Wrapped coins like Wrapped Bitcoin (WBTC) and Wrapped Ethereum (WETH) have been the topic of a lot of discussion this week, some of it valid and some of it top-tier shitposting.
Several well-known cryptocurrency Twitter accounts started spreading the myth that WETH was about to crash earlier this week.
Crypto influencer Cygaar tweeted, "ATTENTION: WETH is soon to become insolvent." "In order to save this space, I will reluctantly bail out everybody holding WETH at a rate of 0.5 ETH per WETH. When the emergency is over, you can thank me.
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| art: Grant Kempster |
Martin Köppelmann, a co-founder of Gnosis, tweeted, "We might see a bank run on redeeming WETH shortly."
All of this was false.
WETH doesn't have the same counterparty risk as the bank-run comments that circulated on Twitter during the FTX collapse. The underlying Ethereum is not held in possession by a single company. There are no excessively leveraged funds using user money at great risk in the Bahamas.
Instead, smart contract risk is the main concern here.
Instead of providing Ethereum to an exchange or a crypto lender to hold onto, users deposit Ethereum into a smart contract to create WETH. WETH is preferred over ETH because, unlike Ethereum, it is also an ERC-20 token (after all, they are essentially the same thing). This enables integration into different decentralized apps much simpler.
As a result, this asset was never in risk of bankruptcy or a bank run. It's just another illustration of the industry's fairly offensive sense of humor. The smart contract might malfunction in some way, but given how long it has been in existence and how well it has worked, if there were a problem, that would have happened by now.
But WBTC is really different.
wBTC's BTC backing is being cared for by BitGo, according to Rugdoc.io, a community-driven organization that evaluates smart contracts. "FTX assets were frozen by Bitgo, resulting in a 4k BTC surplus and the wBTC depeg. If you own wBTC, the Bitcoin is not yours.
With the use of this asset, you can essentially convert Bitcoin to an Ethereum-compatible format for use in various DeFi apps. It is an ERC-20 token linked to the cost of Bitcoin, to put it even more simply.
Additionally, it is backed by actual Bitcoin, which is held in trust by the BitGo company, as was already mentioned. BitGo has 1 genuine Bitcoin for every 1 WBTC in use.
A user must always go via a merchant in order to "unwrap" their WBTC and exchange it for the real thing (this could be an exchange, for example). In order to do this, you must destroy (or burn) the WBTC and remove one Bitcoin from your possession.
Importantly, a handy dashboard allows you to view this minting and burning action as it happens on-chain.
WBTC's price depegged from the underlying Bitcoin last week, which was actually a little more concerning considering the way it was designed (and not necessarily a mean-spirited Twitter joke).
Usually, when a discount like this appears, market makers will seize the opportunity to acquire the cheaper WBTC and exchange it for the actual Bitcoin in order to profit from the difference.
They have been doing very much the same thing over here as well. Alameda, the sister trading company to the defunct FTX, was a significant user of WBTC, therefore their disappearance left a lot of arbitrage to be done.
As a result, the market is playing catch-up while also having to deal with some major FUD.
WBTC is now trading at about a $15 discount to the actual price. That is so little. And it's undoubtedly increased the wealth of some market makers along the way.
https://finance.yahoo.com/news/let-dispel-misconceptions-wrapped-bitcoin-160004433.html