Speech TiTle: Why wrapped bitcoin sucks
Speaker: Andriy Velykyy
Conference: Baltic Honeybadger 2022

Introduction

It is my absolute pleasure to be here. It is my third time at Baltic Honeybadger but the first time as a speaker. This topic (Why wrapped bitcoin sucks) has been quite problematic for me because I do bridging, I help people transfer their assets from one blockchain to another and here, I see bitcoin maximalists who are definitely not interested in other chains, referring to altcoins as shitcoins (you may be true), finding the right topic has been quite an issue. I decided to go with: “Why wrapped bitcoin sucks?”.

Allbridge: overview

I have a lot of experience in bridging, in connecting different chains together and I see the limitations of having assets on another chains and because bitcoin is the first and the most important cryptocurrency and I see the wrapped versions of bitcoin on all other chains, I wanted to share some of my thoughts, knowledge and experience what I have seen happening and why I don’t think having a wrapped bitcoin anywhere is a good idea.

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What is a wrapped bitcoin?

Essentially, all wrapped assets are IOUs. It is not the real asset. It is just the representation of the asset. When we take bitcoin and use whatever bridge you want, they will issue a wrapped version of BTC (e.g. wBTC or renBTC), on the chain you are traveling to and there are some problems with them.

Wrapped BTC and its use cases

Why do people want to transfer bitcoin anywhere? Why are we having this conversation in the first place? If you are happy being on the original chain, you don’t want to move your bitcoin anywhere (especially to some bridge contracts), you’re just happy to have your own bitcoin. But sometimes, people are trying to find a way to utilize some options that are currently available on other chains but still having the possibility of retaining the original.

What are those options? It could be used as the collateral on some chains, it can be used as a medium of exchange, it could be storage of value, it can be traded on other chains and when I say traded, I always mean decentralized trading, I’m by no means speaking about centralized exchanges when you are not just trading an IOU (a wrapped version of the asset) but even worse, you are trading fake numbers on your desk.

Whenever you transfer your bitcoin to the exchange, they’re gone, right? They become the exchange’s bitcoin. I’m speaking about slightly different situation when you still want to trade, you want to do it in a decentralized way and the necessary evil here is having the wrapped version of bitcoin.

Problem 1: Liquidity fractionalization

The main problem is liquidity fractionalization. That means that wrapped bitcoin (e.g. wBTC and renBTC) is a different bitcoin from the purpose of the chain where you are bridging to. This sucks badly because instead of one major asset you are familiar with, you have a variety of assets that are supposed to be the same but they are not. There are services that provide you a possibility of changing one to another but it makes things worse because ultimately, users are confused. They are asking the main question “where is the real bitcoin?”

And the real bitcoin is on Bitcoin blockchain. All those wrapped assets are more or less fake and there are much more wrapped versions than wBTC and renBTC. If you take a look at the variety of chains where people want to bridge bitcoin, it gets even worse because wrapped versions can be re-bridged from second chain to the third one and the contract would again be new. It gets really hard to understand what is happening.

Problem 2: Security concerns

As I mentioned, when you transfer your bitcoin to an exchange it’s no longer your bitcoin, it becomes exchange’s bitcoin. But if we are honest with ourselves, with the bridge it is somehow similar. Yes, it is easier to verify the contracts and potentially, good bridges open source their code and you can understand what is happening to your asset, how you can transfer it here, transfer it back but at the same time bridges are well known for being hacked. I do remember in 2016-2017 each and every day people were writing about exchanges being hacked and bitcoin being stolen.

Now, in 2022, we’re seeing pretty much the same thing with the bridges. They got hacked and that again leads in the user perception to the feeling that this whole operation is not safe.

Problem 3: Deviating from bitcoin’s original values

Deviating from the original values – we know that the maximum amount of bitcoin is 21 million but how do we count all those wrapped versions? Especially those wrapped versions that are re-wrapped on the other chains? Yes, you can potentially trace them back to the original chain and you can see that the number in circulation supply has not changed but at the same time, all those IOUs delude the value. They lead to inflation and other asset creation.

Some of them can potentially get calculated for their market cap on other chains. For example, wBTC is included in market cap ratings on its original chain and on the destination chain. The value is being calculated and then represented in the numbers.

Then this next chain that bitcoin has been bridged to is speaking about its total value locked but this chain did not invent Bitcoin, it did not produce bitcoin, it simply has this wrapped version and still calculates it into its own flow which is ultimately wrong math.

Can we avoid using wrapped BTC?

Yes, if we stick to the original bitcoin. We cannot expect all the players on the market to do that because it is already out of the box. Wrapped versions are already on the market and are being used. I don’t think that we can or should forbid their usage but we should understand the problems and limitations that are associated with the wrapped version of bitcoin and take it into account.

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Also read: Spacechains: one-way pegged sidechains

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