WBTC’s recent depeg, and what you need to know to protect yourself

Because of the recent saga caused by Alameda and FTX, wrapped Bitcoin (WBTC) showed signs of depegging on the 10th of November, with the lowest price being 0.9852 on the 25th of November when compared to its native asset, Bitcoin.

Today, we will find out why this has happened and what you can do to protect yourself if you are currently using wBTC for trading or simply holding it.

What exactly is wBTC, and is it safe?

WBTC is an ERC20 token (Ethereum token) that is backed 1:1 with Bitcoin, and it standardizes Bitcoin to the ERC20 format, thus allowing you to use Bitcoin in smart contracts deployed on Ethereum.

To obtain WBTC for use on Ethereum, you need a merchant who will help you facilitate the minting and burning of native Bitcoin (BTC), and thus the actions for minting and burning are as follows:

1. Minting: The user sends 1 BTC to the merchant, who then forwards the 1 BTC to the Custodian for storage. The custodian will then mint 1 WBTC, which is then sent to the merchant and the user.
2. Burning: The user sends 1 WBTC to the merchant, who then forwards the 1 WBTC to the Custodian to get burnt. The custodian will then return the 1BTC from storage, which is then sent to the merchant and back to the hands of the user.

Thus, as long as the amount of Bitcoin kept by the Custodian is more than the amount of WBTC in circulation, WBTC will not crash.

But where can we check this amount of Custodian vs. the amount of WBTC in circulation?

The answer lies with the current proof-of-assets website which shows the amount of Bitcoin (BTC) that is held by custodians and can be verified on-chain. As of now, the amount of BTC held in custody is more than the amount of WBTC that is circulating on Ethereum, and thus, means that WBTC is safe.

Why did WBTC depeg?

However, we still haven’t answered a major question: What were the reasons that caused WBTC to depeg over the past few weeks?

Alameda’s holdings

Again, the biggest reason for this depeg was because of the FUD surrounding the fact that Alameda was one of the biggest merchants in this WBTC <> BTC pipeline and has over 101k worth of WBTC minted.

Over the past weeks, we have also seen Alameda burning 29k worth of WBTC to redeem for BTC.

However, because Alameda is only a merchant and not a custodian, this means that Alameda only processes and facilitates the minting and burning of WBTC.

Thus, WBTC that Alameda minted can still be redeemed through other merchants, such as but not limited to — according to this table from Dune — Coinlist, Kyber, and Maker.

Massive selling because of delayed redemptions

This FUD from Alameda was then coupled with delayed redemptions that took more than 24 hours, from one of the most highly regarded custodians, BitGo, due to a slow-to-update website, according to their COO, Chen Fang. As of writing, the time for redemptions has returned to normal (in under 2 hours).

The fear that holders of WBTC could not redeem their BTC at a 1:1 rate started to set in, and hence caused a massive selling of WBTC, even at a loss by multiple parties, thus causing the price to go down even further.

Keeping yourself safe

Thus, from what we have seen, we know that WBTC is currently safe. However, what can you do to protect yourself further and avoid such situations?

1. Limit exposure to third parties: While it might be impossible to limit exposure right now if you are trading BTC on decentralized applications, one of the ways you can protect yourself is to limit your exposure to third parties. If possible, always opt for a swap against a smart contract to minimize trust — as we have seen through the recent downfalls of third parties.
2. Limit exposure to wrapped assets: However, just trusting smart contracts has its challenges too. Essentially, you don’t want to deal with wrapped assets because there is always an off-chance that the custodian (in this case, bridges) gets hacked. If possible, always opt-in to trade using only native assets, which allows you to be safe.

Let us know what you think about this situation in our Discord, and we will see you in our next article! Remember, try not to trust third parties, and stay safe!