The “Why Wrapped BTC Matters” AMA explored the evolving landscape of Wrapped Bitcoin (wBTC) and its role in DeFi, highlighting recent custody controversies and the rise of alternatives like tBTC and cbBTC. wBTC continues to dominate, with 65% of wrapped Bitcoin used as collateral in major DeFi platforms, though MakerDAO’s recent move away from wBTC signals a shift in the market.

The discussion covered wBTC’s importance in unlocking Bitcoin’s utility within DeFi, the impact of custody changes, and the growing competition among new alternatives. Looking ahead, panelists predicted a move towards multi-custodian setups and increased diversification of Bitcoin-based collateral. Dive into the highlights to learn more about the future of wrapped Bitcoin in DeFi.

X (Twitter) Spaces: Why Wrapped BTC Matters: Bridging Bitcoin and Defi

Speakers:

• ApeGuru (X (Twitter)): Chief BUllish Officer @ (Lynex)

• João Simões (X (Twitter)): CEO & Co-Founder @ (InceptionLRT)

• Gonzalo Mendizabal (X (Twitter)): KOL Manager @ (Staking Circle)

Index:

1. Highlights
2. Purpose and Importance of Wrapped Bitcoin
3. wBTC Custody Controversy
4. Emerging wBTC Alternatives
5. Impact on Defi Protocols
6. Future Outlook for Wrapped Bitcoin

Highlights:

• wBTC remains dominant with 65% of wrapped Bitcoin used as collateral in major DeFi platforms:

"RAP BTC remains the dominant force in the market, with around 65% of all wrapped Bitcoin currently being used as collateral across major DeFi platforms like Aave. It's an essential part of the ecosystem due to its liquidity and deep integration." – Staking Circle

• Recent custody changes sparked controversy, leading to emergence of alternatives like tBTC and cbBTC:

"BitGo's decision to transfer RAP BTC's custody to a joint venture with BitGlobal has caused a stir in the community, leading to the rise of alternatives like tBTC and cbBTC. These competitors are gaining traction as the market becomes more cautious about centralization risks." – Staking Circle

• MakerDAO stopped supporting wBTC, burning $30 million worth and shifting to cbBTC:

"In response to the controversy, MakerDAO took a bold step by halting new borrowing against RAP BTC and burning $30 million worth of it. They've since shifted their focus to supporting cbBTC, signaling a significant shift in their approach." – Staking Circle

• Future outlook suggests a move towards multi-custodian setups and increased competition in wrapped Bitcoin market:

"Looking forward, we’re likely to see a broader move towards multi-custodian setups to address concerns over centralization. The wrapped Bitcoin market will also become more competitive, with new players emerging to challenge RAP BTC’s dominance." – Staking Circle

Purpose and importance of Wrapped Bitcoin:

• João explained wBTC brings Bitcoin to DeFi, adding composability and yield-generating opportunities:

"The beauty of RAP BTC is that it brings Bitcoin into the DeFi ecosystem, where it gains composability and can generate yields. You no longer need to just hold Bitcoin in a wallet—you can put it to work in DeFi without leaving the Bitcoin network." – João, InceptionLRT

• Ape Guru highlighted wBTC unlocks Bitcoin's utility beyond its own blockchain limitations:

"RAP BTC is crucial because it unlocks Bitcoin's utility, allowing it to be used beyond the limitations of the Bitcoin blockchain. With RAP BTC, Bitcoin can be integrated into programmable smart contract ecosystems like Ethereum, expanding its potential significantly." – ApeGuru, Lynex

• wBTC enables participation in DeFi without exiting Bitcoin positions:

"One of the key benefits of RAP BTC is that it enables users to participate in DeFi while keeping their Bitcoin positions intact. You don’t have to sell your Bitcoin; instead, you can wrap it and use it as collateral or in liquidity pools, generating additional value." – ApeGuru, Lynex

wBTC custody controversy:

• BitGo announced plans to transfer wBTC management to a joint venture with BitGlobal:

"BitGo recently announced plans to hand over RAP BTC management to a joint venture with BitGlobal, which raised concerns across the DeFi space. The move has sparked debates about centralization and transparency, with many questioning the motives and implications for RAP BTC’s future." – Staking Circle

• Initial plan allocated 2 out of 3 multi-sig keys to BitGlobal, raising centralization concerns:

"The original proposal by BitGo gave BitGlobal control of 2 out of 3 multi-sig keys, which would have allowed them to execute transactions independently. This raised immediate centralization concerns, as the power was concentrated in one entity, making the system more vulnerable." – Staking Circle

• Updated arrangement involves 3 entities in different jurisdictions: Hong Kong, Singapore, and US:

"After significant pushback from the community, BitGo updated the multi-sig arrangement to involve three different entities in separate jurisdictions—Hong Kong, Singapore, and the US. This shift helps mitigate centralization risks and provides an extra layer of security." – ApeGuru, Lynex

• Ape Guru argued the new multi-jurisdiction setup mitigates risks of a centralized third party:

"The new multi-jurisdictional setup significantly reduces the risks associated with having a centralized third party. By spreading the control across multiple regions, you eliminate the possibility of a single point of failure, which was a major concern with the initial proposal." – ApeGuru, Lynex

Emerging wBTC alternatives:

• tBTC (Threshold BTC) gaining adoption, particularly in Asia:

"We’re seeing tBTC, a decentralized alternative, gaining serious adoption, especially in Asia. It’s being recognized for its transparency and its ability to bring a trustless wrapped Bitcoin option to the market, making it a strong contender to RAP BTC." – Staking Circle

• cbBTC (Coinbase BTC) launched, backed by Coinbase's institutional presence:

"Coinbase has also entered the wrapped Bitcoin space with cbBTC, leveraging its institutional presence to bring a more centralized but highly trusted option. Backed by a regulated entity, cbBTC could capture a different segment of the market that values institutional backing." – Staking Circle

• Kraken announced plans for KBTC:

"Kraken is planning to launch its own version, KBTC, further expanding the landscape of wrapped Bitcoin options. With major exchanges stepping into the game, we’re likely to see even more competition in the near future." – Staking Circle

• Ape Guru expressed preference for tBTC due to its decentralized, transparent nature:

"tBTC stands out because it is fully decentralized and transparent, which aligns with the core values of crypto. In my view, this makes it the best option for those who prioritize decentralization over institutional backing." – ApeGuru, Lynex

• Team noted potential liquidity fragmentation due to multiple alternatives:

"With all these new alternatives emerging, there’s a real risk of liquidity fragmentation. Having multiple Bitcoin derivatives could split liquidity across DeFi, making it harder for protocols to maintain deep pools for collateral." – ApeGuru, Lynex

Impact on DeFi protocols:

• MakerDAO decided to halt new borrowing against wBTC and burned $30 million worth:

"MakerDAO took decisive action, stopping all new borrowing against RAP BTC and burning $30 million of it. This shows a clear loss of trust in RAP BTC’s long-term stability following the custody changes." – Staking Circle

• MakerDAO shifted support to cbBTC:

"In response to the RAP BTC controversy, MakerDAO has shifted its support to cbBTC, which they believe offers a more secure and institutionally-backed alternative. This could lead to further shifts in the DeFi ecosystem as other protocols may follow." – Staking Circle

• Aave still uses wBTC as one of its largest collateral types:

"Despite the controversy, Aave continues to support RAP BTC as one of its largest collateral types. It’s still deeply embedded in the DeFi space, and its liquidity makes it hard to replace in the short term." – Staking Circle

• DeFi protocols may start building liquidity on new Bitcoin assets to hedge against wBTC losing dominance:

"We might see DeFi protocols gradually building liquidity on alternative Bitcoin assets to hedge against the possibility of RAP BTC losing its dominance. Diversifying collateral could help protect the protocols from any major disruptions in the future." – ApeGuru, Lynex

Future outlook for wrapped Bitcoin:

• wBTC likely to maintain dominance in short term due to current market share:

"In the short term, RAP BTC is likely to maintain its dominance due to its existing market share and strong liquidity. It’s entrenched in the DeFi system, but competition is on the rise." – ApeGuru, Lynex

• Trend towards multi-custodian setups and increased competition expected:

"We’re going to see more multi-custodian setups and an increase in competition as protocols look for ways to reduce centralization risks. This will ultimately lead to a more decentralized and secure DeFi environment." – Staking Circle

• DeFi protocols likely to diversify Bitcoin-based collateral to reduce reliance on single custodian:

"As part of this trend, we expect DeFi protocols to diversify their Bitcoin-based collateral to avoid over-reliance on a single custodian. Having multiple options reduces risk and helps secure the ecosystem." – ApeGuru, Lynex

• Potential for new Bitcoin DeFi opportunities emerging from the current situation:

"This shake-up is creating opportunities for new Bitcoin-based DeFi solutions to emerge. With alternatives like tBTC and cbBTC gaining traction, the landscape is primed for innovation." – ApeGuru, Lynex

• Retail users advised to monitor adoption of alternatives, regulatory scrutiny outcomes, and governance votes on DeFi platforms:

"For retail users, it’s crucial to stay updated on the adoption of these new alternatives, as well as any regulatory outcomes and governance votes on DeFi platforms. These factors will shape the future of wrapped Bitcoin in the space." – Gonzalo, Staking Circle