What’s Going on With Bitcoin Wrapped in Ethereum?

The latest cryptocurrency product to be harmed by the fallout of the once-dominant FTX exchange’s collapse earlier this month was an important “wrapped” token that came dangerously close to unraveling last week.

For those who don’t know, Wrapped Bitcoin (WBTC) has a market cap of $3.5 billion and is the 23rd most valuable cryptocurrency. It is a token designed to stand in for Bitcoin and operates on Ethereum, the most popular blockchain for DeFi and NFTs.

It’s a crucial tool in the world of DeFi, which are financial products that let their users trade, lend, or borrow digital assets without the use of middlemen. WBTC tokens have changed hands for more than $88 million in the last 24 hours, according to CoinGecko.

However, the token depegged last week, losing its 1:1 value to Bitcoin, according to blockchain data company Kaiko. WBTC has reportedly traded on exchanges at a discount to Bitcoin since FTX erupted at the beginning of November, which is against the expectations if the token is pegged one-to-one by the biggest cryptocurrency.

The company stated in a blog post on Monday that “the largest wrapped version of bitcoin on the Ethereum network, WBTC, has traded at a persistent discount to BTC since mid-November, dipping to -1.5% on Friday.”

The company went on to say that charts posted on Twitter that claimed the top WBTC merchant was the insolvent trading firm Alameda Research scared investors into thinking the token might not actually be backed by Bitcoin reserves.

Its COO Chen Fang called the rumors that WBTC wasn’t fully backed by Bitcoin on Twitter “fake news.” Decrypt emailed BitGo for a comment, but they never got back to them.

Decrypt was informed by Kieran Mesquita, the developer behind the DeFi privacy project Railgun, that the depegging is currently not a cause for concern.

In his words, “WBTC hasn’t depegged significantly (2% at its peak, which was quickly restored), so it will continue to serve as a means of bringing BTC into DeFi on Ethereum until that happens.

According to Kaiko, investors in the DeFi space are “no doubt relieved” that WBTC is currently back pegged to Bitcoin.

Mesquita added that, given that BitGo, a centralized company, serves as the asset’s primary custodian, the loss of WBTC’s peg might increase decentralization in the sector. Longer term, he predicted, “WBTC will probably be replaced by a more decentralized alternative if it doesn’t regain confidence.”