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wBTC Unpegging Crisis Overview | Are packaged assets still safe? BitGo, Alameda emerge as potential detonation points

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wBTC Unpegging Crisis Overview | Are packaged assets still safe? BitGo, Alameda emerge as potential detonation points

Since the FTX incident, the price of wBTC has gradually decoupled from BTC. According to Binance's wBTC/BTC trading pair data, at the lowest wBTC price, only 0.985 BTC can be exchanged for 1 wBTC, which is approximately a 1.5% discount. In response to this situation, cryptocurrency KOL Small Cap Scientist conducted an investigation and came to a conclusion - it is advisable to temporarily avoid any Wrapped asset packaging.

This translation and summary are based on the original text. Any uncertainties should be referred to the original source.

wBTC Uncoupling Crisis, BitGo's Insolvency Risk

When Small Cap Scientist noticed a gradual decoupling between the prices of wBTC and BTC, they checked the asset proof on the wBTC official website and found that it was in a safe state of over-collateralization. However, further investigation into the operation mechanism of wBTC revealed potential risks.

There are two main roles in the operation mechanism of wBTC:

  1. Custodian: Holds BTC as reserves for wBTC and has the private key to mint tokens.
  2. Merchants: Main entities that send or receive BTC to mint wBTC.

For example, the cryptocurrency custodian service provider BitGo is the custodian, while over 60 partners of wBTC are the merchants.

Upon examining information about BitGo, it was found that although they claimed to have no risk exposure to Alameda or FTX, just four days after FTX's collapse, BitGo announced a funding round at a valuation of $1.2 billion. Small Cap Scientist views this action as a dangerous signal.

Additionally, besides having custody of BTC, BitGo provided a $150 million loan business to institutional clients in 2020. Even if not affected by the FTX incident, there is still a possibility of being impacted by other institutions.

"I am concerned that if BitGo were to truly default, wBTC holders would not be considered creditors of BitGo. What would happen if BitGo, along with the merchants, filed for bankruptcy with billions of dollars in BTC under custody?" Small Cap Scientist stated.

Merchants Filled with Landmines

Among the over 60 partner merchants of wBTC are companies like 3AC, Nexo, Ren Protocol, Crypto.com, and Coinlist. Some of them have gone bankrupt or faced bankruptcy rumors, with only Alameda being removed from the list.

Small Cap Scientist mentioned that merchants, unlike custodians, do not hold large amounts of BTC. However, the issue lies in the fact that if these merchants were to file for bankruptcy, their assets could be seized.

Since the incident, several issuers have faced problems with the minting and burning of wBTC/BTC, meaning users are unable to smoothly exchange wBTC back to BTC.

Moreover, Small Cap Scientist expressed concerns that FTX users could directly convert BTC to wBTC on the platform. Despite FTX US's official documentation stating that most customer assets are stored in BitGo Trust with $100 million in insurance, this document was written before the FTX collapse.

In this regard, Small Cap Scientist believes the ideal scenario would be confirming that the 228,000 BTC under custody are all stored in wallets controlled by BitGo. However, without on-chain asset proof currently available, this cannot be determined.

"I am worried that if Alameda issues wBTC and it is held in custody by BitGo, would the BTC ultimately be held by FTX US creditors instead of being used as reserves for wBTC? If the targeted BTC gets caught up in the Alameda bankruptcy, eventually wBTC holders may be responsible for these debts," Small Cap Scientist remarked.

Ren Protocol Also Faces Crisis

REN is a native BTC cross-chain bridge controlled by Alameda. Following issues at Alameda, the development team's funds can only sustain operations until the end of this year. The team is currently raising funds and expediting the launch of the Ren 2.0 cross-chain bridge project, with Ren v1 expected to be deprecated in 30 days.

Small Cap Scientist noted that failure to burn assets within the Ren Protocol on the Ren network within 30 days could put a significant amount of on-chain assets at risk.

Furthermore, the liquidity of renBTC is also being tested, as it is being used as a means for funds from the FTX hack to escape, following the path ETH > wBTC > renBTC > native BTC. This action is depleting the cross-chain funds of renBTC, and the Ren Protocol team will not replenish these funds.

Currently, hackers still hold around $40 million in renBTC and are attempting to move it out without liquidity. As hackers continue to seek ways to convert assets to native BTC without liquidity, further issues may arise for bundled assets.

Small Cap Scientist Urges Steer Clear of Bundled Assets

In light of the aforementioned crises, Small Cap Scientist recommends holding native assets whenever possible. They will also sell bundled assets like renBTC, wBTC, and wETH until confirming their safety. If unable to exchange wBTC for native assets, THOR or Kraken can be used for the exchange.

Additionally, Small Cap Scientist stated that if wBTC encounters issues, centralized exchanges and oracles will be tested, with users' wBTC potentially becoming bad debt. Moreover, DeFi protocols holding significant bundled assets are also facing challenging times, and it is crucial to pay attention to the security of these protocols.