Macauley Peterson

This is a segment from the 0xResearch newsletter. To read full editions, <a href="https://blockworks.co/newsletter/research">subscribe</a>.



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Stacks, a Bitcoin-adjacent network often referred to as a layer-2, executed a scheduled hard fork early Tuesday following the September <a href="https://blockworks.co/news/stacks-nakamoto-upgrade-bitcoin-layer-2s">Nakamoto upgrade</a> activated by network miners.



“I think it went as smoothly as we could have hoped,” said Muneeb Ali, Stacks co-founder, on a live <a href="https://x.com/Stacks/status/1851267796706943449">X space</a>. He added that developers in New York were up all night monitoring the fork.



The Nakamoto upgrade increased the alignment of Stacks with Bitcoin’s finality by further binding Stacks blocks to Bitcoin blocks. Stacks uses a consensus mechanism called <a href="https://docs.stacks.co/concepts/stacks-101/proof-of-transfer">Proof of Transfer</a> (PoX), where transactions and Stacks blocks are anchored to Bitcoin.



With the Nakamoto upgrade, this connection is strengthened. So a reorg in the Stacks blockchain would now require changes in the Bitcoin blockchain, according to Rena Shah, VP of product and operations at Trust Machines.



“It is a fundamental shift,” Shah told Blockworks. “You have to try to <a href="https://app.blockworksresearch.com/glossary##">51% attack</a> Bitcoin L1 before you&#8217;re able to do the same activity on Stacks.”



This dependency on Bitcoin makes the Stacks blockchain more secure, as Bitcoin’s high security and resistance to reorgs (given the substantial <a href="https://app.blockworksresearch.com/glossary/#hash-ratepower">hash power</a> of bitcoin miners) provide Stacks with added resilience.&nbsp;



Attempting a reorg of the Bitcoin blockchain is extremely challenging, due to both the financial and computational costs involved. This means Stacks is indirectly protected by Bitcoin’s immutability, so the Nakamoto upgrade effectively made Stacks reorg-proof.



“That might be the beauty of Stacks as an L2 for Bitcoin because it’s always kind of adhered to the ethos of Bitcoin,” Shah said. She noted the upgrade paves the way for sBTC, Stacks’ version of bitcoin, the asset.



Other features of the upgrade include faster transaction processing — Stacks now produces blocks approximately every six seconds — which enhances usability for developers and users, and improves the overall experience on the Stacks network. The upgrade also limits opportunities for miners to profit from rearranging or prioritizing transactions (<a href="https://app.blockworksresearch.com/glossary/#miner-extractable-value-mev">MEV</a>), which contributes to a fairer, more transparent network.



<h2 class="wp-block-heading">The future of sBTC</h2>



Granite, a new Bitcoin-focused DeFi protocol incubated by Trust Machines, <a href="https://www.granite.world/blog/granite-bitcoin-defi">came out of stealth</a> last month, aiming to address the limitations of custodial BTC offerings for use in DeFi. The not-yet-launched app will leverage the sBTC Bitcoin bridge enabled by the Nakamoto upgrade.



The platform should allow BTC to interact directly with DeFi dapps in a decentralized and permissionless manner. Like <a href="https://blockworks-research.beehiiv.com/p/bitcoin-defi-expands-bob">other new noncustodial offerings</a>, sBTC users will be able to lend, borrow and earn yield on their bitcoin while minimizing counterparty risk.



Traditionally, using BTC in DeFi has required custodial solutions or <a href="https://blockworks.co/news/bitgo-wbtc-custodial-changes">wrapped BTC</a> assets, exposing users to substantial counterparty risks.



More recently, Babylon has <a href="https://blockworks.co/news/0xresearch-newsletter-babylon-btc-staking-deposits">attracted interest</a> as a way to direct staking yields to BTC holders, albeit with a risk of <a href="https://blockworks.co/news/bitcoin-staking-babylon">slashing</a>.



Granite, however, follows a no-rehypothecation model. User collateral remains untapped and fully controlled by the owner, ensuring that BTC does not become entangled in protocol dependencies, or what its developers call a &#8220;borrower-centric&#8221; DeFi model.



Granite also introduces &#8220;soft liquidations,&#8221; an approach <a href="https://resources.curve.fi/crvusd/liquidations/">pioneered by Curve</a> that allows collateral to be liquidated only enough to maintain solvency and prevent catastrophic losses. Additionally, position tracking and push notifications allow users to manage positions without constant monitoring, a quality-of-life feature that’s uncommon in DeFi.



Another defining characteristic of Granite is its risk-tranched liquidity provisioning, which allows liquidity providers (LPs) to tailor their risk exposure. By choosing junior or senior tranches, LPs can manage their participation according to risk tolerance, with a reserve protecting all LPs as a first line of defense against market downturns.



Historically, only about 1% of BTC has been engaged in DeFi due to security concerns, according to Ali. “Granite’s security-oriented approach creates an opportunity to begin unlocking the remaining 99% of BTC capital,” he said. As with many other “<a href="https://blockworks-research.beehiiv.com/p/bitcoin-defi-is-heating-up">Bitcoin DeFi</a>” endeavors, Granite aims to make bitcoin a productive asset within the DeFi space, rather than merely “digital gold,” driving new waves of adoption in the process.



“The base case of bitcoin as money becomes more solidified when things like Stacks happens, so this is going to be good for Bitcoin,” Ali said.



Stacks is also <a href="https://x.com/Stacks/status/1837125070453403845">working</a> to bring sBTC to Solana.



The launch comes as <a href="https://blockworks.co/news/bitcoin-price-predictions-election">BTC is retesting</a> its June highs above $71,100. Stacks’ native token, STX, is up over 5% on the day, although it is still down about 50% from its all-time high of $3.84 reached April 1 this year.



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Stacks fortifies Bitcoin ties with Nakamoto upgrade

Donovan Choy

With LayerZero as its official interoperability provider, BitGo is expanding its tokenized wrapped bitcoin (WBTC) product to BNB Chain and Avalanche.



This effectively enables WBTC — one of the most widely used collaterals for DeFi — to be natively minted on the third and seventh largest chains by TVL without incurring additional bridging risks for users to move WBTC collateral from Ethereum.



BitGo’s expansion to BNB Chain and Avalanche is facilitated by LayerZero’s Omnichain Fungible Token (OFT) standard. It’s widely used today by over 100 protocols, including Ethena, Ether.fi and Swell.



LayerZero’s OFT standard enables the transfer of WBTC between BitGo-approved chains for the low cost of an omnichain message. It serves as a pseudo-global accounting standard that mitigates the traditional risks of double-spending or hacks with a third-party bridge.



To transfer WBTC, <a href="https://blockworks.co/tag/bitgo">BitGo</a>’s security configuration involves a 1-of-2-of-3 decentralized verifier network (<a href="https://medium.com/layerzero-official/layerzero-v2-explaining-dvns-02e08cce4e80">DVN</a>) to approve transfers. This includes BitGo&#8217;s DVN, LayerZero Labs&#8217; DVN and Polyhedra&#8217;s zkLightClient.



This is not to be confused with BitGo’s recently changed 2-of-3 multi-signature security model that is required to mint or burn WBTC.



Read more: <a href="https://blockworks.co/news/bitgo-wbtc-custodial-changes">BitGo moves to allay fears over WBTC custodial changes</a>



&#8220;WBTC is one of the largest assets in DeFi, and BitGo is one of the most trusted custodians in crypto — so this is definitely a standout example of what can be built on LayerZero,” Bryan Pellegrino, co-founder and CEO of LayerZero Labs told Blockworks.



“With BitGo running their own DVN, they have full control over the security of WBTC, which is exactly how it should be in crypto; that’s why we’re here. It’s all about teams owning their security and shipping cool stuff.”&nbsp;



<a href="https://blockworks.co/tag/layerzero">LayerZero</a> is the most adopted interoperability protocol today. Since 2021, LayerZero has facilitated 135 million omni messages and $50 billion in value across chains, a press release said.



BitGo’s WBTC is the most successful tokenized bitcoin collateral today, with 152,950 WBTC ($8.7 billion) <a href="https://wbtc.network/dashboard/order-book">issued</a> across Ethereum alone.



Read more: <a href="https://blockworks.co/news/building-better-wrapped-bitcoin-for-defi">Building a better wrapped bitcoin for DeFi</a>



The WBTC issuer was embroiled in some controversy last month after it <a href="https://www.bitgo.com/resources/blog/bitgo-to-move-to-jurisdictional-custody-to-accelerate-global-expansio/">announced</a> a change in corporate ownership that involved TRON founder Justin Sun.



Sky Protocol (previously Maker) immediately sought to <a href="https://forum.makerdao.com/t/wbtc-changes-and-risk-mitigation-10-august-2024/24844?utm_source=blockworks-research.beehiiv.com&amp;utm_medium=referral&amp;utm_campaign=short-term-risk-elevated">delist</a> WBTC collateralization from its DAI stablecoin following the announcement. Aave on the other hand, is adopting a wait-and-see approach, said Aave-Chan Initiative founder Marc Zeller on the <a href="https://youtu.be/M-O11MPtEgg">Bell Curve</a> podcast.



Updated September 10, 2024 at 4:20 pm ET: Clarified scope of BitGo&#8217;s decentralized verifier network. 



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LayerZero chosen as interoperability provider for BitGo’s WBTC

Jack Kubinec

Jeff Albus

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Howdy!&nbsp;



It seems like anyone who’s anyone in New York had their flight home canceled last night — including myself, who is writing this newsletter from North Carolina after being rugged by Spirit Airlines.



This country really needs to build more trains. Anyway:



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<h2 class="wp-block-heading">WBTC controversy could spell opportunity on Solana</h2>



Last week, the Ethereum DeFi project MakerDAO cut off lending and borrowing of wBTC — a “wrapped” bitcoin asset issued by the crypto exchange BitGo.&nbsp;



Maker did so because BitGo said it would begin sharing custody of wBTC with BiT Global as part of a “strategic partnership” with Justin Sun and the Tron ecosystem. The move partly showed how polarizing Sun has become: His name is <a href="https://forum.makerdao.com/t/wbtc-changes-and-risk-mitigation-10-august-2024/24844?utm_source=blockworks-research.beehiiv.com&amp;utm_medium=referral&amp;utm_campaign=short-term-risk-elevated">mentioned</a> six times in the first two paragraphs of the proposal to offboard wBTC.



BitGo raced to quell fears surrounding Sun’s involvement, reversing course on having BiT Global control two of the three keys needed to control wBTC. Coinbase seized on the snafu to advertise its own wrapped bitcoin product. For an overview of where the situation stands, I recommend <a href="https://blockworks.co/news/bitgo-wbtc-custodial-changes">this excellent piece</a> by my colleagues Macauley Peterson and Donavan Choy.



The idea behind wrapped bitcoin is pretty simple: Ethereum users, for instance, might want to use bitcoin for things like DeFi collateral, but Bitcoin and Ethereum are different blockchains with different token standards. To solve this, wrapped bitcoin issuers buy bitcoin, stash it away, and offer tokens that track the price of bitcoin but in the wrapping of an ERC-20, which is Ethereum’s token standard.&nbsp;



The security of this all depends on you trusting the custodian not to do nefarious things with the bitcoin, so BitGo’s Justin Sun partnership being questioned is a big deal for wBTC — and anyone hoping to claw away some of its market share.



Interestingly, the Solana DEX aggregator Jupiter’s anonymous co-founder meow was part of the founding team behind wBTC. They also helped make wBTC the largest wrapped bitcoin product on Solana: The Jupiter Liquidity Provider pool holds about $70 million in wBTC out of around $106 million that’s been brought to Solana using the Wormhole bridge.



Soon after the wBTC controversy spilled into public view, meow got on an X space with Sun and BitGo CEO Mike Belshe, where it was <a href="https://x.com/weremeow/status/1824107809547710749?s=46&amp;t=NpJYoNqI_F2pi0TXrtwLLw">brought</a> up that BiT Global could have a second “backup” key that some feared would let it gain access to wBTC’s 2/3 multisig wallet by itself.



Jupiter “would have exited [immediately]” from its wBTC exposure if this policy remained in place following the X space, meow told me in a text.



BitGo <a href="https://x.com/BitGo/status/1823751918575095854">changed</a> its model to leave Sun-affiliated BiT Global with just one key, but Jupiter will still “likely” be looking to diversify its wrapped bitcoin exposure, meow told me, noting that alternatives won’t necessarily be more secure.&nbsp;



Bitcoin is a big deal everywhere in crypto, though wrapped bitcoin is still bigger business on Ethereum than on Solana. There is roughly 154,000 wBTC on Ethereum, according to a Dune <a href="https://dune.com/hashed_official/btc-on-ethereum">dashboard</a>, compared to around 1,800 wBTC <a href="https://solscan.io/token/3NZ9JMVBmGAqocybic2c7LQCJScmgsAZ6vQqTDzcqmJh#holders">bridged</a> to Solana via Wormhole, per Solscan. Other wrapped bitcoin alternatives are available on Solana, like tBTC and 21BTC, but neither has a significant market cap — there are around 75 <a href="https://dune.com/threshold/tbtc">tBTC</a> and 11 <a href="https://dune.com/21co/21btc-solana">21BTC</a> on Solana.



With wrapped bitcoin facing scrutiny, now could be the time to strike for would-be wBTC competitors. I’d personally expect to see some movement happen here in the coming weeks.



“[It] seems like a good opportunity for wBTC alternatives, especially Solana focused solutions, to carve [out] some space from wBTC&#8217;s current moat,” Infra, the anonymous labs lead at Raydium told me in a text.



— Jack Kubinec



<h2 class="wp-block-heading">Zero In</h2>



It wasn’t a great week for SOL flows:



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXcojlH54pqe0nWbDY64kX2IEH9iWLnNYplVavjM3e4kPoCX2L4NfyzFcwxwnPu6vcemLDOtgy68fn7gPlYyUSPDwkj57Hl5ugorsP0aJ4N-wP11whwLCrnSzhQ2RmRGwCOUE764bOJLPJblE3bGvCaf7kc?key=yZ7Lis_JI6yF1ai6rPEuYA" alt=""/></figure>



CoinShares data showed that around $39 million flowed out of Solana last week, which the asset manager said is SOL’s largest week of outflows on record. In a writeup, CoinShares chalked up the outflows to reduced memecoin trading volume.&nbsp;



One Dune <a href="https://dune.com/ilemi/solana-dex-metrics">dashboard</a> indicates Solana DEX volume was at its lowest point since February last week. SOL itself has been roughly flat on the week, trading at around $144 at press time.



— Jack Kubinec



<h2 class="wp-block-heading">The Pulse</h2>



Google’s vetting process for apps on its Play Store is facing scrutiny after a Florida woman named Maria Vaca <a href="https://www.law.com/therecorder/2024/08/15/google-sued-over-5m-in-crypto-stolen-by-malicious-wallet-app-in-app-store/">claimed</a> she lost $5 million to a scam crypto app. According to Vaca’s lawsuit, it took Google three months to remove the app despite being notified by the Consumer Financial Protection Bureau. The app, masquerading as a legitimate crypto wallet, allegedly allowed cybercriminals to steal funds from unsuspecting users. Although the app wasn&#8217;t named in the lawsuit, some are <a href="https://x.com/gbeni_wealth/status/1825096661883822151">speculating</a> that it could have been a clone of Solana&#8217;s popular Phantom wallet.



The frustration with Google’s oversight was palpable, with @neoworldlife <a href="https://x.com/neoworldlife/status/1825128639626637717">stating</a>, “It’s about time Google adopted Apple Store level checks and compliance.&#8221; @d3fenders <a href="https://x.com/d3fenders/status/1825123290710528343">commented</a>, “In a decentralized world, you are ultimately responsible for the care that you take of your crypto. It’s a shame that Google is getting fined for typical web3 thievery.” Meanwhile, @SolanaJax <a href="https://x.com/SolanaJax/status/1825096295301689718">advised</a>, “Get a cold wallet please &#8211; avoids a lot of these issues.”



Others questioned the severity of the issue, with @tribes_two <a href="https://x.com/tribes_two/status/1825065380047688078">speculating</a>, “I bet it was user error,” while @ABCat07340480 went so far as to suggest that this case could lead to a broader crackdown, <a href="https://x.com/ABCat07340480/status/1825102292422443049">wondering</a>, “And this can lead to a crypto wallet ban on the Play Store if this woman has her way and is lying for free money.”



Skepticism about Vaca’s chances in court was evident, with @chefderek.eth <a href="https://x.com/chef_derek1/status/1825060302700081603">acknowledging</a>, “All of us crypto people know she ain’t gonna win.” Others took a similarly harsh view of the situation, like @branditmanaged who <a href="https://x.com/branditmanaged/status/1825214088517169371">asked</a>, “Who the hell keeps even $50,000 let alone 5m in crypto on a hot wallet let alone a phone hot wallet?!?” @Plagueliche <a href="https://x.com/Plagueliche/status/1825437257882325291">added</a> a bit of dark humor, “I need to sue more people for my stupidity.”



However, the incident has also sparked deeper concerns about Google’s accountability. As @7Pirelli <a href="https://x.com/7Pirelli/status/1825147169289990253">pointed</a> out, “They don&#8217;t care about $5 million. Punish them with $50 or $500 million, then something will maybe change.” And @Coachkcrypto <a href="https://x.com/Coachkcrypto/status/1825374555340476560">added</a>, “It&#8217;s crazy that there was a scam app on the play store for MONTHS. It took Google 3 months to remove an app that stole over $5m worth of crypto… isn’t three months a little bit long?”



— Jeffrey Albus



<h2 class="wp-block-heading">One Good DM</h2>



A message from Tom Wan, strategy and business development at 21.co:


<div class="wp-block-image">
<figure class="aligncenter"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXchT6RB3blyYIWii5PU2X0hsGmp8dq1ItKmjIFy3EEskPbnTcXS5uhonXsf0LNDv9Lv_DNa0t-rgt5zfrBJ8Y3KqJ3mWFIgapM-dbDgVHhirgi7bFKKFYPXk7LVfxNMPm_gsIRCAl4KSs2KjYQ8a7ZyoJmx?key=yZ7Lis_JI6yF1ai6rPEuYA" alt=""/></figure></div>


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With wBTC facing scrutiny, Solana-based competitors have an opportunity

BitGo is preparing to expand management of wrapped bitcoin (WBTC), worth $9.2 billion, to two new entities in Hong Kong and Singapore within two months.



The company <a href="https://www.bitgo.com/resources/blog/bitgo-to-move-to-jurisdictional-custody-to-accelerate-global-expansio/">announced</a> last Saturday that it plans to change the legal custody over its WBTC product into a “multi-jurisdictional and multi-institutional” joint venture with BiT Global as part of a strategic partnership with Justin Sun and the Tron ecosystem.



Sun’s involvement in the new enterprise provoked a reaction from MakerDAO, which immediately <a href="https://forum.makerdao.com/t/wbtc-changes-and-risk-mitigation-10-august-2024/24844?utm_source=blockworks-research.beehiiv.com&amp;utm_medium=referral&amp;utm_campaign=short-term-risk-elevated">launched</a> a governance discussion on Monday aimed at removing WBTC collateralization from its DAI stablecoin. About 3% ($155 million) of DAI’s collateral backing is made up of WBTC, according to <a href="https://makerburn.com/">Makerburn</a>.



The resulting executive vote passed and was <a href="https://vote.makerdao.com/executive/template-executive-vote-wbtc-vault-debt-ceiling-reductions-stability-scope-parameter-changes-bug-bounty-payments-clippermomjob-update-july-2024-aligned-delegate-compensation-6s-capital-stability-fee-increase-monetalis-clydesdale-and-coinbase-custody-dao-resolutions-spark-proxy-spell-august-12-2024">executed</a> Thursday.



“We can infer that <a href="https://blockworks.co/tag/justin-sun">Justin Sun</a> will have significant influence or control over the joint venture managing WBTC,” Block Analitica, a Maker risk management team, wrote.



In an X space hosted Tuesday, <a href="https://blockworks.co/tag/bitgo">BitGo</a> CEO Mike Belshe <a href="https://x.com/mikebelshe/status/1823223990766473410">stressed</a> that the underlying multi-signature and cold storage technology of WBTC will remain the same.



“The technology that’s being used is the exact same technology that’s used today on a go-forward basis,” Belshe stated.



BitGo currently holds 154,266 bitcoins <a href="https://wbtc.network/dashboard/audit">in custody</a>.



The BitGo Trust Company uses a 2-of-3 multi-signature security model. All three private keys are held by BitGo in the US today, and the minting or burning of WBTC requires at least two signees. That may not sound like a lot, but Belshe pointed to processes in place to make each one secure.&nbsp;



“So even though you only have three keys that I&#8217;ve listed here, the protections on each of those keys still make it so that no single person can access even one of those keys,” he said.&nbsp;



Under the planned changes, one private key will be shifted to BiT Global’s ownership. BiT Global is a regulated Trust and Company Service Provider (TCSP) registered in <a href="https://blockworks.co/tag/hong-kong">Hong Kong</a>. The remaining two keys will be retained by BitGo, one of which will remain in the US while the other will be held under BitGo Singapore Ltd.



Belshe argued that this should enhance confidence in the bitcoin backing of WBTC because two parties will verify BTC deposits received prior to co-signing on a WBTC mint transaction on Ethereum.



It’s also an attempt to decentralize the freezing rights of WBTC across jurisdictions which would insulate the asset from a regulatory crackdown risk, he said.



The X space was moderated by the Jupiter co-founder known as Meow, part of the founding team for WBTC, who has <a href="https://meow.bio/wbtc.html">praised</a> BitGo’s transparency in the past.



Meow questioned the premise that the change would improve decentralization. At issue was the suggestion that BiT Global would hold a second “backup” key, that could enable it to meet the two-thirds threshold on its own.



In that case, Hong Kong authorities could theoretically control both keys held with BiT Global.



Belshe responded by suggesting that regulators would need to cooperate and no one jurisdiction would be likely to take unilateral action.



“There&#8217;s no freaking way that one regulator is just going to kowtow to the other one without a lot of conversation,” he said.



All of the merchants who issue mint/burn requests to BitGo already operate outside the United States, Belshe said.



BitGo reiterated in a follow-up X <a href="https://x.com/BitGo/status/1823751918575095854">post</a> that it intends to split up the keys to avoid have two held by BiT Global.



“To address those concerns, the 3rd key will not be held with BiT Global; and will instead be stored in BitGo Singapore Ltd.” the firm wrote.



Blockworks contacted BitGo to clarify how new multisig signing keys would be generated to ensure independence and security among multiple parties, but did not hear back by time of publication.



Belshe noted that the new arrangements were a work in progress.



“I think the key that we want is to make sure that we&#8217;re constantly progressing towards more decentralization, less concentration of power,” Belshe said.



Read more: <a href="https://blockworks.co/news/sec-ameds-complaint-justin-sun-complaint">SEC amends case against Justin Sun to establish jurisdiction</a>



BiT Global board director Rob Liu, highlighted the fiduciary duty of BiT Global in Hong Kong.



“BiT Global is structured as a public holding company under the Hong Kong statutory framework. We enter the regulation as TCSP license holder — what that means is we are in a fiduciary duty to make sure that customer assets are safeguarded according to law and not subject to arbitrary use by anybody,” Liu noted.&nbsp;



Meow questioned how market participants could gain confidence in BiT Global’s operational processes.



“From the outside looking in, there&#8217;s actually no way to ascertain how good the processes of BiT Global are in terms of custody and everything,” he said.



Belshe said the same technology used by BitGo “has been cloned” for use by BiT Global.



Regarding Sun, Belshe reiterated during the X space that Sun is not an employee of BiT Global and that under Hong Kong laws, a single person isn’t allowed to have above a 20% ownership in a public company.



Sun, who was on the call, kept mostly silent. He chimed in at the end to add, “our top priority is to protect the community and protect the users.”



<h2 class="wp-block-heading">Competitors on the horizon</h2>



BitGo’s WBTC dominates the bitcoin DeFi market on Ethereum today, with a market share of 98.8%, according to <a href="https://dune.com/hashed_official/btc-on-ethereum">Dune</a> data. But the public consternation to BitGo’s plans may leave an opening for others, both centralized and decentralized, to gain wider adoption.



On the centralized front, Coinbase is presumed to be launching a potential WBTC competitor. The exchange <a href="https://x.com/coinbase/status/1823501582006411614">teased</a> on Wednesday in a pair of tweets that “cbBTC” is “Coming Soon.”



Projects that make use of Bitcoin’s <a href="https://bitcoinops.org/en/topics/tapscript/">Tapscript</a>, such as dlcBTC, are coming online to provide non-custodial alternatives to getting bitcoin on Ethereum.



Read more: <a href="https://blockworks.co/news/building-better-wrapped-bitcoin-for-defi">Building a better wrapped bitcoin for DeFi</a>



Wrapped bitcoin itself is also gaining greater utility. Liquid restaking token (LRT) specialists <a href="https://blockworks.co/news/swell-launches-layer-2">Swell</a> has recently <a href="https://x.com/swellnetworkio/status/1823722077364609188">introduced</a> swBTC, a Bitcoin LRT that wraps WBTC — with BitGo’s blessing — to offer new avenues for holders to earn yield via restaking.



Launched on <a href="https://blockworks.co/news/symbiotic-seed-round-shared-security">Symbiotic</a>, <a href="https://blockworks.co/tag/eigenlayer">EigenLayer</a>, and <a href="https://blockworks.co/news/universal-restaking-layer-andalusia-labs">Karak</a>, swBTC holder&#8217;s yield comes in exchange for providing economic security to these networks, and potentially from further DeFi strategies.



Users can deposit WBTC to receive swBTC, but in the future Swell plans to add native BTC swaps directly through <a href="https://blockworks.co/tag/thorchain">THORChain</a>. The launch is part of Swell&#8217;s broader initiative to expand restaking opportunities across blockchain networks, with swBTC joining other offerings of staked and restaked ether: swETH and rswETH.



To maintain its dominance, BitGo will likely have some fence-mending ahead, given the <a href="https://x.com/gphummer/status/1823921409418256478">criticism</a> unleashed.



“I think it&#8217;s quite a hard pill for the community to swallow, at least in 60 days,” Meow said at the close of the X space.



Belshe appeared well aware of the challenges.



Over that time period, “we&#8217;re going to be working with all of the big DeFi projects that are touching wrapped bitcoin,” he said. “There&#8217;s a community that has to decide whether it wants to do this or doesn&#8217;t want to do this.”



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BitGo moves to allay fears over WBTC custodial changes

The collapse of FTX has put crypto market participants on edge.&nbsp;



You see it in the embrace of unsubstantiated, doomsday Twitter chatter, <a href="https://blockworks.co/news/weth-fud-is-a-joke" target="_blank" rel="noreferrer noopener">no matter how fanciful</a>. And you see it in the <a href="https://blockworks.co/news/bitcoins-correlation-with-stocks-bonds-hits-3-month-low" target="_blank" rel="noreferrer noopener">decoupling of crypto markets</a> from tech equities.



The entire industry, essentially, has been called into question — from the prospect of Ethereum developers delaying withdrawals of staked ether to Coinbase’s safe storage of bitcoins <a href="https://blockworks.co/news/the-grayscale-dilemma-a-record-discount-and-a-golden-goose" target="_blank" rel="noreferrer noopener">backing Grayscale’s Bitcoin Trust</a> (GBTC).



In the tumultuous last few weeks, wrapped bitcoin on Ethereum (WBTC) fell uncomfortably below par, but finally returned to a healthy valuation on the spot market toward the end of the stock trading session in New York. The deviation started in earnest on Nov. 11 — <a href="https://blockworks.co/news/cryptos-erase-gains-ftx-token-slips-further-on-bankruptcy-news" target="_blank" rel="noreferrer noopener">the day FTX declared bankruptcy</a> — and reached a Nov. 25 nadir of around 0.985 BTC, on the Binance exchange, according to data from TradingView.


<div class="wp-block-image">
<figure class="aligncenter"><img decoding="async" src="https://lh4.googleusercontent.com/Pd3KNivKba52YYMqNgqUFq6WX7fC2x6tegWOEKsPfWEAt_8g_b3cV46FwbaxDHBg23ihvE010JZBFzNDBgyLvqazUBw2NqhEpRQ9GpAOKN4W8t5RrYN5fnH1HzRJ4QdwsZUs5h3rOTN41aJ6QG5zeQ7RKbrJibk7-M7napbRbHfZ0SO_y9Ob_YtzfHqmdw" alt=""/><figcaption>WBTC:BTC pair on Binance, daily timeframe; Source: TradingVideo</figcaption></figure></div>


Euler Finance’s CEO Michael Bentley told Blockworks the incident can be lumped in with general nervousness about lending and borrowing markets.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“There were some unfortunate circumstances, and frankly it made me a little nervous when I first started reading about some of the issues as well,” Bentley said.</blockquote>



He referenced the Thanksgiving holiday weekend, which may have slowed the pace of WBTC redemptions for underlying BTC, as partly to blame.



Market data provider Kaiko called the slide a “crisis of confidence.”



“Investors panicked after charts circulating on Twitter showed that Alameda Research is by far the top WBTC merchant by the number of tokens minted, having created more than 100,000 WBTC. This sparked fears that WBTC is not fully backed,” Kaiko <a href="https://marketing.kaiko.com/wrapped-assets-under-scrutiny" target="_blank" rel="noreferrer noopener">wrote</a> in its newsletter on Monday.



But such panic, like <a href="https://blockworks.co/news/weth-fud-is-a-joke" target="_blank" rel="noreferrer noopener">the misread of wrapped ether</a>, which Bentley said “spread like wildfire, despite being a joke,” betrays a basic misunderstanding of how WBTC works.



For WBTC to be minted on Ethereum, BitGo takes custody of an equivalent amount of BTC. So, Alameda’s insolvency has no relevance; any WBTC they hold either required them to send BTC to BitGo first, or was bought off the spot market. Either way, BitGo has the bitcoins and can redeem them for any circulating WBTC in the market when needed. Chen Fang, BitGo’s chief operating officer, sought to allay investor fears via a tweet that did, indeed, mark the bottom of the crisis.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">BitGo is just the custodian — all end user minting/burning must go through one of the merchants in the WBTC network or trade it at an exchange If folks capitulates to fake news, the market makers win — every WBTC is 1:1 backed, verifiable on chain&mdash; 🍟 Chen Fang (@chenbfang) <a href="https://twitter.com/chenbfang/status/1596225826995179520?ref_src=twsrc%5Etfw">November 25, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



There was another “unfortunate circumstance,” as Bentley put it.



“It seems also that they have this multisig that helps participate in the redemption process…it appears that a couple of people on this multisig either lost access or needed to have their access removed,” he said. “And they decided to make this change at a time when everyone was nervous.”



Victor Tran, CEO of Kyber Network and a member of the multi-signature custodial setup, <a href="https://twitter.com/vutran54/status/1596162341196136448" target="_blank" rel="noreferrer noopener">tweeted</a> he saw no evidence of delayed redemptions but was coordinating the <a href="https://github.com/WrappedBTC/DAO/pull/12">amendment to the multisig keys</a> with BitGo. The group was reduced from 18 to 13, with the number of signatories required to approve transactions dropping from 11 to 8. Notably, one of those removed was the key held by FTX-owned Blockfolio.



The confusion around what was happening led the normal arbitrage market behavior — which normally would restore the peg in such cases — to stall.



“The market’s very inefficient right now, everyone’s very, very nervous; liquidity’s thin in a lot of places,” Bentley said.



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Unusual Wobble in Wrapped Bitcoin Showed Trader Fear

John Gilbert

<div id="highlights-block_62a7ad30cd549" class="highlights">
 <ul>
 <li>Wrapped crypto tokens are smart contracts representing locked collateral of the original asset on a separate blockchain</li>
 <li>They provide liquidity to a growing DeFi ecosystem</li>
 </ul>
 
</div>



Wrapped crypto tokens such as wrapped bitcoin (wBTC) are smart contracts representing locked collateral of the original asset (i.e., BTC) on a separate blockchain. They are used to provide liquidity to a growing DeFi ecosystem.&nbsp;



Think of wrapped bitcoin like an IOU briefcase. But instead of paper representing a promise to pay your BTC back, inside is a live feed to a vault containing every bitcoin and outstanding wrapped bitcoin.&nbsp;



<h4 class="wp-block-heading">Quick facts</h4>



<ul class="wp-block-list"><li>DeFi needs cross-chain liquidity for global adoption.</li><li>Wrapped tokens offer a solution.&nbsp;</li><li>The mechanism of wrapping a crypto token requires 3 parties: merchant, custodian and investor.</li><li>Wrapped tokens carry inherent liquidity- and market-contagion risks.&nbsp;</li><li>The value of wrapped tokens is not necessarily equal to that of their original counterparts.</li></ul>



<h3 class="wp-block-heading">Why wrapped tokens are important to DeFi</h3>



Wrapped tokens offer a solution to a critical problem in DeFi: cross-chain liquidity. Think of each blockchain and its native token as a silo. Demand for that specific token is contingent on the applications built on that network.



DeFi (decentralized finance) and its complex credit and lending ecosystem needs immediate settlement technology that works across all blockchains. Without this technology, blockchains can&#8217;t benefit from the entire industry&#8217;s growth.&nbsp;



Wrapped tokens break down those silos by offering native tokens utility outside their blockchain. This innovation unlocks a flood of capital efficiency that enables diverse investment instruments across most chains. 



<h3 class="wp-block-heading">How wrapped bitcoin works</h3>



All users access wBTC through third-party merchants such as <a href="https://aave.com/" target="_blank" rel="noreferrer noopener">AAVE</a> and <a href="https://makerdao.com/en/" target="_blank" rel="noreferrer noopener">Maker</a>. When a user requests wBTC in exchange, the merchant takes their BTC and sends it to BitGo, a custodian managed by the <a href="https://wbtc.network/" target="_blank" rel="noreferrer noopener">wBTC DAO</a> (a <a href="https://cms.blockworks.co/the-investors-guide-to-daos/" target="_blank" rel="noreferrer noopener">decentralized autonomous organization</a>). 



In the previous analogy, the vault containing every bitcoin and wrapped bitcoin represents the custodian. Once BitGo receives the bitcoin from the merchant, it then mints the equivalent in wBTC — an ERC-20 token on the Ethereum blockchain. This token is a smart contract representation, or IOU briefcase, of the original bitcoin. 



The custodian then sends the wBTC to the merchant, where the user finalizes the transaction. Typically, there aren&#8217;t any merchant fees in this transfer because they only charge fees for exchanging wBTC for BTC. The user will be responsible for any gas fees used in transferring wBTC on the Ethereum blockchain.&nbsp;



Because this exchange requires trust from multiple parties, BitGo partnered with Chainlink to provide an automated auditing system — similar to the direct live feed from the previous analogy. This auditing system is called <a href="https://www.bitgo.com/newsroom/press-releases/bitgo-adopts-chainlink-enable-on-chain-auditing-for-wbtc">proof of reserve</a>.



Other dApps (decentralized applications) in the Ethereum ecosystem use this protocol to monitor BitGo&#8217;s balance sheet when accepting wBTC as collateral or exchange equivalency. If BitGo were to mint more wBTC than the BTC it holds in reserve, every application using Chainlink&#8217;s protocol would stop receiving wBTC.



<h3 class="wp-block-heading">What is the difference between a pegged and wrapped token?</h3>



The value of a pegged token or currency can be linked to that of another asset — digital or physical — using a variety of approaches. Because custodians link wrapped tokens to the value of other crypto assets, they fall under the pegged currency classification.&nbsp;&nbsp;



But they do not classify stablecoins such as USDT as a wrapped token because it pegs its value to the US dollar in off-chain cash reserves. And unlike wrapped tokens, these reserves are not audited through an automated protocol.&nbsp;



<h3 class="wp-block-heading">Is a wrapped token fundamentally the same as the original?</h3>



No: wBTC should not be considered a fundamental equivalent to BTC. This common misconception is why many lose money in liquidation crisis events. In the analogy, the value of the briefcase IOU depends on three things: the quality of the livesteam and the integrity of the vault and the briefcase holding it together. 



Wrapped tokens, in this way, require three layers of trust that the original token doesn&#8217;t need. So, it may seem that the two have the equivalent value for a time. But in bearish markets, the perceived value of the wrapped tokens can drop faster than that of the originals. This is how wrapped tokens can lose their peg even though their balance is still 1:1.



<h3 class="wp-block-heading">The market-contagion risk of wrapped tokens&nbsp;</h3>



A crypto market contagion is a financial crisis spreading from one protocol or crypto sector to another. Contagion is more likely when participants distribute credit risks across institutions and markets.&nbsp;



So with wrapped crypto, increased capital efficiency also comes with an increased risk of contagion. For example, if one protocol managing collateral vaults fails, every other application using their wrapped token or &#8216;IOU briefcase&#8217; is exposed to a potential liquidity crisis. This type of credit contagion has happened multiple times throughout the crypto cycles. They have been mainly associated with the collateral requirement failures of pegged stablecoins such as USDT and UST. Despite these previous episodes, we have yet to see a failure of a wrapped token vault audited by a proof-of-reserve protocol.



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Wrapped Crypto Tokens and Why They’re Critical to Markets

Sam Martin

Ethereum and Bitcoin Price Action, Fundamentals Diverge: Markets Wrap

<div id="highlights-block_60c9fc7f1690b" class="highlights">
 <ul>
 <li>Valkyrie filed an 8-A with the SEC in a key step for a bitcoin futures ETF approval</li>
 <li>Total market capitalization of all digital assets reaches all-time high</li>
 </ul>
 
</div>



Valkyrie filed an 8-A with the US Securities and Exchange Commission in a key step for a bitcoin futures ETF approval. While an ETF is a net positive, a futures-backed ETF could invite Wall Street price manipulation games.



Bitcoin options volume spikes amidst bullish price action. 



Very little of the BTC supply has traded hands above $60,000. 



Perpetual funding rates are rising as traders enter long positions. 



Approximately 1.5% of the circulating BTC supply is locked in Ethereum smart contracts. 



Latest in Macro:



<ul class="wp-block-list"><li>S&amp;P 500: 4,471, +.75%</li><li>NASDAQ: 14,897, +.50%</li><li>Gold: $1,768, -1.56%</li><li>WTI Crude Oil: $82.24, +1.14%</li><li>10-Year Treasury: 1.572%, +.053%</li></ul>



Latest in Crypto:



<ul class="wp-block-list"><li>BTC: $62,150, +7.88%</li><li>ETH: $3,856, +2.21%</li><li>ETH/BTC: .0626, -5.45%</li><li>BTC.D: 46.49%, +3.87%</li></ul>



<h3 class="wp-block-heading">Bitcoin ETF Update</h3>



&#8220;The U.S.&#8217;s dollar dominance, jobs, votes, plenty of revenue (tax) and, most importantly — it counters China — are top reasons we expect Uncle Sam will embrace cryptocurrencies with proper regulation and ETFs. Imagine the potential for a new digital world order if the price of Bitcoin keeps rising, and 1.4 billion citizens are banned from it by their government,&#8221; <a href="https://twitter.com/mikemcglone11/status/1448979416172871692?s=21" target="_blank" rel="noreferrer noopener">wrote</a> Mike McGlone of Bloomberg Intelligence, in a report today.



His comments came moments before Valkyrie <a href="https://cms.blockworks.co/valkyrie-files-8-a-in-key-step-for-bitcoin-futures-etf-approval/" target="_blank" rel="noreferrer noopener">filed</a> an 8-A with the SEC in a key step for a bitcoin futures-backed ETF approval, indicating support of bitcoin from regulators. 



In anticipation of approval, the basis on futures contracts is widening alongside rising open interest in BTC futures. This could open the door for institutions to put on a risk-free basis trade where they sell the futures contract and buy spot BTC in order to lock in a spread. 



&#8220;While over a dozen organizations have applied to launch bitcoin ETFs, the diversity of the applicants attests to a climate of intensive interest in bitcoin among retail investors,&#8221; CTO and co-founder of Lolli, Matt Senter, wrote to Blockworks. &#8220;By offering clients indirect exposure to bitcoin, ETFs will be a powerful way to dissolve barriers to entry in bitcoin, building an onramp to adoption and greater knowledge about bitcoin as a new asset class.”



While providing more investors a new vehicle to gain exposure to BTC is a net positive, it is worth noting that a futures-backed ETF could lead the way to more price manipulation tactics from Wall Street firms.



<div class="wp-block-image"><figure class="aligncenter size-full"><img loading="lazy" decoding="async" width="596" height="593" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-1.52.24-PM.png" alt="" class="wp-image-9457" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-1.52.24-PM.png?w=596 596w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-1.52.24-PM.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-1.52.24-PM.png?w=150 150w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-1.52.24-PM.png?w=258 258w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-1.52.24-PM.png?w=262 262w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-1.52.24-PM.png?w=220 220w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-1.52.24-PM.png?w=80 80w" sizes="(max-width: 596px) 100vw, 596px" /><figcaption>Source: @CaitlinLong_</figcaption></figure></div>



<h3 class="wp-block-heading">Bitcoin Fundamentals</h3>



Despite increased options premiums, volume has spiked on the bullish BTC price action as traders prepare for price discovery:



<div class="wp-block-image"><figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="1024" height="572" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/skew_btc_options_volumes-1024x572.png" alt="" class="wp-image-9452" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/skew_btc_options_volumes-1024x572.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/skew_btc_options_volumes-1024x572.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/skew_btc_options_volumes-1024x572.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/skew_btc_options_volumes-1024x572.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/skew_btc_options_volumes-1024x572.png?w=467 467w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/skew_btc_options_volumes-1024x572.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/skew_btc_options_volumes-1024x572.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/skew_btc_options_volumes-1024x572.png?w=1200 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Source: Skew</figcaption></figure></div>



There isn&#8217;t much on-chain activity at these price levels, meaning that very little supply has changed hands above $60,000. That should come as no surprise considering the brief amount of time BTC maintained its price above $60K back in April. With little support or resistance in this trading range, expect higher volatility as BTC nears price discovery. 



<div class="wp-block-image"><figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="1024" height="576" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/UTXO-dist-1024x576.png" alt="" class="wp-image-9453" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/UTXO-dist-1024x576.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/UTXO-dist-1024x576.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/UTXO-dist-1024x576.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/UTXO-dist-1024x576.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/UTXO-dist-1024x576.png?w=464 464w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/UTXO-dist-1024x576.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/UTXO-dist-1024x576.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/UTXO-dist-1024x576.png?w=1456 1456w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Source: Glassnode</figcaption></figure></div>



Perpetual funding rates are creeping higher, which means the longs are paying the shorts in order to hold their positions. Bulls are getting aggressive in a hurry. It will be something to keep an eye on to gauge the amount of greed in the market over the weekend. The chart below shows the APR longs are paying to keep positions open, sorted from the highest open interest to the lowest. 



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="571" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-4.48.59-PM-1024x571.png" alt="" class="wp-image-9482" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-4.48.59-PM-1024x571.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-4.48.59-PM-1024x571.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-4.48.59-PM-1024x571.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-4.48.59-PM-1024x571.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-4.48.59-PM-1024x571.png?w=468 468w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-4.48.59-PM-1024x571.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-4.48.59-PM-1024x571.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-4.48.59-PM-1024x571.png?w=1206 1206w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Source: https://app.laevitas.ch/dashboard/btc/derivs</figcaption></figure>



Bitcoin is outpacing all altcoins and ether, as seen in the ETH/BTC chart below. Anyone who is positioned heavily in alts is having a rough time. 



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="563" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.10.20-PM-1024x563.png" alt="" class="wp-image-9459" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.10.20-PM-1024x563.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.10.20-PM-1024x563.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.10.20-PM-1024x563.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.10.20-PM-1024x563.png?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.10.20-PM-1024x563.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.10.20-PM-1024x563.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.10.20-PM-1024x563.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.10.20-PM-1024x563.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.10.20-PM-1024x563.png?w=1551 1551w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Source: Trading View</figcaption></figure>



<h3 class="wp-block-heading">Non-Fungible Tokens (NFTs)</h3>



Axie Infinity co-founder, Jeff Zirlin, took to <a href="https://twitter.com/Jihoz_Axie/status/1448660069445300237?s=20" target="_blank" rel="noreferrer noopener">Twitter</a> to announce that the popular play-to-earn game has cracked the top 500 in global websites for engagement over the last 90 days. 



Laguna Games <a href="https://venturebeat.com/2021/10/15/laguna-games-raises-5m-to-launch-crypto-unicorns-with-egg-nfts/" target="_blank" rel="noreferrer noopener">raises</a> $5 million from BitKraft Ventures and Delphi Digital to launch its blockchain-based game, Crypto Unicorns, next month. 



Trading data from <a href="https://opensea.io/rankings" target="_blank" rel="noreferrer noopener">OpenSea</a> and <a href="https://solanalysis.com" target="_blank" rel="noreferrer noopener">Solanalysis</a> of some of the top Solana and Ethereum projects can be found in the photos below:



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="351" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.33-PM-1024x351.png" alt="" class="wp-image-9463" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.33-PM-1024x351.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.33-PM-1024x351.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.33-PM-1024x351.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.33-PM-1024x351.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.33-PM-1024x351.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.33-PM-1024x351.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.33-PM-1024x351.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.33-PM-1024x351.png?w=1252 1252w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Top Ethereum Projects</figcaption></figure>



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="291" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.47-PM-1024x291.png" alt="" class="wp-image-9464" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.47-PM-1024x291.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.47-PM-1024x291.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.47-PM-1024x291.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.47-PM-1024x291.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.47-PM-1024x291.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.47-PM-1024x291.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.47-PM-1024x291.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-2.21.47-PM-1024x291.png?w=1231 1231w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Top Solana Projects </figcaption></figure>



<h3 class="wp-block-heading">BTC on Ethereum</h3>



<ul class="wp-block-list"><li>There is now over 280,000 BTC locked in ethereum smart contracts. That equates to roughly 1.5% of the circulating BTC supply. </li><li>The most popular form of BTC on Ethereum is wBTC, which holds a 76% marketshare. </li></ul>



<div class="wp-block-image"><figure class="aligncenter size-full"><img loading="lazy" decoding="async" width="622" height="376" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-3.51.02-PM.png" alt="" class="wp-image-9470" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-3.51.02-PM.png?w=622 622w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-3.51.02-PM.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-3.51.02-PM.png?w=425 425w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-3.51.02-PM.png?w=432 432w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-3.51.02-PM.png?w=362 362w, https://blockworks-co.imgix.net/wp-content/uploads/2021/10/Screen-Shot-2021-10-15-at-3.51.02-PM.png?w=80 80w" sizes="(max-width: 622px) 100vw, 622px" /><figcaption>Source: Dune Analytics</figcaption></figure></div>



<h3 class="wp-block-heading">Other Notable News</h3>



<ul class="wp-block-list"><li>Tether settled with the CFTC for $42 million over false claims of being fully backed by dollars, Blockworks <a href="https://cms.blockworks.co/tether-settles-with-cftc-for-42-5m/" target="_blank" rel="noreferrer noopener">reported</a> earlier.</li><li>Nine out of 10 lightning nodes that were launched in the last year run on Umbrel, <a href="https://twitter.com/mayankdotch/status/1448999505211187205?s=20" target="_blank" rel="noreferrer noopener">according</a> to the company&#8217;s co-founder. </li><li>The total crypto market capitalization has crossed <a href="https://www.tradingview.com/symbols/CRYPTOCAP-TOTAL/" target="_blank" rel="noreferrer noopener">$2.5 trillion</a> for the first time today. </li><li>US treasury five-year breakeven inflation rate hit 2.753% today for the first time since <a href="https://twitter.com/Fxhedgers/status/1449030958372442126?s=20" target="_blank" rel="noreferrer noopener">April 2005</a>.</li></ul>



That is all for this week, folks. Looking forward to catching up on Monday! 



<hr class="wp-block-separator"/>



Are you a UK or EU reader that can&#8217;t get enough investor-focused content on digital assets? <a target="_blank" href="https://cms.blockworks.co/events/das-london/" rel="noreferrer noopener">Join us</a>&nbsp;in London on November 15th and 16th for the Digital Asset Summit (DAS) London. Use code ARTICLE for £75 off your ticket.&nbsp;<a target="_blank" href="https://cms.blockworks.co/events/das-london/" rel="noreferrer noopener">Buy it now</a>.



<hr class="wp-block-separator"/>

Bitcoin Soars Past $62,000; Price Discovery Nears: Markets Wrap

<div id="highlights-block_61647bab3b1f6" class="highlights">
 <ul>
 <li>Over $51 million of the erroneously distributed COMP has been returned to the Compound treasury</li>
 <li>The mishap points to decentralized governance as a double-edged sword</li>
 </ul>
 
</div>



It started as a technocratic tweak to a long-running DeFi blue chip. “Proposal 62” voted on by holders of the Compound protocol’s governance token, COMP, was meant to give governance wider latitude in distributing incentives to lenders and borrowers.



Compound kicked off the 2020 “DeFi summer” with its then-novel use of liquidity mining following the debut of its COMP governance token in June of last year. With it, anyone providing or using liquidity in the money market protocol would earn COMP — lenders and borrows benefitted equally — rewards were split 50/50.



After a year of real-world testing, it became clear there were some unintended and deleterious side effects, particularly in non-stablecoin markets: WBTC (wrapped bitcoin), for example, could be borrowed at effectively a negative interest rate.



To address this problem, <a href="https://compound.finance/governance/proposals/62">Proposal 62</a>, enabled COMP rewards to be set heterogeneously across markets. It passed unanimously and went into effect on September 29.



Then, trouble:



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">🚨 Unusual activity has been reported regarding the distribution of COMP following the execution of Proposal 062. No supplied/borrowed funds are at risk &#8212; Compound Labs and members of the community are investigating discrepancies in the COMP distribution.&mdash; Compound Labs (@compoundfinance) <a href="https://twitter.com/compoundfinance/status/1443359184897069060?ref_src=twsrc%5Etfw">September 29, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The protocol was paying out too much in COMP rewards to a subset of its users. It needed an immediate patch, first to pause all COMP distribution and then to repair the design flaw in Prop 62.



Compound Labs Inc., a Delaware corporation headquartered in San Francisco, originally developed the protocol, but in a move to decentralize control over its future evolution, they implemented a governance process of reviews, voting, and finally what’s known as a “timelock” on all changes approved by COMP token holders. The mechanism was aimed to prevent malicious code from being quickly rammed through and to move the company out of a primary decision-making role, but in this case, it also meant that any attempt to fix the bug would take at least seven days.



So, is decentralization partly to blame? The founder of Compound, Robert Leshner, doesn’t think so:



“This is not an event that calls into question whether <a href="https://cms.blockworks.co/what-are-corporations-going-to-do-with-all-that-extra-cash-put-it-in-defi/" target="_blank" rel="noreferrer noopener">DeFi</a> can be operated safely. It’s a wake-up call for decentralized, community-run protocols to improve the processes by which changes are introduced,” Leshner <a href="https://www.bloomberg.com/news/articles/2021-10-01/defi-platform-mistakenly-sends-89-million-ceo-begs-its-return">told Bloomberg</a>.



Leshner was quick to downplay the consequences of the bug on Twitter:



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">All supplied assets, borrowed assets, and positions are completely unaffected. Users don&#39;t have to worry about their funds; the only risk is that you (or another user) receives an unfairly large quantity of COMP.&mdash; Robert Leshner (@rleshner) <a href="https://twitter.com/rleshner/status/1443380521019584514?ref_src=twsrc%5Etfw">September 30, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



A fix was <a href="https://twitter.com/compoundfinance/status/1446105336704864256">passed</a> through governance on October 7, and was executed on Saturday, stopping the COMP bleed.



In a typically DeFi twist, Leshner <a href="https://twitter.com/rleshner/status/1446865360448278534">announced</a> that 163,000 COMP tokens that were incorrectly claimed had been returned to the Compound community. That’s about $50 million worth of windfall tokens not taken. A further 130,000 — or roughly $40 million — that could have been expropriated, were left untouched. It’s as though the code to your front door security system was sent to everyone in your address book, along with a picture of the suitcase full of cash just inside, but no one wanted to turn the handle.



For now, there remain 200,000 COMP tokens that were in fact claimed and which have not been returned. That has the effect of diluting all holders of COMP.



Despite the slip-up, the COMP price has remained around $300 per token, without seeing a marked adverse reaction to its price.