Understanding cbBTC: The key to revitalizing Bitcoin? Or a trap of centralization?

Original author: Karen, Foresight News

Last night, Coinbase officially launched its wrapped Bitcoin token Coinbase Wrapped BTC (cbBTC) on Ethereum and Base. The day after its launch, the market value of cbBTC reached $100 million, of which 42% of the supply came from Base and 58% from Ethereum. According to Nansen data, Wintermute is currently the largest market maker for cbBTC.

How does cbBTC work?

cbBTC is an ERC 20 token backed 1:1 by Bitcoin held in Coinbase Custody and is currently available on Ethereum and Base. Coinbase intends to expand cbBTC to more networks in the future.

In terms of operating mechanism, cbBTC demonstrates a high degree of automation and convenience. Specifically, when a user transfers BTC stored in Coinbase to Base or Ethereum network, this process will automatically trigger a 1:1 exchange between BTC and cbBTC, and mint corresponding tokens at the target address. Conversely, the system will destroy these tokens and release an equal amount of BTC from the Coinbase reserve to the users Bitcoin account. Users do not need to be aware of the minting and destruction operations involved.

In terms of security, Coinbase promises that the BTC supporting cbBTC will never be sold, transferred or used for any other purpose. The cbBTC in circulation has an equal amount of BTC stored in a secure custody solution provided by Coinbase (including cold storage). In addition, Coinbase has hired OpenZeppelin to audit the cbETH smart contract (link) to ensure its security and stability.

As for the fee structure, Coinbase does not charge any fees for minting (sealing) or destroying (unsealing). However, users need to pay network fees when withdrawing funds from Coinbase.

The ecological effect of cbBTC

The launch of cbBTC has become a strong driving force for Bitcoin users and the entire DeFi ecosystem. First of all, it can activate the huge Bitcoin stock on the Coinbase platform. These assets that may have been dormant can now shine on a broader stage and earn extra income. Arkham data shows that the current Bitcoin balance on the Coinbase exchange is more than 980,000, with a value of nearly 57 billion US dollars, which is 370 million times the value of its Ethereum balance. The importance of activating Bitcoin stock assets is self-evident.

More importantly, cbBTC lowers the threshold for Bitcoin users to participate in DeFi applications and services, allowing users to easily provide Bitcoin as liquidity to DeFi protocols on networks with better ecological development, or use it as collateral for borrowing other crypto assets. This change not only enriches the application scenarios of Bitcoin, but also injects new vitality into the financial ecology on networks such as Ethereum and Base.

When Coinbase launched cbBTC, it had established close partnerships with a number of mainstream DeFi protocols and platforms, including mainstream DEX, lending protocols, and income vaults. These partnerships not only provide extensive ecological support for cbBTC, but also provide users with more ways to use Bitcoin on the chain, achieving a deep integration of Bitcoin and the DeFi ecosystem. Specific partnerships include:

• DEX: Aerodrome, Curve, Matcha, Uniswap.

• Lending protocols: Aave, Compound, Morpho, Moonwell, Spark.

• Profit Vault: Mellow, Veda.

• xChain Swaps: DeBridge, DeFinitive.

• Oracle: Chronicle Labs.

• Risk Curators: Block Analitica, Gauntlet, Steakhouse.

• RWA:Maple.

cbBTC: Opportunities and risks coexist

Centralization and lack of reserve transparency have become the focus of controversy and doubts about cbBTC, and it has even been labeled the controversial Central Bank Bitcoin. Although this title is meant to be sarcastic, it reveals the markets doubts about the decentralized nature of cbBTC. After all, in a world of cryptocurrencies that should emphasize trustlessness and decentralization, cbBTCs design features and its shortcomings in reserve proof make people compare it with the centralization in the traditional financial system.

The cbBTC white paper states that the cbBTC package contract managed by Coinbase has a blacklist administrator role that can blacklist certain addresses and prohibit them from performing transfer, minting, and destruction operations. This means that the government or other parties may have the right to directly freeze the Bitcoin on the chain through a subpoena, raising concerns that the government or other authoritative agencies may directly intervene in the liquidity of Bitcoin on the chain through legal means.

In addition, the on-chain price of cbBTC is completely determined by market supply and demand, and Coinbase does not directly intervene in its pricing process. However, due to the possible lack of liquidity in the early stage, the price stability of cbBTC will be highly dependent on the expansion and maturity of its ecosystem. Only when the liquidity and market acceptance of cbBTC reach a certain level, its price will be likely to stabilize and provide investors with a more reliable value anchor.

summary

Coinbases vision is to bring economic freedom to more than 1 billion people. And cbBTC is a key link in this blueprint. By building a bridge between off-chain Bitcoin liquidity and networks such as Base and Ethereum, connecting the Bitcoin world with the emerging DeFi ecosystem, cbBTC not only promotes the efficient flow and value release of assets, but also opens a door to a new financial world for global users.

With the expansion and deepening of cbBTCs application on more blockchain networks, a more open, inclusive and efficient financial ecosystem is gradually taking shape. In this system, Bitcoin will no longer be an isolated island, but a bridge and link connecting all financial corners. However, those challenges and doubts also constitute variables that cannot be ignored in the future development path of cbBTC.

Reference: https://coinbase.bynder.com/m/1303c2f4d78fc966/original/cbBTC-White-Paper.pdf