Nothing spells Bitcoin like custodians holding BTC reserves to back the circulation of a token that represents Bitcoin prices on the Ethereum network. Kyber Network is turning what is supposed to be a P2P form of electronic cash into a derivative on a blockchain that requires an inflationary digital asset to operate. Aside from the philosophical, there are many fundamental flaws with this idea. Here are some of them.
BTC – WBTC Arbitrage
Let’s start by pointing out the obvious: The interaction between BTC and WBTC will offer opportunities for arbitrage, which not everyone will be able to take advantage of. There is absolutely no way to keep BTC prices and WBTC prices at the same level, for several reasons:
- The assets will not be used for the same purpose – WBTC is supposed to be used as a proxy to trade BTC on decentralized exchanges and to use on smart contracts – which will yield varying levels of demand.
- Like we saw with Tether – USDT – characteristics from assets that back other assets don’t necessarily translate, creating price differences.
- Anyone can wait and see how WBTC will work and then copy every single aspect of it to launch a different version of WBTC. With competition, WBTC prices might dip even lower, bringing about even more opportunities for arbitrage.
- Transaction congestion on Ethereum could create temporary price gaps between BTC and WBTC.
- It will take time for users to redeem their BTC when they “cash in” on their WBTC, which will create temporary price differences. With Bitcoin well into the thousands, small percentage changes on those prices can mean large profits for those who have the right information.
Can you Trust Kyber Network and the DAO it is Creating to Launch WBTC?
This last point sheds light on the net potential weakness that this WBTC concept has. Kyber Network is creating a DAO to manage the supply of WBTC, the exchange of WBTC for BTC and reserves. Everyone will be able to verify this via both blockchains. So far, so good right? Well, that is if you already forgot what happened with the infamous DAO. It all comes down to the code and the implementation. Even if the idea sounds like it can work in theory, the quality of both key variables remains to be seen.
Bitcoin on Ethereum, Who Would Have Thought?
Going back to that infamous DAO, there are characteristics of Ethereum that many Bitcoin holders would like to avoid like the plague, and for a good reason. Ethereum is de facto not immutable. If the network could take the DAO debacle out through a fork and bail people out, it can do it again. Therefore, an asset such as the WBTC will be worth less than BTC to those who appreciate immutability.
Ethereum’s Inherent Weakness
Then there is the issue of the Ethereum network itself. It is a more complex network insofar as its goals go, when compared to Bitcoin. Therefore, Ethereum will require much more intervention and tweaking going forward. Knowing that smart contracts are likely to run better with an inflationary medium of exchange for example, Ethereum is slated to transition into PoS, which will be inflationary. There are no true PoS blockchain networks right now, so the transition will inherently put all the assets on the Ethereum blockchain at risk. BTC doesn’t face those risks, so there is no reason to acquire a riskier asset backed by Bitcoin when you can just acquire Bitcoin.
More Points of Failure
Potential Ethereum failures or glitches could affect WBTC at other levels. The logic behind this is that there will be more moving parts when transactions on two chains have to be somehow synchronized. WBTC will bring about more points of failure, so people interested in this asset should weigh the risks they will incur and see if the advantages of using it outweigh them. A simple look at the concept reveals that there are just too many flaws to take WBTC at face value.