According to WooFunai, as Circle (CRCL.US) officially released the CirBTC product description on September 4, the vague conflict over the definition of 'ownership' in the crypto asset sector was once again brought to the front of the stage. From the established WBTC to the emerging CirBTC, the rise of every packaged token product is redefining the boundaries of users' control over their underlying assets. For Bitcoin holders in urgent need of cash flow, selling BTC directly is not the only option; they prefer to secure loans by collateralizing Bitcoin, thereby converting asset value into liquidity while retaining exposure to Bitcoin prices.
However, behind this seemingly perfect financial project, there are complex cross-chain dependencies and trust transfers. What users hold is no longer just digital assets, but a series of multiple promises to custodians, protocol parties, and market liquidity.
In technical principle, the operation of wrapped tokens relies on cross-chain hosting and tokenization processes. Its core is to solve the asset isolation problem between the Ethereum and Bitcoin main networks. Since Ethereum independently records the ownership of assets on the chain, and users' bitcoins are recorded on the Bitcoin main network, lending applications on Ethereum cannot directly use Bitcoin network assets as collateral. To this end, a common solution came into being: users hand over Bitcoin to a custodian for storage in exchange for an on-chain token that can be recognized by lending apps on public chains such as Ethereum. The original Bitcoin is locked in the hands of the custodian, and the newly generated token represents this Bitcoin asset on other chains. Take the wBTC deposit/redemption mechanism introduced by BitGo as an example. This process involves an approved partner merchant connecting with a custodian to complete the exchange and charging the corresponding processing fee. Once the deposit is confirmed, the other chain will mint an equal amount of the corresponding token. This process is called minting (minting). Redemption is a reverse operation: tokens in circulation are destroyed, and service providers release native bitcoins according to the process.
It is worth noting that ordinary retail investors can also buy issued wrapped tokens on the secondary market. At this point, the transaction only transfers ownership of the tokens, and there is no need for new bitcoins to enter the escrow pool. Each wrapped token is theoretically equivalent to 1 Bitcoin, which means that the packaging operation does not create a new currency on the Bitcoin main network. Holders are still unable to avoid the risk of falling Bitcoin prices, and their gains and losses are completely tied to Bitcoin.
In terms of borrowing logic and settlement risk, smart contracts play a key role in automatically enforcing rules. After the current currency is transferred to the lending application, users can initiate loans. Smart contracts accept packaged bitcoins as collateral assets, allowing users to borrow stablecoins linked to the US dollar. In the process, while users are burdened with debt, they still have exposure to the rise and fall of Bitcoin.
However, borrowers must provide collateral worth more than the loan to counter the possible drop in the price of Bitcoin while the loan is pending. Once the price of the currency falls too much, causing the collateral safety pad to be exhausted, the application will trigger a clearing mechanism to dispose of the collateral assets to offset the debt. This ultimately caused users to fall into a situation they wanted to avoid: they did not actively sell, but lost part of their Bitcoin positions due to liquidation. In the clearing process, other market participants can repay part of the debt on their behalf to obtain collateral, and the platform usually sets incentives to attract liquidators to participate.
Furthermore, wrapping tokens themselves do not generate interest, and holders must perform additional operations if they want to reap the benefits, such as lending out the tokens, but this also introduces additional risks other than holding the tokens themselves.
The ecological comparison of competing products shows that WBTC, cbbtc, and cirBTC have adopted a differentiated path. WBTC relies on merchant networks to open up minting and redemption links and connect with major exchanges and institutions. Most ordinary users buy WBTC from exchanges. Mature tokens rely on this cooperative ecosystem to exert their value, making it difficult for new entrants to the market to replicate the same conditions in a short period of time. Coinbase (COIN.US) integrates the exchange function into the exchange account. When withdrawing bitcoins from the account, eligible users can choose a supported network to directly obtain on-chain CBBTC; users transfer CBBTC back to Coinbase's designated deposit channel, and the account will receive the native Bitcoin account.
Although cbbTc's exchange rules are geographically limited, the entire process is almost no different from a regular transfer for eligible users. CirBTC launched by Circle is mainly aimed at institutional customers, including traders and loan agreements, and is deeply connected with Circle's existing business and USDC.
According to WooFunai's compilation, Circle claims that the underlying Bitcoin is risk-isolated from the company's own assets, discloses the storage address, and is also connected to the Chainlink oracle, so that on-chain software can read data related to reserves. For borrowers, competition among products directly determines which platforms their bitcoins can be used as collateral and how easy it is to exchange tokens for BTC.
Liquidity difficulties and closed commercial loops are cold start problems faced by new tokens. A loan agreement needs to evaluate the amount of each collateral asset that can be loaned and ensure that when the borrower bursts out, the collateral can be sold smoothly. Liquidity means collateral assets can be quickly disposed of without breaking the market price. No matter how many token reserves are sufficient, there is still no real value if there are few buyers in the target chain market. This is why established packaged tokens with high trading activity are more likely to be selected as collateral, and more lending scenarios in turn attract more holders and traders. The new token is in a dilemma: it is necessary not only to persuade the loan agreement to accept an asset with a small number of users, but also to persuade the user to hold a token with few support agreements. In terms of business logic, WBTC directly allows partner merchants to earn exchange fees. Easy-to-use packaged tokens can be diverted to service providers, but actual revenue depends on the business model. Unlike treasury bond assets behind some US dollar stablecoins, bitcoins in escrow pools do not automatically generate income. Their commercial value comes from various businesses generated by users subsequent use of tokens, such as recollateral or borrowing in DeFi applications.
The nature of risk and the ultimate conclusion point to the fragility of the trust chain and the right to redemption. For ordinary users, checking the Bitcoin reserve situation is only the first step. Coinbase provides a CBBTC reserve data dashboard to make it easy for users to compare the number of tokens in circulation with the disclosed escrow bitcoins. However, the disclosure of reserve assets does not answer how to dispose of assets after the service provider goes bankrupt, nor can it guarantee that every token holder can immediately redeem them. The terms of the product agreement define who has the right to redeem, and the redemption service itself must have the ability to pay. When current coins are stored in personal wallets, users control the private key to transfer tokens, but the underlying native Bitcoin private key is in the hands of the custodian. Even if the tokens are placed in one's own wallet, the underlying assets are still held by a third party institution. Using tokens to participate in lending also requires additional reliance on loan agreement software. The agreement requires accurate execution of business logic and obtaining reliable price data to evaluate the value of collateral. Even if the issuer of the packaged token has more than a penny of Bitcoin reserves, users may still suffer losses due to software bugs. For holders who only want to get cash and don't want to sell Bitcoin, using wrapped tokens is a trade-off. It allows Bitcoin to connect to DeFi applications that don't originally support BTC. The cost is processing fees, and you have to trust multiple third party institutions and smart contracts. This also explains why many companies are scrambling to be wrapped tokens for the same Bitcoin asset. The foundation of a wrapped token is to open the door for users to borrow or other financial services. The starting point of borrowing may be Bitcoin, but in the end, the most important thing is whether the holder can get the Bitcoin back.