Wrapped Bitcoin (BTC): Overview of wrapping alternatives (cbBTC, tBTC, sBTC)

Introduction and Context

During the development of decentralized finance (DeFi) in 2017, Ethereum quickly encountered the challenge that Bitcoin (BTC) was not designed to be programmable or interoperable. Despite being the most capitalized digital asset, it was impossible for users to utilize BTC in this new ecosystem of applications under development.

To address this problem, “wrapping” solutions emerged. In 2018, BitGo, Kyber Network, and Ren Protocol partnered to launch Wrapped Bitcoin (WBTC). WBTC is an ERC-20 token compatible with Ethereum and replicating Bitcoin’s value.

The purpose of Wrapped Bitcoin is to address Bitcoin's technical limitations, such as high costs and significant delays during periods of network congestion, while expanding BTC's utility beyond its traditional role as a store of value. Ethereum could now benefit from the liquidity held in bitcoins to boost the growth of the DeFi ecosystem.

However, recent events have raised doubts about WBTC's security and reliability. First, in 2022, following the collapse of FTX and Alameda Research, Ren was forced to shut down the bridge associated with renBTC. Then, BitGo announced that WBTC would now be co-managed by BiT Global, a firm tied to Justin Sun, raising concerns about the centralization of the asset.

In this context, new solutions are emerging, shedding light on the mechanisms enabling the transfer of bitcoins to other blockchains. In this analysis, we compare the main Bitcoin wrapping solutions, examining their levels of decentralization, security, and adoption, while highlighting the trade-offs of these different approaches.

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The Different Types of Bitcoin Wrapping

Bitcoin wrapping solutions differ in their technical approaches, which directly influence their levels of security, decentralization, and utility for users. Below are the main identified wrapping types:

Wrapping Techniques

Centralized solutions, such as Wrapped Bitcoin (WBTC) or Coinbase Bitcoin (cbBTC), rely on third-party entities for asset custody and management. These approaches offer operational simplicity for users and greater compatibility with blockchains, as their deployment is extremely straightforward. However, they introduce centralization risks: companies can mint or burn wrapped Bitcoin at will.

Hybrid solutions, such as renBTC, use a mix of centralized mechanisms (for certain functions) and decentralized protocols to manage deposits and token creation. This model aims to balance security and decentralization but can be vulnerable to structural failures, such as those observed with Ren following Alameda Research’s collapse.

Synthetic tokens, like sBTC, do not require locking actual BTC. Instead, equivalent assets are deposited as collateral to issue tokens pegged to Bitcoin. While this method reduces custody risks, it relies on complex mechanisms that increase risks associated with smart contracts or collateral asset volatility.

Trust-minimized solutions, such as tBTC, aim to minimize the need for trust by relying on decentralized mechanisms. Although they align more closely with ecosystem principles, adoption remains limited due to technical complexity. These solutions are also more challenging to implement on DeFi applications.

Mechanism Comparison

Each approach presents trade-offs:

• Operation: Centralized solutions simplify the minting and burning of wrapped bitcoins by controlling the process, while trust-minimized alternatives add steps to ensure decentralization.
• Decentralization: Centralized models suffer from single points of failure, whereas trust-minimized solutions strive to eliminate this dependence, often at the cost of slower adoption.
• Associated Risks: Centralized solutions are exposed to regulations and potential misconduct by third parties, while synthetic and hybrid alternatives face challenges related to smart contract vulnerabilities and governance model complexity.

These fundamental distinctions among wrapping techniques shape the landscape of available solutions, allowing users to choose based on their priorities, whether simplicity, security, or decentralization.

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What is Wrapped Bitcoin (WBTC)?

Launched in 2018, Wrapped Bitcoin (WBTC) is a pioneering solution in the Bitcoin wrapping space, enabling BTC compatibility with Ethereum. By extension, WBTC has made Bitcoin liquidity accessible for decentralized applications (dApps) and decentralized finance protocols.

Operation

Each WBTC token is backed 1:1 by BTC stored by third-party entities, ensuring parity. These entities handle the minting and redemption of BTC and WBTC. The wrapping process involves collaboration between three key players:

• The user: Transfers their BTC to a merchant.
• The merchant: Transfers the BTC to the custodian and initiates WBTC minting.
• The custodian: Holds the BTC securely and issues an equivalent amount of WBTC.

Once minted, WBTC can be used on Ethereum and other compatible blockchains, such as Tron or Layer 2 solutions like Base. It enables Bitcoin holders to participate in activities such as lending, borrowing, or trading while mobilizing BTC's vast liquidity in programmable environments.

Advantages

• Interoperability: WBTC is the first initiative to connect Bitcoin with Ethereum and smart contract blockchains in general, allowing users to capitalize on their bitcoins.
• Access to DeFi: Users can use their BTC as collateral or integrate it into yield farming strategies on platforms like Aave, Curve, or Maker.
• Increased Liquidity: WBTC has significantly improved the liquidity of DeFi protocols on Ethereum.

Limitations and Controversies

• Centralization: The model relies on custodians like BitGo, introducing a single point of failure and counterparty risk. Recent governance changes, including BiT Global (linked to Justin Sun), have heightened concerns about centralization.
• Regulations: KYC requirements imposed by most merchants contradict the fundamental principles of decentralization.
• Recent Controversies: Concerns over governance have led MakerDAO to gradually remove WBTC as collateral from its SparkLend protocol in 2024. Similarly, Coinbase has decided to delist WBTC from its exchange platform.

With a market capitalization exceeding $13 billion, WBTC remains the most widely used wrapping solution in the DeFi ecosystem. However, its centralized model has driven some users and developers to explore trust-minimized alternatives, which we will discuss next.

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The Main Bitcoin Wrapping Alternatives

Threshold Bitcoin (tBTC)

Launched in 2020, tBTC is a decentralized wrapping solution operated by the Threshold network. Designed as a “trust-minimized” alternative to Wrapped Bitcoin (WBTC), tBTC aims to reduce centralization risks by relying on community governance and advanced cryptographic signatures.

Unlike centralized models, tBTC uses an architecture where deposited Bitcoins are secured by a group of node operators participating in the Threshold network. These operators must reach a majority agreement before any action, reducing risks of manipulation or malicious attacks. Additionally, the minting and redemption steps are straightforward:

• To mint tBTC: The user generates a deposit address, transfers BTC, and initiates tBTC creation.
• To redeem BTC: The user burns their tBTC tokens, specifies a receiving address, and receives their BTC after validation.

This model relies on Guardians and Minters. Guardians are community members in the Threshold network responsible for monitoring transactions to prevent fraudulent behavior, while Minters, composed of DAOs such as Curve and Aave, manage minting operations.

In more detail, tBTC uses cryptographic signatures based on secure multi-party computation (MPC). This mechanism, introduced in version 2 (tBTC v2), replaces traditional multisignature addresses with a scalable model requiring 51 out of 100 operators to agree. While this improves decentralization, it remains partially permissioned due to technical limitations (notably the current inability to identify malicious actors). A transition toward fully permissionless governance is currently under development.

With a total value locked (TVL) of $490 million at the time of this analysis, tBTC lags behind WBTC in adoption. This is due to its more recent launch and a more complex process, but its lower fees (0% for minting, 0.2% for redemption) make it a promising option. Additionally, WBTC’s recent controversies have contributed to tBTC’s TVL growth over the past two months.

In summary, tBTC positions itself as a solution more aligned with the ecosystem’s decentralization principles. Despite technical limitations and moderate adoption, the trust-minimized model is an interesting alternative to centralized solutions, addressing the growing demand for more secure and decentralized options in the DeFi ecosystem.

Coinbase Bitcoin (cbBTC)

Launched in September 2024, cbBTC is Coinbase’s Bitcoin wrapping solution. Designed to operate primarily on Base, Coinbase’s Ethereum Layer 2 network, cbBTC targets institutional clients and users prioritizing simplicity and regulatory compliance.

cbBTC operates on a fully centralized model, with Coinbase acting as the sole custodian of BTC and issuing an equivalent amount of cbBTC on Ethereum or Base. The minting and redemption mechanisms are fully automated:

• Automatic minting: When BTC is transferred from a Coinbase account to an address on Base or Ethereum, it is automatically converted into cbBTC.
• Automatic redemption: Conversely, users receive their BTC by depositing cbBTC into their Coinbase account, where conversion is performed in real-time.

This simplified process eliminates the need for intermediaries such as merchants while integrating cbBTC directly into Coinbase’s existing infrastructure.

The advantages include simplicity and speed for users, as everything is automated and managed by Coinbase. Moreover, cbBTC benefits from Coinbase’s credibility as an exchange. Its compatibility with the Base ecosystem is a significant advantage, particularly given that this Layer 2 network has become one of the most widely used.

However, the disadvantages are also notable. cbBTC depends entirely on Coinbase for custody, issuance, and redemption. This model introduces counterparty risk and contradicts the principles of decentralization. Unlike other solutions like WBTC, Coinbase has not yet published proof of reserves in BTC backing cbBTC, leaving users to rely on the company’s internal audits.

Stacks Bitcoin (sBTC)

sBTC is a solution proposed by Stacks, a Bitcoin Layer 2 protocol. Currently in its testnet phase, sBTC is an asset intended to be integrated into the Stacks network for use in various decentralized applications, with a conversion process facilitated by the network’s reliance on Bitcoin.

sBTC is backed at a 1:1 ratio with Bitcoin, ensuring that each sBTC token corresponds to one BTC held in reserve. Unlike centralized models, sBTC relies on a decentralized infrastructure and enables:

• The conversion of BTC into sBTC in three Bitcoin blocks (~30 minutes).
• The reverse conversion of sBTC into BTC in six blocks (~60 minutes).

In its initial phase, a limited group of signatories manages protocol operations. Over time, the goal is to make the system fully permissionless, eliminating the need for a centralized entity to hold the assets. Additionally, sBTC’s "Bitcoin Write" technique allows transactions to be recorded directly on the Bitcoin blockchain, functioning similarly to Ethereum’s Layer 2.

The primary advantage is introducing programmability to Bitcoin, enabling the use of this asset in DeFi applications based on Stacks. sBTC benefits from Bitcoin’s network security and adopts a decentralized and permissionless mechanism, distinguishing it from centralized solutions.

However, sBTC is primarily designed for use on Stacks, limiting its interoperability with other blockchains. While integrations, such as the one with Aptos announced in September 2024, are planned, this does not fully resolve the issue. Additionally, during the launch phase, the protocol relies on a limited group of signatories.

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Conclusion

Bitcoin wrapping solutions have transformed the crypto ecosystem by integrating the most liquid asset into programmable blockchains. Through centralized, hybrid, or trust-minimized approaches, these solutions address the challenges of interoperability between Bitcoin and other networks. However, these methods involve trade-offs between security, decentralization, and user control.

Currently, Wrapped Bitcoin (WBTC) dominates the market with over 85% of the sector’s share, thanks to its pioneering role, simplicity, and widespread adoption across major DeFi protocols. Nevertheless, recent events have raised concerns about its centralization and the inherent risks of custodial Bitcoin.

Other solutions like tBTC or the upcoming sBTC offer alternatives more aligned with the ecosystem’s decentralization principles but struggle to compete in terms of liquidity and integration. The future of this market sector depends on protocols’ ability to balance liquidity, security, and decentralization.