Coinbase, one of the world’s leading cryptocurrency exchanges, has introduced a new digital asset, Coinbase Wrapped Bitcoin (cbBTC). This wrapped version of Bitcoin is designed to bridge the gap between Bitcoin and decentralised finance (DeFi) ecosystems, opening up new opportunities for Bitcoin holders to engage in DeFi. Launched on 12 September 2024, cbBTC is now available on Ethereum and Base, Coinbase’s layer-2 scaling network. This move signals Coinbase’s entry into the wrapped Bitcoin market, where it aims to compete with established players like BitGo’s Wrapped Bitcoin (WBTC).
What is cbBTC?
Wrapped Bitcoin is a form of tokenisation where Bitcoin is represented on a different blockchain, allowing it to be used in applications and environments where Bitcoin’s native capabilities are limited. Coinbase Wrapped Bitcoin (cbBTC) is an ERC-20 token backed 1:1 by Bitcoin held in custody by Coinbase. Essentially, for every cbBTC issued, an equivalent amount of Bitcoin is held in reserve. This enables Bitcoin holders to leverage their assets within the Ethereum and Base ecosystems, both of which are key players in the DeFi landscape.
The process is straightforward. Users can send Bitcoin to a Base or Ethereum address, and it will be automatically converted into cbBTC. When they send cbBTC to a Coinbase address, it is converted back into regular Bitcoin at a 1:1 ratio. This seamless conversion offers Bitcoin holders flexibility in moving between networks without the need for additional transactions or processes.
Expanding Bitcoin’s Role in DeFi
The utility of Bitcoin in decentralised finance has been somewhat constrained by the limitations of Bitcoin’s native blockchain. Bitcoin operates on a UTXO (Unspent Transaction Output) model, which restricts its use in smart contracts and other DeFi applications. On the other hand, Ethereum’s account-based model is better suited to these kinds of applications, which is why Ethereum has become the dominant blockchain for DeFi.
Wrapped Bitcoin tokens like cbBTC allow Bitcoin holders to bypass these limitations. By converting Bitcoin into an ERC-20 token, users can employ their Bitcoin in various DeFi applications, such as lending, borrowing, and providing liquidity to decentralised exchanges. At launch, cbBTC will be supported by popular DeFi protocols like Aave, Compound, and Curve, among others. This will allow Bitcoin holders to access yield opportunities, use Bitcoin as collateral for loans, or participate in liquidity pools without having to sell their Bitcoin.
Competition and Challenges in the Wrapped Bitcoin Market
Coinbase’s entry into the wrapped Bitcoin market follows in the footsteps of BitGo’s Wrapped Bitcoin (WBTC), which has been the dominant wrapped Bitcoin token since its launch in 2019. WBTC is backed by over $8 billion in Bitcoin, making it the most widely used wrapped Bitcoin in DeFi applications.
However, Coinbase’s cbBTC faces challenges and scrutiny. BitGo’s WBTC has recently come under fire after a decision to diversify its custodial structure across multiple jurisdictions, including Hong Kong and Singapore. Tron founder Justin Sun has been accused of being involved in this decision, sparking concerns over the security and control of WBTC.
Coinbase is now positioning cbBTC as a trustworthy alternative. As one of the largest custodians of digital assets, Coinbase’s involvement lends credibility to the new token. However, critics such as Sun have pointed out potential vulnerabilities in Coinbase’s custodial model. In a statement, Sun remarked that cbBTC lacks proof of reserve, independent audits, and could be subject to government intervention. He warned that Coinbase’s custodial structure could allow authorities to freeze Bitcoin assets held as cbBTC, undermining the decentralised nature of Bitcoin.
Security and Regulatory Concerns
Sun’s criticism brings attention to a fundamental debate within the cryptocurrency community: the tension between decentralisation and regulatory compliance. Centralised entities like Coinbase are subject to regulations, including potential government subpoenas that could force the freezing of assets. This is in stark contrast to the ethos of Bitcoin, which was designed to be a decentralised, censorship-resistant asset.
In response, Coinbase has emphasised the trust and security that it provides as a regulated institution. The exchange has assured users that it holds Bitcoin in secure custody, and that the 1:1 backing of cbBTC ensures transparency. Furthermore, Coinbase’s reputation as a trusted institution may appeal to institutional investors and users who prioritise security and regulatory compliance over decentralisation.
Looking Ahead
Coinbase has ambitious plans for cbBTC, with the goal of expanding the token to other blockchain networks and further integrating it into the broader DeFi ecosystem. As the wrapped Bitcoin market grows, competition between Coinbase’s cbBTC and BitGo’s WBTC is likely to intensify. For users, this competition could result in better services and more options for using Bitcoin across different blockchain environments.
At launch, cbBTC is available to users in the United States (excluding New York), the United Kingdom, the European Economic Area, Singapore, Australia, and Brazil. As Coinbase expands its reach, cbBTC may become a significant player in the wrapped Bitcoin market, offering Bitcoin holders new ways to utilise their assets in DeFi while also fostering a more interconnected and efficient financial system.