A short and cryptic tweet sent X-circles into a frenzy late Tuesday night when leading global exchange Coinbase hinted at plans to enter the packaged Bitcoin market. The initial speculation was quickly validated by senior employees who reaffirmed their enthusiasm for further integration of the Bitcoin asset into the company’s on-chain ecosystem.

Other observers have highlighted the strategic nature of the decision following a tumultuous week for the current market favorite, BitGo’s wBTC. The latter has long been considered the easiest and most popular method for Bitcoin investors to gain exposure to DeFi products.

As the industry focuses on Bitcoin-native alternatives, the announcement is seen by many as a decisive step towards maintaining Ethereum’s dominant position as the de facto Bitcoin DeFi layer.

The Origin of Wrapped Bitcoin

To better understand the rise of and interest in wrapped Bitcoin products, we need to go back in time to 2018, when the idea of ​​DeFi was just beginning to emerge on Ethereum.

In order to attract liquidity to their protocols, a collection of projects decided to focus on the most liquid asset on the market: Bitcoin. Loi Luu, one of the original contributors of wBTC, shared his perspective on the ordeal:

“We realized that to really grow DeFi, we needed to bring Bitcoin liquidity into the ecosystem.”

wBTC’s TVL (Total Value Locked) over the years

As the old saying goes, the rest is history. In mid-2020, “DeFi summer” sparked a speculative frenzy that would push the total value of wBTC deposits to over $10 billion. Today, just over 150,000 bitcoins are still locked in the Ethereum contract, overseen by institutional provider BitGo.

This custody, and the liability that comes with it, is the subject of the current controversy surrounding wBTC. Late last week, for example, BitGo unveiled a new strategic partnership with Hong Kong-based BiT Global, which aims to expand the wBTC product to a “multi-jurisdictional custody” setup. Behind BiT Global is notorious cryptocurrency founder Justin Sun.

The announcement was met with widespread criticism from users who felt that introducing new actors into the custody arrangement was a miscalculated risk.

Dominoes began to fall the next day when community members of popular algorithmic stablecoin Maker began calling for wBTC to be removed from the protocol’s collateral assets list as a safety measure. On Tuesday, BitGo founder Mike Belshe and representatives from Bit Global defended the decision at a public X Space.

While concerns raised on social media haven’t made a material dent in wBTC deposits, they have opened the door for challengers. Despite BitGo’s long track record in the space, it’s safe to wonder if they’ve worn down market participant confidence.

Earlier this year, a lawsuit filed by the company after a failed takeover of Galaxy Digital resurfaced when the Delaware Supreme Court ruled that the case should proceed.

A Challenge for Programmable Bitcoin Layers

For Coinbase, this move into the wrapped asset business may be more than just opportunism. Analysts see potential for the company to breathe new life into a aging product by tapping into the popular Bitcoin DeFi narrative.

Based on research from BitcoinLayers, over 60% of new proposed Bitcoin scaling protocols are touted as replacements for Ethereum’s EVM (Ethereum Virtual Machine). Over the past year, the excitement surrounding these proposals has led many to suggest that they could push users off Ethereum and onto Bitcoin, but most projects have not made much progress thus far. Coinbase may see an opportunity to nip any future competition in the bud.

The company’s stake in Ethereum’s success has grown significantly since the launch of its native rollup implementation, BASE, late last year. While it’s fair to wonder why it took so long to compete with BitGo’s packaged product, the ability to immediately capitalize on the growing demand for on-chain Bitcoin speculation is likely the driving force behind the decision.

Coinbase recently reported nearly $20 million in revenue from their BASE product in the last quarter alone.

Despite touts for more Bitcoin-native, trust-minimized solutions, market participants have thus far favored established institutional custodians like BitGo over more complex and economically volatile alternatives. Coinbase looks set to double down on this approach by leveraging its existing moat in the custody business.

Given that the company is already responsible for the custody of assets of large institutional investors such as Blackrock’s IBIT ETF, the proposed cbBTC product is expected to instill even more trust among larger players than its predecessors.

The impact this could have on future Bitcoin layers is significant. Coinbase is uniquely positioned to attract liquidity that will be difficult for smaller projects to match. Their strongest argument will rest on the security of their bridging mechanism, which is still a work in progress.

According to analyst Jacob Brown, this week’s announcement follows a series of moves by Coinbase that show growing interest in the Bitcoin ecosystem.

Of course, the security trade-offs that come with storage products are still heavily criticized by technologists and proponents of more decentralized solutions. The question remains whether market participants adhere to these principles.