The Wrapped Bitcoin market is seeing the emergence of new players, like Coinbase, the largest American crypto exchange. Analysts believe the markets current condition presents an opportunity for higher user engagement, enhanced cross-chain liquidity, and significant growth in the coming years.

However, observations made in the latest CryptoQuant report suggest the race may not be smooth, and investors may be reluctant to use some tokens because of the mechanisms used by the custodians.

The Emergence of New Wrapped Bitcoin Tokens

Wrapped Bitcoin tokens enable holders to use other networks and decentralized finance (DeFi) applications that are not on the Bitcoin network without selling their BTC. They are backed 1:1 with BTC and are mostly found on Ethereum. The first of its kind, WBTC, was created in 2019 by digital asset infrastructure provider BitGo. It is currently the largest Wrapped Bitcoin in the market, with a circulating supply of 153,000.

Other types of Wrapped Bitcoin were launched in 2020, including HTX exchanges HBTC, the Threshold Networks tBTC, and the Ren Protocols renBTC. Coinbases cbBTC is the latest in the market, and it is found on the Ethereum layer-1 network and the exchanges layer-2 protocol Base.

Coinbase launched cbBTC on September 12, and within a week, the token became the third-largest Wrapped Bitcoin in the market, surpassing HBTC and renBTC. CryptoQuant analysts found that 64% of the tokens supply on Ethereum is on the decentralized exchange (DEX) Uniswap. The token has been deposited in pools to provide liquidity for several trading pairs like cbBTC/WBTC and cbBTC/USDC.

Issues and Criticisms

The Coinbase Wrapped Bitcoin has a circulating supply of roughly 1,670 cbBTC ($101 million), with 941 cbBTC directly on Ethereum and 729 on Base. While cbBTC has unlocked a range of financial opportunities and offers holders access to trading, lending, borrowing, and yield farming on DEXs, the token has faced criticism from the community.

Unlike BitGo, which publishes the list of addresses holding the BTC backing WBTC on the Bitcoin network, Coinbase has refused to disclose the same information for cbBTC. This has made it impossible for any user to remotely verify that the BTC backing up cbBTC actually exists on the Bitcoin blockchain.

Other criticisms have surfaced because the cbBTC smart contract administrator can blacklist addresses from transferring, minting, and burning cbBTC. This could imply a risk for cbBTC users that their holdings could be frozen, CryptoQuant said.