A Weekend of FUD: The Wrapped Versions of Bitcoin and Ethereum (wBTC and wETH) Are Safe, and Binance Remains the Least Risky CEX for Now

Rohail Saleem

This is not investment advice. The author has no position in any of the stocks mentioned. Wccftech.com has a disclosure and ethics policy.

As the continental US was enjoying a much-deserved Thanksgiving weekend, the crypto world was rocked by an avalanche of FUD narrative around wBTC and wETH, further fraying the already-stressed nerves of investors. For the uninitiated, FUD refers to Fear, Uncertainty, and Doubt, and this abbreviation is often used to identify false rumormongering. In the post-FTX environment where holders of Bitcoin, Ethereum, and other cryptocurrencies have only become trigger-happy sellers, seeking to liquidate some of their holdings at the first sign of trouble, FUD narratives can spread like wildfire, allowing substantial manipulation of crypto asset prices in the process.

Toward the start of the Thanksgiving weekend, the brief de-pegging of wBTC created substantial consternation among crypto investors. As a refresher, wBTC is an ERC-20 token, the most popular coin protocol in the Ethereum ecosystem. This is essentially a wrapped version of Bitcoin that allows the holders of the world’s premier cryptocurrency the opportunity to seamlessly interact with the Ethereum ecosystem without dumping their Bitcoin holdings for other coins. Here, a user sends Bitcoin to a designated merchant, who then forwards the coin to the wBTC custodian. The custodian then mints the wBTC coins on a 1:1 basis and sends these coins to the merchant, who then forwards them to the end user. Once the user wishes to redeem his wBTC holdings, this entire process occurs in reverse, with the custodian burning the received wBTC and returning the original Bitcoin.

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As explained in the Twitter thread above, the now-defunct trading arm of Sam Bankman-Fried’s (SBF) empire, Alameda Research, minted 101,746 wBTC but only burnt 29,435 wBTC. Also, FTX’s balance sheet, which was revealed as part of its bankruptcy filings, did not show any Bitcoin holdings. This resulted in a panic in the crypto sphere, spread by the notion that the FTX-affiliated entity might have minted wBTC out of thin air. The critical point to understand here is that as long as the custodian holds a 100 percent Bitcoin reserve, the 1:1 BTC to wBTC peg can’t be broken, and any wBTC minted by Alameda can be redeemed via other merchants.

Source: https://wbtc.network/dashboard/audit

As is evident from the snippet above, the wBTC custodian remains over-collateralized. Of course, as this FUD narrative spread, wBTC liquidations escalated, which resulted in a slowdown in the redemption request processing, further fanning the flames of panic in the market.

The COO of BitGo, the custodian of wBTC, later tweeted that a website update further added to redemption request processing delays. Anyways, after briefly de-pegging amid a rush of liquidations, the wBTC peg with Bitcoin has been restored.

Of course, as the wBTC FUD narrative was spreading, another joke around wETH’s peg further compounded the prevailing panic in the crypto sphere. For the uninitiated, the Ethereum coin – also known as Ether – is not based on the ERC-20 protocol. Consequently, the Wrapped version of Ethereum (wETH) allows Ether holders to seamlessly interact with ERC-20-only blockchains. Here, the required Ether coins are sent to a smart contract that then immediately issues the wETH coins on a 1:1 basis. Since this entire process is run by a smart contract, the wETH to ETH peg can’t be broken.

However, the Twitter user @0xCygaar, a blockchain developer and contributor to the ERC-721A token standard, was one of the first persons to jokingly tweet that wETH isn’t fully backed by Ether on a 1:1 basis. Soon, the host of The Daily Gweim, Anthony Sassano, and Gnosis co-founder, Martin Köppelmann, also joined in this supposedly light-hearted rumormongering. The result was a run on wETH, resulting in brief de-pegging amid mounting liquidations.

Meanwhile, the Centralized Exchange (CEX), Binance, released the results of an audit of its Bitcoin reserves on the 25th of November. The audit proved that Binance maintains a 101 percent reserve ratio on Bitcoin. The exchange has also wowed to release audit results for reserves held in other cryptocurrencies and has empowered its customers to verify the backing of their assets via Merkle Tree.

Nonetheless, rumors continue to persist that Binance employed a fractional reserve system for some of its coin holdings, as in, the exchange did not maintain 100 percent reserves for some of the coins. Chico Crypto identified a troubling development in a YouTube video a couple of days back. Binance allows anyone to check its proof of collateral. However, on the 10th of November, Binance’s holdings of Bitcoin Cash did not match the on-chain proof, as shown in the video above (starting from the 06:10 mark). This led Chico Crypto to theorize that Binance might have accidentally listed its Bitcoin Cash liabilities instead of reserves. Of course, the results of a formal audit will go a long way in clearing up any misgivings on this count. Readers should note, however, that Chico Crypto has been predicting the downfall of Binance for a number of years. So, while we do encourage our readers to take note of his claims, please perform your own due diligence.

Meanwhile, as fear continues to reign supreme across the crypto sphere, we expect further instances of FUD narratives taking hold in the near future. Trade accordingly!

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