![\"decrypting](\"https:\/\/img.decrypt.co\/insecure\/rs:fit:1536:0:0:0\/plain\/https:\/\/cdn.decrypt.co\/wp-content\/uploads\/2021\/10\/decrypting-defi-2.png@webp\")
<\/span>There\u2019s been a ton of chatter about\u00a0wrapped tokens<\/a> like Wrapped Bitcoin (WBTC) and Wrapped Ethereum (WETH) this week\u2014some of it legitimate, some of it top-tier shitposting.<\/p>\n Earlier this week, several notable crypto Twitter accounts began peddling the idea that WETH was on the verge of collapse.<\/p>\n \u201cATTENTION: WETH is about to be insolvent,\u201d tweeted<\/a>\u00a0crypto influencer Cygaar. \u201cI will begrudgingly bail out anyone holding WETH at a rate of 0.5 ETH per WETH in order to save this space. You can thank me once the crisis has been averted.\u201d<\/p>\n \u201cWe might see a bank run on redeeming WETH soon,\u201d tweeted<\/a>\u00a0Gnosis co-founder Martin K\u00f6ppelmann.<\/p>\n None of this was true.<\/p>\n <\/p>\n Unlike the bank-run tweets that swirled around Twitter amid the FTX collapse, WETH doesn\u2019t have the same counterparty risk. There is no centralized organization custodying the underlying Ethereum. There are no over-leveraged funds in the Bahamas taking a massive risk with user funds.<\/p>\n Instead, the key risk here is smart contract risk.<\/p>\n To mint WETH, users deposit Ethereum into a smart contract rather than giving it to an exchange or a crypto lender to hold on to it. The reason people use WETH instead of ETH (after all, they\u2019re basically the same thing, right?) is that it, unlike Ethereum, is also an ERC-20 token. This makes it much easier to integrate into various decentralized applications.<\/p>\n Thus, there was never a risk of insolvency or a bank run on this asset. It\u2019s simply another example of the rather obnoxious sense of humor that exists in the industry. Sure, the smart contract could somehow break down, but it has existed and operated smoothly for so long that something like that would\u2019ve already happened by now if there was some sort of bug.<\/p>\n WBTC, however, is much different.<\/p>\n \u201cBitGo is the custodian for the BTC backing for wBTC,\u201d\u00a0wrote<\/a>\u00a0Rugdoc.io, a community-driven project that reviews smart contracts. \u201cBitgo froze FTX assets, creating a 4k surplus of BTC and the wBTC depeg. It’s not your Bitcoin if you hold wBTC.\u201d<\/p>\n This asset basically lets you create an Ethereum-compatible version of Bitcoin so that it can be used in different DeFi applications. Even more simply, it\u2019s an ERC-20 token pegged to the price of Bitcoin.<\/p>\n It\u2019s also backed by real Bitcoin, which, as mentioned above, is custodied by a firm called BitGo. For every 1 WBTC in circulation, BitGo has 1 real Bitcoin.<\/p>\n Whenever a user wants to \u201cunwrap\u201d their WBTC and redeem it for the real deal, they must go through a merchant (this could be an exchange, for example). Doing this means destroying (or\u00a0burning<\/i>) that WBTC and withdrawing one of the Bitcoin from custody.<\/p>\n Critically, you can also see this minting and burning activity occurring on-chain thanks to a\u00a0convenient dashboard<\/a>.<\/p>\n Last week WBTC depegged in price from the underlying Bitcoin, which\u2014given its design\u2014was actually a bit more worrisome (and not necessarily a mean-spirited Twitter joke).<\/p>\n Normally, when a discount like this emerges, market makers will swoop in and arbitrage the difference for profit by buying the cheaper WBTC and redeeming it for the real Bitcoin.<\/p>\n And that\u2019s pretty much what they\u2019ve been doing here, too. But because Alameda (the sister trading firm to the collapse FTX) was a huge WBTC user, their absence left a lot of arbitrage to do.<\/p>\n Thus, the market is doing a bit of catch-up as well as battling some serious FUD along the way.<\/p>\n Right now, WBTC is trading at roughly a $15 discount to the real deal. That\u2019s peanuts. And it\u2019s likely made some market makers all the richer along the way.<\/p>\n Decrypting DeFi is our DeFi newsletter, led by this essay. Subscribers to our emails get to read the essay before it goes on the site. Subscribe\u00a0here<\/a>.\u00a0<\/i><\/p>\n![\"wbtc](\"https:\/\/img.decrypt.co\/insecure\/rs:fit:1536:0:0:0\/plain\/https:\/\/cdn.decrypt.co\/wp-content\/uploads\/2022\/12\/unnamed-25.png@webp\")
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