The New wBTC Custody Model and How It Compares with dlcBTC

Explore the recent changes to wBTC's custody model by BitGo and how it compares to dlcBTC, a decentralized alternative that emphasizes security, transparency, and user sovereignty in the DeFi ecosystem.

Author

Josiah Makori
September 21, 2024

Key Takeaways

  • BitGo recently revised the custody model for wBTC, initially proposing a multi-jurisdictional setup that raised concerns over centralization and regulatory risks. Following community backlash, BitGo introduced a third key holder to improve decentralization, but questions about transparency and regulatory compliance remain.

  • The recent changes to wBTC's custody model highlight the ongoing challenges of using wrapped Bitcoin in DeFi. The situation underscores the critical need for secure, transparent, and decentralized custody solutions in the crypto space to maintain trust and stability.

  • dlcBTC offers a more secure and transparent alternative to wBTC by focusing on self-custody, on-chain transparency, and minimal regulatory risks. With its decentralized approach, dlcBTC addresses the vulnerabilities of traditional custodial models, providing a safer option for using Bitcoin in DeFi.

Since 2019, BitGo has been the primary custodian and token issuer of Wrapped Bitcoin (wBTC), a token that has played a crucial role in enabling Bitcoin to be utilized in DeFi ecosystems.

Recently, BitGo announced changes to its wBTC custody model, sparking concerns among industry players due to the potential risks introduced. 

Although BitGo quickly revised its proposal, the debate over wBTC's centralized custody model continues, raising questions about its security, regulatory compliance, and transparency.

This article explores the developments surrounding wBTC's custody model and how it compares with dlcBTC, a more decentralized alternative.

What Exactly Happened? 

wBTC was a groundbreaking innovation that brought Bitcoin liquidity to DeFi, growing into a top-15 token with over $10 billion in TVL.

However, its reliance on BitGo as the sole custodian has always been a point of vulnerability.

Despite BitGo's strong reputation, concerns over the lack of on-chain transparency and potential regulatory risks persist.

BitGo's recent announcement to transition wBTC's custody to a "multi-jurisdictional and multi-institutional" setup raised alarms in the crypto community. 

The proposal effectively gave BiT Global, an entity associated with the TronDAO ecosystem, control over two of the three keys, raising concerns about centralization, regulatory uncertainty, and trust issues.

The proposal led to significant backlash, including MakerDAO halting new borrowing against wBTC and Coinbase announcing a competing product, cbBTC.

Image credit: Coinbase 

In response to the outcry, BitGo revised its proposal on August 14, 2024, as follows:

  • 3 jurisdictions: United States, Hong Kong, and Singapore.

  • 3 institutions: BitGo Inc., BiT Global, and BitGo Singapore Ltd.

  • 2-of-3 cold-storage multi-signature setup: Each institution holds one key.

While this revision addressed the immediate centralization concern, questions about BiT Global's role, regulatory compliance, auditability, and emergency procedures remain.

The Implications of BitGo's Proposal on DeFi 

BitGo's updated proposal has far-reaching implications for the DeFi ecosystem:

  1. Decentralization Concerns: The continued reliance on centralized entities for custody in wBTC might prompt the development of more decentralized BTC wrapping solutions.

  2. Increased Scrutiny: DeFi projects may demand more rigorous vetting of custody arrangements for all wrapped assets, potentially leading to a diversification of BTC-based collateral options.

  3. Trust and Transparency: The situation underscores the importance of transparency and trust in custody models, which can significantly impact the stability and growth of the DeFi ecosystem.

How dlcBTC Compares with wBTC's New Custody Model

dlcBTC offers a decentralized alternative to wBTC, addressing many concerns associated with centralized custody. Here's how dlcBTC compares:

Feature

wBTC

dlcBTC

Collateral management

Merchants transfer Bitcoin to BitGo-controlled wallets managed by three institutions.

Merchants maintain self-custody of Bitcoin in segregated wallets, eliminating single points of failure.

Auditing & Transparency

Off-chain minting/burning creates transparency challenges.

All transactions are on-chain with Chainlink’s Proof-of-Reserve providing additional verification.

Regulatory uncertainty

Involvement of three institutions introduces regulatory risks.

Self-custody eliminates regulatory interference, keeping control with the user.

User sovereignty

Users relinquish control to custodians, reducing sovereignty.

Users retain full control through self-wrapping, ensuring only they can access their Bitcoin.

Theft-Proof Mechanism

There is no theft-proof mechanism.

DLC wallets are designed to only pay out to the original depositor, ensuring funds are secure.

Transaction speeds

Partially automated, causing delays of several hours to a day.

Fully automated via DLCs, 3-10 times faster, typically completing within an hour.

Decentralization & security

Relies on centralized institutions, introducing risks of centralization and failure points.

Fully decentralized via DLCs, eliminating the need for a central custodian and enhancing security.

Conclusion

dlcBTC presents a compelling alternative to wBTC, offering enhanced security, transparency, and user sovereignty.

By allowing funds to be held in self-custody by each merchant and eliminating reliance on a centralized custody mechanism, dlcBTC addresses many of the risks inherent in wBTC's model.

As the DeFi landscape continues to evolve, the choice of custody model will play a crucial role in shaping the future of Bitcoin in decentralized finance.

About dlcBTC

As a decentralized wrapped Bitcoin, dlcBTC leverages Discreet Log Contracts (DLCs) and Chainlink's Cross-Chain Interoperability Protocol (CCIP) to provide a theft-proof bridge to cross-chain DeFi, backed by the security of the Bitcoin network. dlcBTC unlocks yield for your Bitcoin in DeFi with the benefit of lower fees and merchant self-custody, empowering users to put their Bitcoin to work.

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