Will Sky’s Decision to Remove wBTC Disrupt $200M in Loans?

Sky, a top DeFi lender in crypto, will vote on a proposal to remove Wrapped Bitcoin (wBTC) from its ecosystem. BA Labs, a DeFi risk management firm, made the proposal, which arises from concerns about Tron founder Justin Sun’s role in the custody of the underlying assets. 

With $200 million in wBTC loans in the Sky ecosystem, this move could change DeFi collateral practices. Also, wBTC is vital in DeFi. It allows users to use Bitcoin (BTC) on other blockchains. This vote could have significant effects, especially for wBTC-backed loan users.

Wrapped Bitcoin (wBTC) has long served as an essential asset in DeFi, with a market capitalization of $9 billion. By allowing Bitcoin holders to participate in various DeFi protocols on non-Bitcoin blockchains, wBTC has become a key collateral asset for platforms like Sky. 

However, recent developments have increased scrutiny of wBTC’s custodial practices. A primary concern emerged following BitGo’s announcement that control of wBTC would transition to a joint operation involving BiT Global, a platform linked to Justin Sun and the Tron ecosystem.

The new partnership aims to distribute custody of wBTC across three global entities, purportedly to enhance decentralization. However, BA Labs, which plays a vital role in Sky’s governance, argues that this change introduces significant risks. 

Should the proposal pass, the process will unfold in five steps, with the first scheduled for September 26, 2024. Each phase will require a separate vote to determine whether the removal will proceed to the next step.

Furthermore, the proposal includes measures to diversify collateral assets to cover wBTC and keep Sky’s lending platform well-equipped. At the time of press, Sky’s lending platform, SparkLend, had $73 million in loans collateralized by wBTC, and the company’s previous vaults had about $127 million in wBTC-backed loans. These figures elucidate the implications for the market if wBTC were removed because it directly affects borrowers, lenders, and the rest of the DeFi ecosystem. 

The potential exit of wBTC from Sky’s ecosystem has ignited competition among other tokenized Bitcoin projects. Competitors like Threshold’s tBTC, dlcBTC, and FBTC are positioning themselves to capture market share should Sky proceed with the offboarding of wBTC. 

FBTC, backed by Mantle Network, and Coinbase’s recently launched wrapped Bitcoin alternative are emerging as key players in this race. These projects offer investors alternative means to utilize their Bitcoin in the DeFi space, providing more options for collateral in a rapidly evolving market.

Spot On Chain data shows that DeFi whale James Fickel is adjusting his positions due to changing dynamics between Ethereum (ETH) and wBTC. Over the past six days, Fickel swapped 5,000 ETH ($11.3 million) for 204.8 wBTC at a 0.041 ETH/BTC rate. 

Once a strong ETH/BTC bull, Fickel has shifted away from long positions since August 11. To repay his Aave loan, he swapped 15,000 ETH ($37.4 million) and 12 million USDC for 841.7 wBTC ($49.4 million). At the time of writing, he still has 2,236 wBTC ($130 million) borrowed.