More concerning than slippage is the underlying risks posed by the wrapping process, which for Bitcoin, the biggest wrapped market, has to go through centralised Custodian.
Because Bitcoin is not Turing Complete wrapping cannot be automated via Smart Contract, so wrapping happens through centrally controlled programs like BitGo.
This means that a decentralised asset can becomes more centralised. BitGo currently holds 1.4% of the total Bitcoin supply as collateral for wBTC. This leaves it open to potential abuse and manipulation, as there is just one point of failure.
At the moment demand is so great from native Bitcoin owners that they are willing to live with this compromise and how it skews distribution.
Vitalik Buterin, Ethereum’s founder, was fairly prophetic when he talked about some of the dangers:
“I’m worried about the trust models of some of these tokens. It would be sad if there ends up being $5b of BTC on Ethereum and the keys are held by a single institution.”
In February 2022 Buterin’s fears became a reality with the Wormhole hack. Wormhole is a token bridge between Ethereum and several other blockchains, including Solana.
The Solana side of the bridge was exploited for the loss of 120,000 Wrapped Ether (wETH) tokens valued at the time at around $326million.
This exploit casts doubt over the viability of the whole bridging/wrapping concept and narrows the potential for blockchain interoperability. It would make a bullish case for so-called layer 0 blockchains, Polkadot or Cosmos, which support multiple interoperable layer 1 blockchains, who in turn support digital applications.
Nevertheless the demand for wrapped coins, such as wBTC and wETH remains high, and until those blockchains can directly interact with each other are likely to remain an important part of the wider crypto ecosystem.
Leave a Reply