BitGo's plan, announced last week, to transition WBTC to "multi-jurisdictional custody" – adding operations in Hong Kong and Singapore – might help to address some of the concerns. Instead, some projects and commentators have homed in on the involvement of Tron founder Justin Sun in BiT Global, the custody firm that will now oversee the locked-up bitcoin, as a new risk. "The partnership has raised eyebrows among industry observers," Nydig research head Greg Cipolaro wrote on Aug. 16.

In a tweet, Sun acknowledged he had "heard that the community has some concerns about my involvement in various projects, including WBTC," but insisted that his "personal involvement in WBTC is entirely strategic. I do not control the private keys to the WBTC reserves and cannot move any BTC reserves." BitGo CEO Mike Belshe joined an X Spaces to point out that "there is no single party that has the ability to mint or steal from the underlying treasury."

Even so, the decentralized stablecoin issuer MakerDAO, after a spicy online discussion on its forum, passed a motion on Aug.14 to eliminate its exposure to WBTC, due to concerns that the new setup would "centralize too much control with BiT Global," as reported by CoinDesk's Sam Reynolds. For now, the DeFi protocol Aave is sticking with WBTC, according to the analysis firm CoinMetrics, but "this transition has brought custodial and operational risks to the forefront, spurring increased interest in permissionless alternatives."

Those might include Threshold's tBTC, or another one called dlcBTC – both out in full force on the podcast circuit over the past week. The U.S. crypto exchange Coinbase teased a new "cbBTC." On X, crypto influencers touted FBTC, another wrapped bitcoin alternative that launched last month with the support of Mantle Network, as a possible solution to WBTC's "centralization risks." Such players are "accelerating the development for alternative (and decentralized?) versions of wrapped bitcoin," Galaxy Digital's Gabe Parker wrote in a newsletter. Or as Gauntlet's Tarun Chitra put it on the Chopping Block podcast, "There's going to be this mad rush to try to fill the gap."

A broader and perhaps more bankable take came from Presto Research: "Regardless of one’s view on Sun’s involvement, the attempt to decentralize a key piece of the DeFi infrastructure is likely a step in the right direction, despite its challenges."

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Urbit founder Curtis Yarvin (David Merfield/NASA, composite by Jesse Hamilton for Coin