TLDR: Coinbase launched its own version of wrapped Bitcoin: cbBTC. Like WBTC, it is an ERC-20 token, backed one on one by BTC. The difference is that it is integrated with both the Ethereum network and Coinbase’s Layer 2 Base. It allows ‘DeFi’ curious people to experiment with DeFi – albeit a hybrid form, where you have to trust Coinbase to do a good job of custodying your BTC.
Coinbase, always the builder of bridges from traditional finance to DeFi, has added a new crossing: cbBTC. The new Bitcoin wrapper allows holders to put their sats to work in DeFi protocols, such as Aerodrome, without having to part with their BTC. Coinbase custodies the BTC, and this sets their service apart from ‘real’ DeFi.
What is cbBTC?
Coinbase has taken a bold step into the DeFi space with the introduction of cbBTC: a wrapped version of Bitcoin designed to unlock new opportunities for BTC holders. Built as an ERC-20 token, cbBTC is backed 1:1 by Bitcoin and securely held in Coinbase custody, ensuring users can access the world of decentralized finance without compromising the integrity of their assets.
By bridging Bitcoin to Ethereum, Coinbase is opening the door for BTC to participate in DeFi protocols—think staking, lending, or trading on decentralized exchanges. This move not only enhances Bitcoin’s utility but positions Coinbase as a key player in integrating traditional and decentralized finance.
With seamless conversion between BTC and cbBTC on platforms like Ethereum and Base, Coinbase is enabling users to leverage their Bitcoin in ways previously reserved for Ethereum-native tokens, effectively expanding the market and reimagining Bitcoin’s role in the evolving crypto ecosystem.
Supply of cbBTC
In the first three weeks after launch, more than 5.500 cbBTC were minted, predominantly on Ethereum, but almost 40% on Ethereum Layer 2 Base.
The vast majority of the volume happens on Aerodrome, as you can see in below screenshot from Dune.
Background: what is Wrapping a Coin?
Wrapping a coin is nothing new. It means temporarily converting a cryptocurrency into a token that can be handled by a decentralized application. That makes intuitive sense if we are talking about different blockchains.
But ever wondered why Ethereum has a version that is wrapped: WETH? It’s because many decentralized finance (DeFi) applications and decentralized exchanges are designed to handle ERC-20 tokens. They cannot directly work with ETH.
Why? ETH is the native coin but there is a difference between the native coin and tokens on the same blockchain. ETH doesn’t follow the Ethereum-based ERC-20 standard, unlike all ERC20-tokens (USDC, USDT, LINK, UNI, etc). So, ironically, in order to use ETH in apps built on Ethereum, you have to make it a token first: you have to wrap it.
This leads to the need for Wrapped ETH (WETH), which is an ERC-20 version of ETH. How does the wrapping process work?
- Wrapping ETH involves sending ETH to a smart contract that locks the original ETH and issues an equivalent amount of Wrapped ETH (WETH).
- Issuance of WETH: The smart contract mints WETH tokens, which are ERC-20 compatible, and sends them to the user. This allows users to use WETH in any DeFi application that requires ERC-20 tokens.
- Unwrapping: At any time, users can “unwrap” their WETH to get back the original ETH. This involves sending the WETH to the smart contract, which burns the WETH and releases an equivalent amount of ETH back to the user.
Of course, the same logic applies even stronger if you were to use Bitcoin on Ethereum or another chain. You’ll first have to package it, to wrap it.
In the case of cbBTC, a Coinbase user can send their BTC from Coinbase to an address on Base or Ethereum. This BTC will automatically be converted 1:1 to cbBTC. When users receive cbBTC in their Coinbase accounts, it will be converted 1:1 from cbBTC to BTC.
Leveraging Your Coinbase BTC in DeFi Apps
With cbBTC, Bitcoin holders can now leverage their BTC in DeFi apps across multiple blockchains without having to trade or sell.
An example: you can become a liquidity provider for the cbBTC/WETH pool on Aerodrome, the most used automated market maker (AMM) on Base. There are other pools too, such as a USDC/cbBTC pool.
Other applications that have integrated cbBTC are Curve, Uniswap, Aave, Compound. They either have integrated it or are in development to support it soon.
Read in Premium Investor Report #358 about three ways – including the one just discussed, namely being a liquidity provider on Aerodrome – how DeFi Dad would leverage your cbBTC on Coinbase. Another way is to lend passively. A third is to create a leveraged position borrowing USDC, EURC, or WETH against cbBTC with a potential risk of liquidation.
Criticism from the WBTC Camp
There already is a wrapped version of BTC, aptly called wrapped Bitcoin (wBTC) but there has been some trouble in that paradise. Launched in 2019, wBTC has a 9 billion market cap. The custodian is BitGo and it was announced that BiT Global was to do the management, a Hong Kong-based entity. The joint venture included BiT Global and the Tron ecosystem, affiliated to Justin Sun, who is somewhat controversial. Long story short, the time was ripe for a competing wrapped Bitcoin, facilitated by a trusted player like Coinbase.
Maybe this explains why according to Sun, there are issues with cbBTC. Coinbase lacks transparency, he claims. He points out that no one can verify that every cbBTC issued is actually backed by BTC.
Brian Armstrong, aka Baldilocks (lol), responded:
“This is what it looks like if you want a bunch of institutional money to flow into Bitcoin. […] yes, you’re trusting a centralized custodian to store the underlying BTC – we’ve never claimed otherwise.’
Fair enough. There is trust involved here. Which begs the question: how much can we trust the way in which Coinbase custodies its clients’ coins?
Coinbase’s Prime Vaults
Coinbase writes on its website:
“cbBTC is backed 1:1 by BTC held in custody by Coinbase – which has a 10+ year record of securely custodying billions in Bitcoin for institutions and customers.”
But what does it mean that it is held in custody? Isn’t that tricky?
Coinbase uses cold storage to store assets offline. Their institutional service Coinbase Prime uses multiple geographically distributed vaults to enhance security. Coinbase uses a cryptographic technique known as key sharding, where the private key is split into multiple fragments. These fragments are stored separately in these geographically dispersed vaults. Pretty advanced, and Coinbase as an unblemished reputation.
Still, however sound these processes may be, there is no guarantee. You’re still dealing with a party that you have to trust on their word, and the word of their auditors.
Implications
The cbBTC launch cements Coinbase as a player that has its foot firmly in two worlds: the world of DeFi tinkerers on the one hand, and the world of retail, who have a Coinbase wallet with some BTC and are ‘DeFi-curious’. Coinbase makes it super easy to onramp to DeFi with a trusted coin.
For Bitcoin, it will mean even more liquidity, and better interoperability with other blockchains. For Ethereum, it cements its position as the dominant smart contract platform.
Conclusion – Is cbBTC ok to use?
The market of wrapped Bitcoin is huge and Coinbase now has yet another stake in such a profitable market. Coinbase has created yet another use case for its own blockchain Base. Coinbase keeps growing its dominance as the exchange that helps bridge blockchains AND bridge the worlds of centralized exchanges and dexes. tions sets it apart in gaming and real-time social dApps. As both projects are low float/high FDV, this could create bullish momentum in a bull run – but on the flip side, the unlocks could create extra downside in a bear market.
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
