Transcript 0:01 Is your Bitcoin that is staked or wrapped at risk? The answer is it could be. Um, there's some rumors swirling this week, and I will dive deep into them. 0:14 Well, I won't dive super deep, but I'll kind of explain the high-level stuff. Thanks for joining Bitcoin Season Two. Let's play the intro. 0:22 [upbeat music] Yeah, so, uh, this week, uh, some tweets and some rumors and some on-chain sleuths were diving into, uh, 0:44 the, the world of staked and wrapped Bitcoin and, uh, questioning whether certain service providers are, uh, basically kind of re-hypothecating or reusing some of that stake and inflating TVL. 0:58 And I will get into that, but before that, let me hit some interesting news that I saw this week, um, just kind of in the Bitcoin Season Two, uh, ecosystem. I will first kick it off with the AnchorWatch announcement. Um, 1:15 I have the CEO and founder of AnchorWatch, Rob Hamilton, uh, on Bitcoin Season Two later this week, so make sure you stay tuned for that episode. 1:24 I'll be interviewing him on the design of AnchorWatch and then just in general some c- some thoughts on, uh, like Bitcoin development in general. But AnchorWatch is a new custodian. 1:35 Um, they have designed it, uh, pretty interestingly, so it is a fully insured vault by Lloyd's of London. They have what's called a cover holder, um, insurance policy, I guess, and it insures all your Bitcoin. 1:51 And they have, 1:52 uh, an interesting design using, uh, particular type of script within Bitcoin called Miniscript, which kind of gives like fallback, uh, uh, options and, uh, minimizes the amount of signatories you have to trust. 2:06 And it's a pretty interesting design, so stay tuned. I'll be interviewing Rob next week on that. Otherwise, the other in-- the other news is, uh, everybody has got Pizza Pet fever. 2:18 If you are listening to this and you're more of a conventional Bitcoin person and you don't know what Pizza Pets are, then, uh, here's basic- it's basically, uh, Tamagotchis, if you remember those things from the early 2000s or '90s. 2:33 Basically, Tamagotchis are little pets that you have to feed on Bitcoin. You have to take care of them. You gotta, you gotta make sure that they don't die. 2:41 So you've gotta feed these pets, and you've gotta clean up after them, and you can give them all sorts of drugs and stimulants if you want. 2:47 But the interesting thing, the interesting kind of global mechanic is there's a bunch of these. There's thousands of these. 2:53 And there is a, uh, there's these kind of like global death events where people can, um, uh, uh, trigger a what's called pulverizer, which after a certain number of blocks, it explodes, and certain pets will die if you haven't protected them. 3:10 So the Pizza Pets game, uh, rolls on. I think, um, uh, if we wanna go look at the dashboard, we can see that the majority of the pets are now dead. You can see a survival chart here. 3:24 There are seventeen thousand five hundred pets alive, forty thousand pets dead. Um, some pets can become immortal, but that basically means that most pets have, uh, evolved into, uh, kind of teenagers, if you will. 3:38 So they're a little bit bigger, and the majority of pets have also died. So interesting to see this. Um, this has been a popular collection from a pricing standpoint. So, uh, really fun to do this. 3:51 I'm playing it, and, uh, I, uh, wish you all luck and, um, uh, hope your pets don't get pulverized. Speaking of people who are building stuff, uh, in the Pizza Pets auxiliary ecosystem, you also have LIFO FIFO here, 4:07 who, uh, this is not a Pizza Pets-related announcement, but, uh, he put out, he and his team, the Wizards of Ord team, put out, um, a new meta protocol. 4:17 I know before you throw up your hands in exasperation and say, "I don't want to hear about another meta protocol," this is actually an interesting one. 4:24 It's called the Assign meta protocol, where basically if you have an inscription in a cold wallet, and you, like you wanna squirrel it away, and you wanna not be like using that wallet to sign transactions a lot because you don't want to actually lose that, that inscription, you want to secure it in a much more reliable way. 4:42 Um, this is a meta protocol where you can, uh, if, if you want to like use that cold wallet to, uh, uh, if you want to like use a hot wallet and, and retain all the benefits of owning your, 4:58 you know, your, your cherished, uh, item in the cold wallet, um, you can, uh, 5:07 from that cold wallet, send kind of like a delegate to your hot wallet to say that, uh, I own this asset in the cold wallet, and I'm going to gate-- basically delegate, um, by sending an inscription to the hot wallet, uh, you can basically get all the benefits of your cold wallet, uh, from the hot wallet. 5:27 A great example of this is on the Wizards of Ord, um [mic interference] Whoops. The Wizard [chuckles] the Wizards of Ord, uh, uh, Wizards of Ord, um, like inscription tooling sites. 5:43 Uh, they give certain benefits to holders of that inscription collection. So, uh, 5:50 if you delegate a certain hot wallet as being like, uh, having the assign inscription, uh, you can, uh, then enjoy all the benefits of your Wizard of Ord in your cold wallet, uh, whenever you use the Um, uh, the hot wallet with the delegate assign inscription in it. 6:13 So interesting, ingenious idea. It's only being recognized by Life of FIFO and the Wizards, Wizards of Ord team right now. 6:21 But I could see this being popular for-- I see-- I like-- I know, like, the OMB folks, the Ordinal Maxi Biz folks like to promote taking your OMB and putting it into a cold wallet, never touching it. 6:31 So I could see this being interesting for the OMB folks to, like, say, "Okay, I'm gonna, I'm gonna, um, delegate my OMB into this hot wallet so I can, like, not be, um, so I can enjoy the benefits of, like, having my hot wallet be, be counted as an OMB holder without actually risking it, um, and, and moving that, uh, OMB to a, to a, a wallet where you, um, are signing a lot more transactions." 6:57 So I think it's pretty interesting. Okay, now we get into the wrapped Bitcoin. Uh, the title of this is, Is Your Staked Bitcoin At Risk? And the answer, I'll just give it to you straight, is it could be. 7:14 Um, this is, this is one of those things where we assume a lot of counterparty trust, and not all, not all, not all counterparties are built the same. 7:22 And, um, because of that, we have some rumors and FUD swirling around, but sometimes FUD is true. Is there an on-chain FTX brewing? Maybe that might scare you, but we'll see. 7:37 Um, let's kick it off with this post from Yannis over at Bitcoin Layers. I like-- He's a very good sounding board and to kind of contextualize things. So here's the, here's the tweet. 7:47 It says, "All right, who's holding the money? There's a number of custodians securing Bitcoin that backs various pegged assets on other networks, and many derivatives share the same custodians." 7:58 He gives a bunch of examples. I'll just name a couple. Wrapped Bitcoin is, uh, issued by BitGo Global. Used to be HQ'd just in the US, now is HQ'd both in the US, Singapore, Hong Kong. 8:11 And they issue the WBTC asset mainly on Ethereum, but on other blockchains, so they issue WBTC. 8:18 Finance BTCB, Coinbase CBBTC, and Lombard Finance LBTC, those are the other, like, larger, like, wrapped Bitcoin equivalents. 8:29 So these are Bitcoin-- these are paper Bitcoin, a Bitcoin, theoretically Bitcoin-pegged asset, which are issued by these various types of custodians. 8:39 So you deposit your Bitcoin to the custodian, they issue a comp-- they issue the corresponding asset on another chain, such as wrapped Bitcoin's WBTC or Coinbase's CBBTC, and you basically trust that that custodian or that counterparty will allow you to redeem your wrapped Bitcoin equivalent back to real Bitcoin. 9:01 And the reason you wanna-- the reason that this is a product is because-- th-that these are products is because you can go, and you can take Bitcoin, which is this kind of pristine collateral asset, and go do other things on other chains with it. 9:13 Maybe you wanna mess around and stake your Bitcoin and trade it on, you know, Uniswap. You can do that with, like, wrapped Bitcoin. 9:21 So this is a very interesting-- this is a very popular trend, and the amount of wrapped Bitcoin equivalent has only gone up over the past year. 9:31 And now that, um, now it's becoming even more popular for, like, large custodians like Coinbase to issue wrapped Bitcoin equivalents like CBBTC. Um, and so there's a bunch of these. 9:42 There's Stacks, there's Lorenzo Protocol, there's Liquid BTC, Rootstock, um, Fractal, Bitcoin's Bool, it's-- Kraken is, is launching one too. Um, so, uh, Yannis continues in this thread to say, "There's a pattern here. 9:59 In every instance, a specific entity or network acts as the custodian securing BTC backing a respective derivative asset. 10:08 Custodian equals the party or parties responsible for securing the BTC backing a specific derivative asset. 10:14 Some custodians are centralized like Coinbase, others are more distributed like RBTC," which is Rootstock, "LBTC," I believe it's Lombard or Liquid, "TBTC, I, uh," which is Threshold, um, Network and IsleSide." 10:29 I found, uh, Matt, uh, Luongo, the founder of that, uh, on this podcast. And, um, he says, "With a number of these protocols, the disclosure 10:38 of the Bitcoin that has been cust-custodied is simply listed in a blog post or their documentation site. Also, reserves most of the time are simply listed Bitcoin addresses on a webpage." Here's the thing. 10:52 He says, "We really don't really know for a lot of these if they are in fact an address managed by the relevant custodians." So to clarify, to reiterate, 11:03 some of these custodians who issue these wrapped Bitcoin assets, many of them even, um, they post an address, and you basically have to, like, 11:12 see that, uh, you see that address, and you, you can verify that there is X amount of Bitcoin in there. But then the question is: Does that custodian actually control that address? 11:23 That is one dimension of the kind of assumptions and trust assumptions that a lot of people are making. 11:29 And sometimes these custodians can and have proven, yes, we do control these, and we say that there's a multisig or multipart MPC structure to this and, uh, and we're demonstrating insofar as we can that we do control this. 11:45 So, um, Yannis says, "For users, there's a few things to think through related to these custodians. One, do you trust the reputation of the participants?" This is, 11:56 you know, as much as you can cryptographically prove things, a lot of this is just reputation and trust. 12:02 Two, if a distributed custodian net-- if it's a distributed custodian network, do you trust the consensus mechanism and method for signer selection? That is, some of these have various types of distributed signers. 12:13 They're all- It, it's basically multisigs on multisigs, and the more signatories in the multisig, generally, the more distributed it is. 12:24 And then, uh, Jana says, "Does the custodian or custodian network provide attestations or clear documentation on things like hardware, process for signing sign- for selecting signers, and also have a clear path towards building a proof of reserves?" 12:36 If you're not familiar, familiar with proof of res-reserves, it's basically saying, um, "We can prove that the, the-- we can sign for and we own X amount of reserves." 12:47 And it usually corresponds to their publicly stated reserves, um, as well. [lip smack] So, um, 12:59 then Jana says, "And while custodians can secure the native BTC without issue, users have-- also have to trust operators of the derivative asset not to issue more derivative tokens than BTC secured by the custodians." 13:10 That is, um, if wrapped BTC from BitGo has a thousand Bitcoin in it, you have to basically trust that BitGo doesn't issue more than a thousand wBTC. So there's like that's another dimension of trust. 13:24 So this gets into the staked Bitcoin re-staking hypothecation topic, which is, so could TVL numbers be inflated for some projects mentioned? Yes. Could derivatives be unbacked? Yes. 13:38 Do users trust the reputation of entities involved in integrity of signers in all cases? Arguably, yes. Which is, be honest, and I agree with this, saying that you do have to, uh, trust the custodians and signers. 13:54 Then he says, "Does this make all custodian providers insecure? Of course not. A derivative with a centralized custodian might always stay backed, the Coinbase model. 14:02 A future trustless bridge implementation could get hacked. But there's a lot of trust put into Bitcoin derivative custodians and providers, even in distributed setups. 14:11 The de- the derivative asset that you hold is not BTC. It is an IOU at the custodian, and the derivative asset operator will give your Bitcoin back if you ask for it." 14:23 Um, he says that there is a lot of credit to be given for, um, there are some interesting, robust custody and signing mechanisms that were designed thoughtfully. I, you know, I have some favorites of mine. 14:38 And then, um, he also says some caveats like s- more signers doesn't always mean better. And, um, he points people to, uh, Bitcoin layers. I also point people to Bitcoin layers. 14:50 Um, they do some great research, and they kind of have a, like here's, uh, uh, you know, here's the BT- BTC supply on these layers. And they do, um, you know, trust assumptions and like tracking and Bitcoin locked. 15:08 And it's a pretty useful site. So that said, that groundwork laid, there is a trend right now to stake Bitcoin, these wrapped Bitcoin assets, on, um, uh, a platform protocol like Babylon. 15:26 Babylon takes, instead of proof of stake generated assets like Ethereum or Solana, Babylon takes a proof of work generated asset like Bitcoin and uses it to stake for new chains. 15:43 Now, they're still in the kind of early rollout of this, but they've taken, um, some-- I would like-- where is the, uh, where's the actual... Uh, here we go. Babylon's staking. 15:59 They've taken about fifty-six thousand, um, Bitcoin, uh, onto the Babylon protocol, which is about five point five nine billion dollars, and they've been kind of accumulating it for the past four months or so. 16:15 And the, the depositors into this Babylon protocol are kind of the, the popular names of like Bitcoin staking, such as Lombard Finance, Solve BTC, um, Pstake, or, uh, PBTC. And, um, 16:33 so the question is, uh, there's this activity going on, and then are these, um, wrapped Bitcoin, uh, service providers like Lombard or Solve BTC, 16:47 is the Bitcoin that they-- the bit-- the liquid Bitcoin assets they're putting into things like Babylon or staking on-- in other protocols, are those, uh, are those one-to-one backed? 17:00 Or is, um, uh, one of these staking providers, uh, issuing basically 17:08 maybe they're not issuing more, uh, wrapped Bitcoin equivalent, but maybe are they taking that wrapped Bit- Bitcoin and putting it in multiple places at the same time? Well, rumors were swirling, um, this week. 17:21 Here is a thread that I won't dive too deep into, but it's from user Hans or Trackor. He is the, or they are the co-founder of newbit.org, and, um, they put kind of an-- 17:37 what-- they're, they are putting out, uh, speculation, which is backed by, uh, reasonable, 17:47 uh, reasonable thought process that one provider in particular, Solve BTC, may be cycling some of these, uh, wrapped Bitcoin assets they, they issue. 17:57 So, um, they may, uh, finger quotes, stake or lock up some of the Bitcoin in multiple staking protocols at the same time when, in fact, if there were true slashing, they'd only be able to do one. 18:12 So Hans goes through and says, um, you know, a b-- one Bitcoin in Solve might be the same, uh, Bitcoin on B square. It might be the same- Bitcoin on, um, uh, Merlin or, or some of these other chains. I forget. 18:29 I don't-- I'm not-- don't quote me on those specifics. Um, and so it's been a, it's been a back and forth here on this thread. And, uh, 18:40 uh, Hans has kicked a hornet's nest here, and, um, I might want to ha- I'd love to have them on maybe even to or maybe an expert to help m- uh, c- me kind of wrap my head a-around this. 18:52 But there's a lot of speculation and, um, going back and forth trying to identify where the specific assets are and where the obligations for these staked assets. Uh, what are the obligations for these staked assets? 19:05 So, um, I am not saying that this is happening. I'm just saying that, um, this could be happening, and there's one rumor that is, I feel, currently incomplete and not resolved, um, in this direction. 19:23 So, um, I see, uh, Val- Vallejo HODL in the chat say, "Trust no one." And the answer is, uh, probably, yeah. 19:37 I mean, if you want, uh, if you want the guarantee that no one can take your Bitcoin from you, you don't wanna trust anyone. 19:45 Um, I think one of the arguments for people even doing this in the first place is, well, okay, well, the utility provided or the yield you can get on your Bitcoin warrants certain trust assumptions. And, um, so, 20:01 uh, maybe those trust assumptions are not priced in. I think that's the main takeaway here is a lot of users assume that these things are just kinda cryptographically guaranteed and, and in reality, very few of them are. 20:13 I will shout out, um, uh, I will shout out, um, Nuvet did a thread with, uh, showing that Lombard Finance, um, did, 20:30 uh, has demonstrated as, you know, insofar as they're cryptographically capable, that they are fully collateralized for all of their staking obligations. So, you know, that's nice. 20:43 Lombard is the lar- I think one of the larger of these wrapped Bitcoin issuers, so that's good to see. Um, but the question is, is everybody doing this? And, um, if crypto has taught you anything, if the last 20:59 five to eight years of counterparty trust and FTX-type equivalents have taught you anything, there is probably somebody out there doing, uh, rehypo- rehypothecation or does not necessarily have the Bitcoin that they say they have. 21:15 So this is one of those, this is one of those things where, um, I don't want to spread specific fear or FUD, but I want to s- I want to just talk about the trust assumptions that a lot of the ecosystem is making and some of the concerns which have been raised. 21:31 Um, this is a story which could develop, you know, not at all in the next week or a ton in the next week. So, uh, you know, you heard it here first on Bitcoin Season 2. 21:42 Um, if you want, I will probably be writing a newsletter about this in the Bitcoin, uh, in the Blockspace newsletter, uh, tomorrow morning. That is Tuesday. 21:53 Uh, so make sure you like and subscribe to that, so you can get that maybe a, a more, if you prefer written content or maybe a little bit more specific deep dive into it. That would be great. 22:04 I see Chris says, "Love this channel." Thank you, Chris. Thanks for watching. Um, yeah, everyone, thank you so much for listening to Bitcoin Season 2. I'm Charlie Spears, Blockspace Media. Like and subscribe. 22:15 Give us a review. Hopefully, five stars out of five, but be honest. Otherwise, make sure to follow the Twitter, @BTCSZN2. Uh, and I will see you all next week. 22:29 [upbeat music]
