How secure are the wrapped tokens WBTC and WETH?

If you want to use Bitcoin or Ether in the DeFi applications or smart contracts in different blockchains, you need versions of the coins that are compatible with the respective token standard of that blockchain. Such versions are created via the so-called “token wrapping”. Coins such as Bitcoin or Ethereum can be exchanged for the packaged version at a 1:1 ratio to spend them on the required chain. The wrapped token mirrors the course of its original.

That’s the theory. The drama surrounding the versions of Bitcoin and Ethereum soBTC and soETH created on Solana (SOL) recently showed that this bond can fail. After SOL’s price drop, these were trading well below the prices of their original (soBTC only at a paltry $1,100).

It appears that the close association between these derivatives and FTX has been their undoing. Also because they could only be exchanged for real Bitcoin and Ether on FTX itself. Now some fear a similar fate for other wrapped tokens. Above all the major tokens WBTC and WETH on Ethereum.

WBTC: A ticking time bomb?

Panic quickly followed that WBTC’s bond was also at risk. Because the ERC-20 (Ethereum token standard) version of Bitcoin was apparently mainly mined by Alameda Research, the troubled trading company behind FTX.

A look at the other large stamped WBTCs also raised concerns. In second place is CoinList, the crypto exchange that was last down due to delays in payouts had to justify. Not far behind: insolvent crypto hedge fund Three Arrows Capital. As the bond between WBTC and Bitcoin began to loosen, the fears appeared to be coming true. Meanwhile, the token was trading two percent below the actual Bitcoin price and apparently threatened to fall further.

Finally, Chen Fang, COO of BitGo, the centralized service provider behind WBTC, had to speak up to bring clarity to the coinage of the wrapped token. He called the unrest surrounding WBTC FUD (Fear, Uncertainty and Doubt) and complained that users needed to stop “submitting to fake news”.

The bitcoin reserves behind WBTC are owned by BitGo and can be verified on the blockchain, according to Fang. Companies like Alameda Research were just one of many verified WBTCs for traders. Upon request, they could receive BTC and deposit it with BitGo to mint and distribute WBTC in return. Since Alameda Research or others never themselves traded the received Bitcoin, there is currently no risk of exchange, according to Fang.

Bad joke about WETH

The case of Wrapped Ethereum or WETH also showed that the nerves in the crypto sector are on edge across the board. Since ETH does not behave like other ERC-20 tokens on its own blockchain, a corresponding compatible version is created for certain applications.

For this, the WETH Smart Contract accepts ETH and always issues WETH at a 1:1 ratio. A relationship that is built into the code of the smart contract, making bankruptcy or depegging technically impossible. The only danger is errors in smart contract programming. However, the code is open source and has been independently tested several times.

Actually a definite thing. To some within the Ethereum community, it is so obvious that a Joke about bankruptcy of WETH, based on recent bankruptcy rumors of several crypto companies. A joke that many already insecure investors did not take kindly to. The “rumor” of the WETH bankruptcy quickly went viral. Eventually, even Bloomberg picked up on the news before the financial media corrected the error.

the height of fear

The horrors of the 2022 bear market seem to still be with many in the crypto community. Doubts about the Wrapped Token testify to the huge breach of trust that occurred in the months following the Terra collapse and more recently with the fall of FTX.

For cautious investors and crypto-enthusiasts, it is therefore important to be cautious and objective when dealing with alleged information about new crypto-crashes and shaky candidates. The recently scrutinized attitude of many crypto institutions in the wake of the FTX collapse otherwise threatens to escalate into a mistrustful delusion, even if justified.

In addition, various crypto-influencers like to bathe in attention from scare influences. As in bullish market phases, their intentions can more often be questioned. In this example, the course of WBTC shows that the (often unfounded) panic still has consequences.

In addition to being redeemable at retailers, the token can also be traded on the open market. And may therefore deviate slightly from the price of the original as a result of stronger sales. Driven by fear, for example, this panic selling becomes a self-fulfilling crash prophecy. However, as with WBTC, once the underlying feature is secured, the course eventually returns to its origin.

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