Hello and welcome everyone to Layer Zero Lounge. My name is Simon Baxis. I am the VP of business development at Layer Zero Labs. Joined today in our Vancouver office by Bryan Pellegrino, our CEO and founder. And we have a very special guest today, Mike Belshe, the co-founder and CEO of BitGo. And today's topic will be WBTC as an OFT. I'm excited to chat about this. Mike, welcome. How are you?
I'm great. Thanks for having me on the all-in pod here.
That name is taken unfortunately, I think, already, but nonetheless, you've been at this for nearly 14 years now. Talk a little bit about the history of founding BitGo and sort of the thesis behind it.
Sure. Well, look, I'm a technologist. I think a lot of the people that started in the Bitcoin space back in that era come from the technology field. The third or fourth time I read the Bitcoin argument, I started to say, okay, does this really work? And I couldn't shoot any holes in it. And it led down this fascinating journey of trying to understand money better, how do our financial markets work better and things like that. The problem of that time was really just people losing their keys. They would lose it on their own in their individual capacity. This thing called web wallets came along and then the web wallet would do the early rug pulls. Those happened. Companies would get hacked that really didn't know how to do appropriate OPSEC. All of those things we wanted to solve that. So I scoured how to do a better security thing. I found this little corner of Bitcoin called P2SH, which is a technological term for pay-to-script hash, but it's the underpinnings of what we use in order to do multi-sig. And it's a very open community. I remember reaching out to the Bitcoin Wizards IRC channel. Everybody was really welcoming and supportive. I kind of described what I was thinking of. They're like, 'Yeah, it's a great idea. Go do it.' And so, BitGo was born from there. But when it comes to security and people have latched on to this, ultimately what you're doing is just eliminating single points of failure. So we've now done that on all aspects. If you've got a single key, split it into multiple keys. If you've got a single person guarding that key or those keys, split it across multiple people, multiple companies, multiple jurisdictions. And we do all of these things today. We also employ a newer technology called multi-party computation or MPC. This is a cryptographic and mathematical way of taking a single key and chopping it into parts that never have to be brought together. So we use that on some blockchains. All in all, BitGo remains at the technology layer committed to pulling out all the stops on whatever blockchain we interface with to make sure that we're providing the most secure solution. So on Bitcoin, of course, that's multi-sig. Actually XRP, by the way, supports native multi-sig as well. On Ethereum, we use a combination of two things. For cold storage, we use a smart contract. Again, it's a two out of three smart contract. We pioneered that. It's been running successfully, I don't know, eight or nine years now at this point. We also use MPC for some of the more high transactional self-custody wallets. And then a number of blockchains we use MPC because they don't support multi-sig natively, but whatever it is, we will use the best technology. So, and by the way, also on Bitcoin, you've got Schnorr signatures and signature aggregation techniques. And then of course, some of that's over on other chains. Sometimes you'll see BLS signatures and things like that. So, all right. Anyway, the origins of BitGo is all around security and keeping your assets safe.
So, talked about the origins of BitGo, like where does WBTC come in? What does it look like the origins of that and sort of growth along the way? Obviously it's grown to one of the single largest assets in the entire space with almost 10 billion dollars of WBTC issued.
You know, Ethereum started to have these DeFi apps that came to life and they were getting real traction and this was the first time where we started to have lending platforms emerge. We started to have the DeFi trading apps emerge. It was exciting stuff. And the first mechanism of kind of collateral used in those systems was wrapped ether. Of course still used a ton today. It's an ERC20 that wraps an ether that's easily used in smart contracts of all types, but Ethereum doesn't carry nearly the value of Bitcoin. So, Bitcoin has emerged, of course, as the best store of value, the biggest store of value. About half of all crypto assets are Bitcoin if you just add up the total size of the value. So, we came up with this idea, you know what, we really ought to have a wrapped Bitcoin component. And by the way, we don't deserve all the credit for it. There were a number of companies in the industry, Radar and Republic and others were all kind of asking about how do we do this but BitGo had the custodial component of it. So really as actually a side project, just a couple of engineers worked on this and they created wrapped Bitcoin and had a mechanism for minting and burning and we would store the custody at BitGo. And like literally for the first year and a half it was so small, I think it was less than $10 million for a good 18 maybe even 24 months and we kind of wondered all right well maybe that didn't work. But then DeFi started to pick up with its kind of second wind and all of a sudden it just took off. So look, there had been a number of other attempts to figure out ways to encapsulate the value of Bitcoin in something that was usable cross-chain to an Ethereum network. They all had problems. And so some of them were capital efficiency problems like trying to tie up collateral inside of a contract itself. Others just got hacked actually pretty quickly. But wrapped Bitcoin has emerged. I guess we're somewhere in the seven or eight years old running at this point. It has operated without a fault. We employ a network of partners. We call them merchants that help with the distribution of it. We've got an open website called wbtc.network. So, it's always audited. You can always just see exactly where the reserves are. Chainlink came along at one point. They added a proof, an oracle proof where you can look and verify that the assets that you see on chain matches what it's supposed to be. So all of this has just built the ecosystem and of course today WBTC I think owns 80 or 85% of kind of the Bitcoin store on Ethereum and yeah that's the origins of wrapped Bitcoin.
Can I ask Mike? I mean I think you know so many of these stories relate back to this little paper that came out in October of 2008 around Bitcoin and there have been so many attempts around doing a variety of things around Bitcoin. You know you're wearing the Bitcoin logo on your hat there. Why do you think WBTC ended up being successful? There's been many that tried before. There's been many that tried frankly after. Is it execution? Is it because they were focused on solving the wrong problems? Is it because you had custody and maybe others didn't although there are other custodians as well? What do you think was sort of the silver bullet there?
Well, I'll give you kind of two comments on it. I mean, first off, the reason it won is because of trust. And then by the way, even though BitGo is a centralized custodian, we constantly want to make sure that decentralized finance works. And there's this argument and I think it's pretty valid that trusted third parties eventually always become a security hole. So that's true and I think we need to continue to work to federate and decentralize even wrapped Bitcoin. There are places to use a custodian like I mentioned with institutional where you need it. But in general we got to continue to make it more decentralized and we will. But the reason wrapped Bitcoin took off is basically because of trust. Look, I think the generation of founders that got into digital assets back when I did were a little bit less just about let's make a quick buck and it's kind of obvious because there was no quick buck to be made. But we got into it because we had a passion for can we change the way the financial system works? Can we change money? Can we actually make it so that our computers can trade with each other without any intermediary? These are very kind of technological and idealistic things and then that's carried in through our brand like with everything we do with security, we focus on it all the way through. We've been vetted by the largest institutions out there. We do a lot of work on it. Not just at the technical level, but also of course at the operational level. You can have the greatest tech in the world, but if your ops is terrible, you're not going to survive very long. And that's happened to a number of folks. So really it comes down to trust. And then when we built the custodian, it's been purpose-built. It's highly trusted. I'm just kind of flattered actually every time I go to conferences and things, just to hear such positive feedback about BitGo. I'd like to think that what I'm valued for is for the technology that we build, but you know what, the trust over time actually matters, too. So anyway, that's the reason that it's succeeded.
What do you think, Bryan? So, you know, Mike talked about sort of the emergence of DeFi, which I think helped WBTC become the asset that it is. You were certainly there for that and know DeFi maybe more than most people. What do you think bringing Bitcoin to Ethereum means? What problems does it solve? What's your general perspective on that?
Yeah, I mean I think so I think you look back when I first got into crypto there's literally only Bitcoin basically. But then you get to like 2013, 2014 era. We had all this other stuff happening and we had exchanges, we had all this sort of stuff spinning up around and everything was paired against Bitcoin, right? So you didn't trade against dollars, you didn't trade against anything else. You traded asset/BTC and you tracked how much something was worth in sets that it was worth basically and that was just how trading happened. That was how everybody sort of thought about the world in the space and you have these kind of crazy anomalies. I think Zcash when it launched like the first one sold was like 4,400 Bitcoin or something and you had this crazy natural sort of market stuff. But that was the basis for everything. Even if you wanted to participate in the Ethereum ICO, you donated Bitcoin. It was like 2,000ish ETH for one BTC at the time. And so there's the basis of everything. You fast forward now and Ethereum launches and you have stablecoins that come out and we had stablecoins like Tether was on I think XCP prior. We had stablecoins start to arrive there, but DeFi and on-chain stuff really started to become this really compelling use. And you saw sort of growth of stablecoins start to ramp along with overall market and DeFi usage. And so, things started to shift to not be paired against BTC or not be paired against ETH and be paired against like dollars a lot more because there was this normalizing factor. I think this happens with FX markets and with everything else like there are other pairs that exist. You can find BTC pairs on almost anything on Binance or Coinbase or wherever else. But the dominant trading became sort of these stablecoins. But if you look at global demand for Bitcoin, right, like Bitcoin ETF is hailed as one of the if not the most successful ETF of all time in terms of rapid growth and inflows. Yeah. The most. Yeah. In terms of rapid inflows, in terms of all of this and so now we have, and again, this is stuff that I remember when we had the first sort of S&P 500 companies having Bitcoin on their balance sheet. And I was like, I didn't think that was going to happen for like a decade, right? And now you have Tesla, these other companies are like, okay, Bitcoin on the balance sheets. And then you have ETF and now we have like presidential candidates talking about strategic reserves and all this. All this is accelerating very rapidly and I think we're way ahead of where I thought that we would be. But I think if you look at global demand for Bitcoin from whether it's the ETF, whether it's demand at the smaller nation state levels, so this is your El Salvadors, your Venezuelas, places like that to now obviously the US talking about it on what that might look like which will clearly sort of set the stage for others. I think it's clear that again demand is growing, demand is there in terms of at the highest degree and so one of the things I'm very interested in talking about is a sort of solution that we've come up with together and what that means because DeFi only lived on Ethereum but now you look at where DeFi happens like look at trading volumes on Solana, look at the layer 2 ecosystem, look like everything else in the longer tail. The ability to take Bitcoin and bring it easily, kind of low friction version into all of these ecosystems and open that up as an easier trading pair is going to be very impactful for DeFi and sort of across all ecosystem and so yeah I'm excited. I don't know if you want to jump on the whiteboard now but I'm excited to kind of talk through existing structure and kind of what we've been working on.
Yeah, I think that's a good transition and maybe Mike, first would be good to understand sort of where that lies today, right? So, I think Bryan to your point, first step was how do we bring Bitcoin into Ethereum? That's done. But now we have hundreds of chains and millions of users and all these ecosystems. And so now the challenge is well, how do we bring that to where all these users actually are, right? Not just Ethereum. And so, I think I'll whiteboard how I view it as existing today. Okay. And Mike, you tell me if I'm wrong anywhere and then we can talk about a broad solution here. All right. So, you have Bitcoin today and what happens right now? My understanding is, there's a custodial wallet that BitGo... get deposited in this wallet and then you mint a synthetic version over to let's say Ethereum. And so right now I don't remember the exact distribution across chains but let's say it's something like I don't know 7.5 billion that exists on Ethereum. And so this gets minted as WBTC which brings it to this chain and this is great. There's an established process for deposit, mint and go through this entire flow. This is longstanding and where some complexity got introduced is now we have all of these other chains. So, I'm just gonna, you know, I think there's four or five others. I think it's Tron and I don't remember off the top of my head the others, but you know, there's... Yeah, we'll just say, you know, chain A, B, and Tron. But now you also have WBTC that gets wrapped here and comes to this chain and comes to this chain and comes to this chain. So you have additional WBTC on each of these and this could be like 1 billion and 0.5 billion and I don't know like $150 million. And so all this goes out into the ecosystem which is great. This is kind of indicative at this point of multi-chain versus cross-chain kind of structure. And so in this case, we're multi-chain here. But the goal is I want to be able to move my WBTC in this pathway and in this pathway. And so if you think about why and same thing, here and everywhere else. And so when you think about each of these markets being isolated and independent, what becomes difficult are simple things like arbitrage and inventory, right? There might become a lot of demand here. And it's very difficult for market makers or any participant to basically switch inventory and take advantage of that ARB. Just all markets work like this. And so what happens now today is if I want to take my WBTC from chain A here and I want to bring it to Ethereum what would happen is I'm going to redeem back here through a merchant and so there's some merchant who's going to do this for me. This has some fee associated with it and so I pay a fee. The merchant has redeemed me back my BTC on Bitcoin and then I can basically issue another mint from another merchant which basically comes out and gets me my WBTC on Ethereum. How long does this process take roughly Mike off the top of your head?
Well, I was about to say that the whole process, well the arrows are written correctly. The process is actually so much worse. Right. So remember everything that we do in our BitGo custody is cold storage. So the mint redeem process is not intended to be asynchronous and never was. So instead what's going to happen if you actually want to do this is you're going to be going to the market. It's really the only feasible way to do it with wrapped Bitcoin today. Going through a full mint and burn. I mean I don't know, you're talking a day kind of best case. Maybe two days.
And so if you go to market, so we checked right before this and we checked for which market I think it was Jumper and it was just going between was it Ethereum and Arbitrum... Arbitrum and Optimism. So just going L2 to L2 and if you wanted to transfer 10 Bitcoin, you're paying a 100 basis points of slip basically to execute that. So you're getting a 9.91 Bitcoin on the other side, which is like a really high amount of slip. So this is, if you want to, there's this very lengthy sort of redemption process that exists today is not intended for the purpose of rebalancing or you go to market and again you're probably looking at even for modest size of about 10 bitcoin, 100 basis points which is really high. So I'm going to pull this over and then just talk about what this looks like now. And so what we've done I think both of us were looking for like this is a cool thing to build a solution around and what does this actually look like and what impact can it have and so we still have Bitcoin same as it has, still has a wallet here you still mint WBTC over to Ethereum, everything as it exists today and so we'll just say this is the 7.5 billion again minted over there. And so that process of like minting into Ethereum is totally fine. And now what we have is the entire world of chains. And I'm just going to draw until my hand gets tired. Now we're going to say, hundreds of chains. There's certainly more than hundreds of active chains right now. And we're basically taking wrapped Bitcoin as it is and converting it using our standards. So is omnichain fungible token and the vision of the thing that was exciting when we first talked about it, the thing that was most exciting to me is you basically take the entire inventory of an asset and rather than having 300 million here, 400 million there, 500 million there and if you have inventory issues you have third party bridges and you have to go out to market and you have these high fees and you have all of this stuff that's tied into friction of that and you basically make it so the asset itself can move for only the price of gas. So if I want to move 10 bitcoin I'm going to pay effectively the cost of gas of the two chains I'm transacting. So if I'm going from Arbitrum to Optimism this is going to be near free and if I want to transfer 100 bitcoin or a thousand bitcoin it doesn't matter. Same exact thing, everything is a generic packet because the end solution is the contract itself manages inventory and it's really just coordinating where that inventory lives. It doesn't matter to the overall state of WBTC if there's 50 here and 150 here or if there's 100 and 100, that's just an accounting chain change. And so what you want is to guarantee total supply is obviously equivalent here and there's all of these checks that you guys have in place to do that, there's checks within the system in terms of pre-crime and other things. What it means is that all of the WBTC across all of these ecosystems now becomes... I drew too many boxes. I'm gonna have too many arrows here. But it becomes a complete mesh, right? So it's not just there. It's everywhere in between. And so what this means is that if you think about this and the way that I've always thought about it is right now if it's 100 basis points to move Bitcoin 10 BTC between Arbitrum... then nobody's going to be rebalancing any of these pairs until it gets to a spread that's over 100 Bitcoin. If you can do this for only the cost of gas somebody is going to take an ARB that is the cost of gas plus some very moderate premium. Somebody will take the free money. This is how markets work. And so what you're going to end up is spreads across chains will come down. You can basically have spreads that are sub-cent spreads because you can move basically unlimited size for the cost of gas. So long as it can make enough value in closing that spread and rebalancing it across these chains, somebody is going to take it. Which means spreads get tighter, which means the ability to move WBTC gets more frictionless. Bitcoin as an actual usable asset in the broader ecosystem becomes infinitely more powerful than it is today in terms of hey I want to have this on Solana, on Arbitrum, on Polygon, wherever it is, the ability to expand now becomes obviously you guys can move to chains much much much faster, we support 83 chains today and you can basically go to any of them overnight. But as soon as you have done that expansion and you're there interacting between any of those chains and movements is as seamless as you can possibly, there is nothing lower in terms of friction than the cost of gas. So it becomes coordination simply at the contract level with the same global guarantees and I think this when you talk about overall demand for Bitcoin and when you talk about what this looks like on a broader scale and why I mean 10 billion is a very non-significant amount, there's clearly has been a lot of demand for WBTC but if you look at stablecoins you look at some of these others I think we're at probably 150ish, 130, 150 billion worth of stablecoins right now. Obviously we like you said wrapped ETH gets used a lot. Bitcoin as a usable asset in the broader ecosystem now gets so much more compelling and I think that itself is just like super exciting. Because again if you look at the delta between, and I know this is like sort of just happening now, but the difference between the Bitcoin ETF and the Ethereum ETF is like a very large delta right now. Like sure Ethereum ETF is there and it's happening but the flows relative to Bitcoin are not even close. I think again broad demand is extremely different. If you talk about assets that people are actively trying to hold that are being used especially as more institutional stuff comes on chain. I think there's a lot of unlocks that happen here. And so I'm very excited about kind of what that will look like and what that will enable.
Well, I think Bryan, you described it super well and look from our side we've always wanted to get across to more chains and as we started to look at what's the most efficient way to do it, we've been trying to figure out how to do this, we've been super excited to be able to partner with Layer Zero who's already got so much of this built and now we put WBTC onto that. And as you know, traders have this phrase, liquidity begets liquidity. So what's going to happen here is it's going to be much easier to get access to wrapped Bitcoin. And then of course some will take advantage of the arbitrage that you described, but it's really going to light up DeFi in a much stronger way across all these other blockchains. And there's so many good blockchains out there and they're duking it out between Aptos and Sui or Solana or Ethereum, etc. And it's hard to get these ecosystems going, especially when you've got the non-EVM based ones where they have to kind of rebuild the whole community in order to get started. And obviously having some good storage of collateral and wrapped Bitcoin is that good storage. It's critical. And so this is going to light up all of that, which at the end of the day increases innovation, right? Because now we can have all of these blockchains growing much more quickly. We got the DeFi apps growing better. It's very exciting actually in terms of what this is going to enable across the ecosystem.
