Coinbase has introduced cbBTC, an ERC20 token that maintains a 1:1 backing with Bitcoin (BTC), thereby enabling millions of BTC holders and Coinbase account holders to access DeFi applications. But the initiative to improve Bitcoin’s usability and functionality through cbBTC has sparked a wide range of discussions and feedback across various social media sites.
What is Token Wrapping?
To understand cbBTC, we need to understand ‘wrapped tokens‘. In short, token wrapping is a mechanism where a cryptocurrency, like Bitcoin, is locked in a smart contract, and a corresponding token, in this case cbBTC, is issued on another blockchain.
What is cbBTC?
cbBTC, or Coinbase Wrapped BTC, is an ERC20 token that is backed 1:1 by Bitcoin (BTC) held in custody by Coinbase. This wrapping process allows Bitcoin holders to use their assets on-chain, integrating with DeFi applications on Ethereum and Base networks (which is also the L2 backed by Coinbase).
How Does cbBTC Work?
Coinbase users in select geographic regions can move their BTC on and off-chain using the send and receive features on Coinbase. When users send BTC from their Coinbase account to an address on Base or Ethereum, it automatically converts to cbBTC at a 1:1 ratio.
Conversely, cbBTC received in Coinbase accounts converts back to BTC at the same rate. Notably, cbBTC will not have a separate order book or trading pair on Coinbase.
Why Would I Want to Wrap BTC to Get cbBTC?
Wrapping BTC into cbBTC allows users to engage more directly with DeFi, and leverage their Bitcoin in ways that were not previously possible directly through Bitcoin’s old network. Users can borrow, lend out their wrapped Bitcoin.
What Are the Concerns Regarding Trust and Stability with cbBTC?
Many in the crypto community have expressed concerns regarding the trustworthiness of wrapped coins on Coinbase, particularly after issues with previous projects like $wLUNA, which saw the wrapping fail. Some saw it as a way for a few entities to obtain more BTC.
The other concern is that by centralizing a large portion of Bitcoin, the asset becomes more vulnerable to single points of failure such as government seizures or hacks, reminiscent of historical incidents like Mt. Gox.
The sentiment towards cbBTC is mixed. Some users appreciate the additional functionality it brings to Bitcoin by making it compatible with Ethereum’s smart contracts. Others criticize it for the potential risks associated with its centralized control. Little fun fact, Coinbase is one of the largest custodians of Bitcoin ETF reserves, which leads to a form of indirect centralization of the asset even on top of it.
https://s27.q4cdn.com/397450999/files/doc_downloads/2024/Coinbase-Q4-23-Earnings-Call-Transcript.pdf
Is There Proof of Reserves for cbBTC?
Transparency is a fundamental concern among many. Providing proof of reserves for cbBTC could help build trust and show commitment to transparency. But this hasn’t happened yet, so we still have to wait a little to see that their wrapped coins are backed adequately by actual BTC reserves.
What Are the Legal and Tax Implications of Converting to cbBTC?
Another consideration is whether converting BTC to cbBTC constitutes a taxable event. This is still unclear, and understanding the legal and tax implications would help users make informed decisions without unexpected financial consequences.
How Are Layer 2s Proving Superior to Layer 1s for Token Launches?
Recent statistics indicate a growing preference for Layer 2 solutions over traditional Ethereum Layer 1s for token launches. For instance, Aerodrome on Base Layer 2 showcases a total value locked (TVL) of $40 million, a trading volume of $21 million, and $11k in fees. These figures substantially outperform UniV3 on the Ethereum mainnet, which reports $26.4 million in TVL, $1.5 million in volume, and $742 in fees. This trend is worth monitoring.
Is it that Base (L2) and cbBTC are going to take over a big volume of the ‘decentralized’ space? Or is this an indicator that the apps on the BASE chain are going to see more exposure and volume?
Im the cbBTC product lead at Coinbase. Here’s a demo of moving BTC onchain.
Our goal is to make products for billions so tell us how we can further improve the experience.
Enabled through @coinbase, @base , @CoinbaseWallet & our partners! pic.twitter.com/XgtPpA1dhZ
— Lukas Staniszewski (@call_me_lukas) September 13, 2024
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