Coinbase has officially launched its wrapped Bitcoin token, cbBTC, on its layer-2 network, Base, and Ethereum mainnet, according to a Sept. 12 statement.

The new product comes around a month after Coinbase teased it on the social media platform X.

cbBTC

According to Coinbase, cbBTC is an ERC-20 token fully backed by Bitcoin and custodied on the platform. When users send BTC from Coinbase to Base or Ethereum, it automatically converts to cbBTC and vice versa.

Wrapped Bitcoin tokens allow users to leverage their BTC on other networks. So, the exchange noted that cbBTC aims to drive innovative financial applications and boost Bitcoin adoption in DeFi.

Already, several major DeFi protocols, including Aave, Morpho, Sky, Compound, Aerodrome, Curve, Veda, Mellow, and the real-world asset platform Maple, have already integrated cbBTC for their users.

Moreover, cbBTC is available via the Coinbase application in Singapore, the UK, the European Economic Area, Australia, Brazil, and the US (excluding New York State). The asset will also be accessible globally on Base and Ethereum.

Data from blockchain analytics firm Arkham Intelligence shows that Coinbase holds over 984,000 BTC, valued at approximately $57 billion. Meanwhile, most of this is held for exchange-traded fund issuers like BlackRock, who custody their ETF assets with the Brian Armstrong-led exchange.

WBTC troubles

Coinbase’s launch of cbBTC comes at an interesting time as the dominant Wrapped Bitcoin token issued by BitGo WBTC faces challenges.

Over the past month, crypto users have sought alternatives to WBTC due to BitGo’s new partnership with TRON founder Justin Sun. While the firm has tried to allay these worries, critics have pointed out that Sun’s involvement poses a threat to the token due to his track record.

Due to this, several projects have been seeking to take advantage of the fallout to push a Bitcoin wrapper product.

Earlier this month, 21.co, the parent company of 21Shares, introduced its Wrapped Bitcoin product (21BTC) on the Ethereum blockchain. Prior to that, DeFi protocol Threshold has proposed merging its BTC “wrapper” token, tBTC, with WBTC in an effort to save the more popular BTC product.

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Aave DAO has received a proposal to integrate Coinbase’s upcoming Bitcoin wrapper, cbBTC, into its V3 platform on the Ethereum mainnet and Base.

In a Sept. 10 post, Aave’s founder, Stani Kulechov, explained that the proposal aimed to position Aave as the preferred platform for launching Tier-1 assets.

Proposal details

The proposal seeks to expand the options for Bitcoin holders participating in DeFi on Aave V3. By adding cbBTC, users would gain more choices for leveraging their Bitcoin, which could boost liquidity and engagement.

It noted that the integration of cbBTC aligns with Aave’s strategy to offer high-quality assets. It allows users to access Coinbase’s liquidity while benefiting from Aave’s established lending and borrowing features.

The proposal stated that the synergy between a major centralized exchange and a leading DeFi platform could attract mainstream users and drive the platform’s growth.

In addition, the proposal also highlighted concerns surrounding Wrapped Bitcoin (WBTC) due to its association with TRON founder Justin Sun. It stated:

“With the ongoing changes with WBTC it is pertinent to have alternative wrapped BTC tokens for use on Aave. With Coinbase as the issuer and custodian, their reputation will likely make this a trustworthy alternative to WBTC.”

The proposal concluded that while cbBTC may take market share from WBTC, it provides a valuable alternative that could enhance BTC adoption on Aave.

Concerns raised

Meanwhile, an Aave user, Midapple, expressed concerns that the proposal to onboard cbBTC “seems premature, given that the asset is not yet live.”

The user highlighted several unanswered questions, including minting mechanisms, liquidity concerns, and proof of reserves.

Midapple also flagged potential regulatory risks, noting that Coinbase could face challenges that might affect cbBTC. Additionally, the user raised concerns about custodial risks, pointing out that if cbBTC relies heavily on Coinbase, it could pose a single point of failure.

They concluded:

“It seems that the standard vetting process has been sidestepped entirely, and cbBTC is receiving special treatment that other assets have not been afforded. This sets a dangerous precedent and raises questions about the integrity of our decision-making process.”

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According to a Sept. 3 statement, 21.co, the parent company of 21Shares, has introduced its Wrapped Bitcoin product (21BTC) on the Ethereum blockchain.

The company stated that it was collaborating with Flow Traders, a leading global market maker, to launch a product that would give customers “peace of mind as they explore decentralized applications and new opportunities on the Ethereum blockchain.”

21.co’s 21BTC aims to differ from competing products in the market because it securely stores the underlying assets in cold storage, eliminating the need for a bridge.

Eliezer Ndinga, head of strategy and business development at 21.co, stated:

“As one of the world’s largest issuers of crypto ETPs, we bring stringent asset management best practices and our operational excellence to the world of wrapped assets, involving institutional-grade custodians and security protocols.”

Bitcoin wrappers are ERC-20 tokens backed by BTC, issued on various blockchains, backed one-to-one by BTC, and held by a centralized custodian. To redeem, holders burn the tokens to receive native BTC, while minting involves depositing native Bitcoin to receive the tokens.

WBTC faces struggles

The launch of 21BTC coincides with challenges faced by WBTC, the most popular Bitcoin wrapper with a market capitalization of approximately $9 billion.

Over the past month, WBTC has been under increased scrutiny due to issues involving BitGo and TRON founder Justin Sun. On Aug. 9, BitGo announced plans to transfer control of WBTC to a joint venture with crypto custody platform BiT Global and Sun.

This announcement raised concerns within the community, particularly about Sun’s involvement in the project.

In response, the lending protocol Sky (formerly MakerDAO) voted to stop new users from borrowing against WBTC, and demand for the asset declined. Dune Analytics data shows that WBTC’s supply decreased by over 1,000 tokens last month, marking the third-highest monthly negative change this year.

In light of these developments, several competitors, including Coinbase, are seeking to challenge BitGo’s market dominance. Further, DeFi protocol Threshold has proposed merging its BTC “wrapper” token, tBTC, with WBTC in an effort to save the more popular BTC product.

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MakerDAO, the decentralized autonomous organization behind the DeFi protocol Maker, has approved a proposal to halt new borrowing against BitGo’s wrapped Bitcoin (WBTC).

On Aug. 15, MakerDAO revealed that it was reducing the debt ceiling for all WBTC vaults to zero. This move effectively prevents any new borrowing from these vaults and lowers WBTC’s loan-to-value (LTV) ratio on SparkLend to 0%.

The protocol outlined the changes, stating:

“WBTC-A, WBTC-B, and WBTC-C have been removed from the Debt Ceiling Instant Access Module (DC-IAM). The debt ceilings for WBTC-A, WBTC-B, and WBTC-C are now set to 0 DAI.”

MakerDAO clarified that these changes will not affect existing borrowing positions within the Maker Protocol’s core WBTC vaults and SparkLend.

Etherscan data shows that two Maker’s smart contracts are among the top ten largest holders of WBTC, with more than 6,600 WBTC tokens valued at nearly $380 million.

Why MakerDAO removed WBTC

MakerDAO’s decision to remove WBTC is linked to recent community concerns over Tron founder Justin Sun’s involvement with the digital asset.

Last week, BitGo, the developer and custodian of WBTC, announced a partnership involving Sun and BiT Global to manage WBTC custody. This arrangement shifted custody from the United States to multiple jurisdictions, including Hong Kong and Singapore.

Following the news, several crypto stakeholders, including MakerDAO contributors, expressed concerns about the security of the tokens and Sun’s involvement with the project.

However, BitGo CEO Mike Belshe emphasized that Sun has no influence over the tokens and assured that the crypto entrepreneur had no access to the crypto custodian’s asset keys.

Over $30 million WBTC burned

Nevertheless, these assurances appear to have had no impact on crypto investors’ confidence.

On-chain data shows that crypto investors were reducing their exposure to WBTC by burning and redeeming their assets. According to its dashboard, approximately 575 WBTC, worth over $30 million, have been burned during the last seven days, with crypto exchange Crypto.com and Galaxy Digital leading the charge.

Meanwhile, WBTC’s rivals, like tBTC, have seen a growth in their numbers. According to the Dune Analytics dashboard, tBTC holders surpassed 1,000 during the past week, while its total supply stood at 3,107.36 tBTC as of press time, equivalent to more than $180 million.

Additionally, Coinbase has hinted at launching its own wrapped Bitcoin product soon.

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Blockchain security firm Cyvers Alert reported that an unnamed crypto trader lost 1,155 Wrapped Bitcoin (WBTC), equivalent to $70.5 million worth, to address poisoning.

The firm said:

“Are we mistaken, or has someone truly lost $68 million worth of WBTC? Our system has detected another address falling victim to address poisoning, losing 1,155 WBTC.”

Meir Dolev, the founder and CTO of Cyvers, added that this was “probably the highest value lost due to an address-poisoning scam.”

Address poisoning

Address poisoning is one tactic malicious entities employ to exploit crypto traders. This nefarious act typically ensnares victims by luring them into transferring digital assets to fraudulent addresses owned by scammers.

The modus operandi involves creating addresses strikingly similar to the target’s, employing identical starting and ending characters to deceive unsuspecting victims.

Subsequently, they execute a crypto transfer from the newly fabricated matching address to the target’s wallet, contaminating the transaction history. The victim, unaware, inadvertently copies the tainted address from the transaction log instead of referencing their records, thereby directing funds into the hacker’s wallet.

Notably, this kind of attack has become somewhat prevalent in the industry, with Changpeng Zhao, the former CEO of Binance, highlighting one such incident last year. At the time, Zhao said:

“The scammers are so good now they generate addresses with the same starting and ending letters, which is what most people check for when doing a crypto transfer. In fact, many wallets hide the middle part of the address with ‘…’ to make the UI look better.”

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