​WTF is WETH and WBTC?

Okay, time to discuss something at least slightly detached from FTX.

We're here to tell you about 'wrapped tokens' - particularly Wrapped Ethereum (WETH) and Wrapped Bitcoin (WBTC).

First off, what is a wrapped token?

Glad you asked...

Remember back in the day how some arcades wouldn't let you use real cash to play their games, because the machines were designed to take custom arcade tokens?

So you'd trade your cash for arcade tokens, play some games, then convert whatever tokens you had left over, back into cash.

Wrapped crypto tokens are kind of like that.

Bitcoins won't transfer to the Ethereum network, but you can trade your Bitcoin for 'Wrapped Bitcoin' (aka WBTC), and then spend/trade that WBTC on Ethereum.

And you can wrap Ethereum in a similar way, to create 'WETH,' and trade it on other incompatible networks.

Okay, so, last week there was a bunch of rumors on Crypto Twitter that both WETH and WBTC were at risk of bank runs (the thing that happened to LUNA earlier in the year).

A couple of crypto influencers tweeted things like: “ATTENTION: WETH is about to be insolvent."

But it wasn't true.

There's no centralized organization holding custody of the underlying Ethereum; and no over-leveraged fund in the Bahamas taking a massive risk with user funds.

*Cough* Alameda *Cough*.

There is some risk that the smart contract that powers the wrapping of ETH could be hacked - but that's kind of like how, sure, Apple could be hacked, but you'd still be able to use your iPhone.

WBTC, on the other hand, may have legit risk.

Each WBTC is backed by real Bitcoin, which, is held by BitGo - a centralized company. For every 1 WBTC in circulation, BitGo holds 1 real Bitcoin.

Whenever a user wants to “unwrap” their WBTC and redeem it for actual BTC, they have to go through a merchant.

(Think of a 'merchant' like the front desk at the arcade, where you swap your remaining tokens back into cash).

That WBTC must then be destroyed (aka 'burnt') and a Bitcoin that was previously held on your behalf by BitGo, will be withdrawn and returned.

FTX was a huge user of WBTC, and since their collapse, the value of WBTC has lost price parody with the value of BTC, twice.

(Not good).

So far, the market has simply taken advantage of the arbitrage opportunity, converting their WBTC for BTC and making a small profit, bringing it back to level.

But the fact that this can happen is a concern.