Wrapped Bitcoin goes live on Compound DeFi protocol

Wrapped Bitcoin (WBTC) can now be used as collateral on the Ethereum-based Compound protocol. Compound recently became the most utilized decentralized finance (DeFi) application in existence, with almost $1 billion in decentralized loans currently outstanding.

The addition of Wrapped Bitcoin to Compound follows a community proposal which was floated to Compound holders in May 2020. After two months of deliberation, the Compound community voted in favor of adding WBTC to the lending protocol, at 533,899 votes against 523,974, on May 12.

What is Wrapped Bitcoin?

Wrapped Bitcoin is an Ethereum-based token with a 1:1 peg against the real Bitcoin. WBTC gives Bitcoin holders the chance to use applications built on Ethereum. 

The closeness of the vote to include WBTC among Compound’s list of approved assets could be a sign of uncertainty surrounding Wrapped Bitcoin. According to the writers of the initial community proposal, WBTC suffers from “a single point of failure,” and is not “trustless.” 

The advantages of adding WBTC as collateral, according to the proposal, include the diversification of cryptocurrencies used on Compound. Also, the addition of WBTC to another major De-Fi lender, MakerDAO, prompted the opportunity for increased interoperability between Maker and Compound.

WBTC will now launch on Compound with a 40% collateral factor, according to a tweet by the WBTC team on July 12. That means users can only loan 40% of the value of any WBTC they elect to use as collateral.

Previously, WBTC had a collateral factor of 0% on Compound, meaning that loaning assets based on the token was impossible. Regarding WBTC’s status on Compound, the protocol’s founder, Robert Leshner, wrote:

“When WBTC was originally supported, there was approximately $2M of WBTC in existence, and the asset was very immature from a market/liquidity/integration perspective. Separate from the centralization risk, the market risk (liquidation capacity) alone justified a 0% collateral factor.”

But according to Lesher, the BTC market has “developed considerably” since then, and he believes it is now worth “exploring the risk of the asset, and whether it can be used as collateral.”

The DeFi boom is now more open to Bitcoin holders than it was before, but with such a high premium currently placed on collateralizing WBTC, it’s an open question whether they make the leap to Compound.