What Happens to Wrapped Bitcoin on Ethereum?

An important “wrapped” token almost unraveled last week – the latest crypto product to be hurt by the fallout from the once-dominant FTX exchange that collapsed earlier this month.

For those who don’t know, Wrapped Bitcoin (WBTC) is the 23rd largest cryptocurrency, with a market cap of $3.5 billion. It goes on Ethereumthe leading blockchain for DeFi and NFTsand is a symbol intended to represent Bitcoin.

The idea – for the most part – of WBTC is that traders who want to use their Bitcoin holdings in Ethereum the ecosystem can do so with tokens that are one-to-one backed by Bitcoin. It is how Bitcoin holders can interact with DeFi tools without spending more money on Ethereum or other Ethereum-based tokens.

It is an important tool in the world of DeFi – financial products that allow their users to borrow, lend or trade digital assets without third-party intermediaries. In the past 24 hours, over $88 million WBTC tokens have traded hands, according to CoinGecko.

But last week, the token decoupled, losing its one-to-one value to Bitcoin, blockchain data firm Kaiko so. Since FTX exploded in early November, WBTC has traded on exchanges at a discount to Bitcoin, it reported — something that shouldn’t happen if the token is pegged one-to-one by the biggest cryptocurrency.

“The largest wrapped version of bitcoin on the Ethereum network, WBTC, has been trading at a sustained discount to BTC since mid-November, falling to -1.5% on Friday,” the firm wrote in a blog post on Monday.

“While a WBTC should always be redeemable for a BTC through official sellers, the token is also traded on open markets, meaning that its price relative to BTC can fluctuate.”

The firm added that charts shared on Twitter who claimed that bankrupt trading company Alameda Research were the most alarmed WBTC traders who believed that the token might not be backed by Bitcoin reserves. This is not true, Kaiko said, adding that the reserves can be “verified on the chain.”

Alameda Research was set up by former FTX CEO Sam Bankman-Fried. It fell with FTX after it emerged that client money from the exchange was being used by the trading firm – which was ultimately unsustainable.

Crypto custodian BitGo is the main custodian of WBTC. Its COO Chen Fang said on Twitter that rumors WBTC was not backed one-to-one by Bitcoin were “fake news.” BitGo did not respond Decryptits request for comment.

Kieran Mesquita, a developer behind the DeFi privacy project Railgun, said Decrypt that for now depegging is nothing to worry about.

“WBTC has not depegged significantly (~2% at peak, which quickly recovered), until that happens it will still serve as a way to bring BTC into DeFi on Ethereum,” he said.

For now, WBTC is back tied to Bitcoin – something investors in the DeFi space are “no doubt relieved” about, according to Kaiko.

But Mesquita added that if WBTC loses its link, it could lead to more decentralization in the space, given that the asset’s primary custodian is BitGo, a centralized firm. “Longer term, if WBTC does not regain trust, it will likely be replaced by a more decentralized alternative,” he said.