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Grayscale Launches Aave Fund “Grayscale Aave Trust gives investors exposure to a protocol with the potential to revolutionize traditional finance”

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Here is how tBTC works: a randomly selected group of operators manages the Bitcoin deposits, ensuring no single entity has too much control. These operators must reach a consensus before any action can be taken, and the selection process rotates regularly, ensuring no one group can seize control of the funds. This structure sharply contrasts with WBTC, where BiT Global could technically move users’ BTC with just two signatures—both controlled by the same organisation.

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In contrast to these custodial models, tBTC, developed by the Threshold Network, offers a trust-minimised, decentralised alternative. tBTC uses cryptography to secure Bitcoin deposits, requiring a threshold majority of decentralised operators to manage the wrapped assets. This model is far more resistant to centralisation risks than WBTC. Newer participants like Botanix have similar designs.

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These new entrants also signal a shift in the market. As institutional players step in, they bring greater credibility to the concept of wrapped Bitcoin. However, their custodial models, while familiar to traditional finance, may still introduce the same centralisation risks we see with WBTC.

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However, there is a key difference. Companies like Coinbase and 21Shares have existing revenue streams that can subsidise these operations. Minting and redeeming wrapped BTC can function as an additional service to their core businesses rather than a primary revenue source. Unlike BitGo, this allows them to enter the space without prioritising immediate profitability, which relies heavily on WBTC for its earnings.

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As BitGo navigates its partnership with BiT Global, new players are emerging in the wrapped Bitcoin market. Notably, Coinbase has announced plans to introduce its own wrapped BTC, while 21Shares has already deployed a version on Ethereum. These institutional players are moving into the space with revenue models similar to BitGo, relying on fees for minting and redeeming wrapped BTC.

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This situation also serves as a warning to other projects: controlling a large share of a market does not guarantee sustained success unless the model is profitable. Monetisation strategies need to be continually aligned with user engagement to ensure long-term sustainability.

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This situation highlights an important point: market dominance does not always translate into profitability. BitGo’s control of the WBTC market does not necessarily mean it is financially thriving. With fewer mints and redemptions, the platform’s income from WBTC is shrinking, and this is likely a factor in BitGo’s decision to partner with BiT Global—perhaps as a way to offload some operational burden while seeking alternative revenue streams.

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The answer lies in BitGo’s revenue model for WBTC, which depends on the fees generated from minting and redeeming the token. There are no fees for simply holding WBTC on users’ behalf. However, minting and redeeming activity has stagnated over the past couple of years. While WBTC remains widely held, the lack of movement has likely caused a decline in BitGo’s revenues from this service.

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At first glance, BitGo’s decision to relinquish control seems puzzling, especially as WBTC controls over 95% of the wrapped Bitcoin market on Ethereum. With such overwhelming market dominance, why give up control?

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Centralisation is a serious concern in crypto, especially when the asset in question is Bitcoin, a symbol of financial sovereignty and decentralisation. By placing control in the hands of BiT Global, WBTC now faces increased regulatory risks. Should any legal issues arise involving Justin Sun or BiT Global - WBTC holders could find their assets locked, seized, or otherwise compromised.

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BiT Global cited Hong Kong’s legal requirements to defend this move, stating that no single shareholder can hold more than 20% control in a company. The corporate registry indicates that all of the five listed shareholders share the same British Virgin Islands address. This has fuelled suspicions that Justin Sun, although not formally listed, still has a disproportionate influence over BiT Global. While there is no direct proof, the circumstantial evidence has raised serious questions within the community about the true level of decentralisation in this new structure.

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Under the new arrangement, BiT Global was supposed to control two out of three keys in the 2-of-3 multisig wallet that secures WBTC. In simple terms, BitGo would become redundant in all practical senses, as BiT Global would have majority control over WBTC holdings. This has triggered fears about centralisation and security vulnerabilities, especially given Justin Sun’s involvement with BiT Global. After community backlash, there is a new proposal that said BitGo will retain control of 2 keys. However, issues surrounding Justin Sun’s involvement still persist.

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On 9th August 2024, BitGo, the primary custodian for WBTC, announced a partnership with BiT Global. This was not just a routine business collaboration. It involved a major shift in control over WBTC’s multi-signature wallet, which has raised significant concerns in the crypto community.

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Today’s focus revolves around BitGo, the custodian behind Wrapped Bitcoin (WBTC). WBTC is one of the most widely used Bitcoin wrappers, particularly across Ethereum Virtual Machine (EVM) compatible chains. It has been the dominant form of wrapped Bitcoin on Ethereum, allowing BTC holders to participate in Ethereum’s DeFi ecosystem. Alongside WBTC, other forms of wrapped Bitcoin, such as tBTC, renBTC, HBTC, and imBTC are also used across various ecosystems, but none have come close to WBTC’s scale.

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Trust-minimised bridges attempt to combine the best aspects of the two models. Instead of relying on one entity to hold users' BTC, they involve multiple reputable entities in storing and managing assets, offering a balance between security and practicality. These bridges employ decentralised mechanisms to reduce the risk of any one entity failing or acting maliciously.

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Custodial bridges, however, use a centralised provider to manage asset transfers. These providers hold users’ BTC (Bitcoin) on the Bitcoin network and mint synthetic tokens, or wrappers, on destination chains like Ethereum. While easy to set up and maintain, custodial bridges introduce significant risk as they rely on a single trusted party, which becomes a point of failure.

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