MSTR Cat

Blockchain/Level V · Layers/5.2 Other layers/Lesson 7

Wrapped bitcoin and bridges

Who holds the coins when bitcoin travels to another chain

MaterialsEtherscan (to view the WBTC token contract and supply)A notebook to track custodian changes for major wrapped assetsA spreadsheet for tracking bridge TVL and audit statusAccess to a block explorer for the source chain of a wrapped asset

Wonder

  1. What makes an ERC-20 token on Ethereum equivalent to native bitcoin?
  2. Why did a change in custodian structure cause protocols to dump their wrapped assets?
  3. How does a rotating group of signers differ from a single corporate vault?

Explore

    Part IWrapped bitcoin on other chains

  1. Wrapped Bitcoin (WBTC) launched in January 2019 as an ERC-20 token on Ethereum. It is not native bitcoin; it is a claim on bitcoin held by a custodian. For every WBTC minted, one BTC must be locked into the custodian’s cold storage. The peg relies entirely on the solvency and integrity of that custodian. At its peak in 2022, about 285,000 WBTC were in circulation.
  2. The mechanism is lock-and-mint. Approved ‘merchants’, institutions such as exchanges rather than ordinary users, send BTC to the custodian, originally BitGo. After confirmation, the custodian mints the matching WBTC on Ethereum. Redemption runs the other way: a merchant returns WBTC to be burned, and the custodian releases the bitcoin to the merchant. The supply of wrapped tokens is capped by the actual bitcoin held in custody.
  3. In August 2024, BitGo announced a shift in its custody structure, moving into a joint venture involving BiT Global, an entity linked to Justin Sun. This change raised concerns about counterparty risk and regulatory exposure. In response, some lending protocols and exchanges reduced their exposure to WBTC or stopped supporting it. The incident highlighted that wrapped assets are only as safe as the entities holding the underlying collateral.
  4. Coinbase launched its own version, cbBTC, in September 2024, offering a custodial alternative backed by Coinbase’s regulated infrastructure. Meanwhile, tBTC from Threshold Network uses a different model: randomly selected groups of node operators jointly control deposits with threshold signatures. This reduces the single-point-of-failure risk associated with one corporate custodian but introduces trust in the signer set and their coordination.
  5. renBTC illustrates the fragility of cross-chain bridging. Ren’s network of nodes moved assets between chains, and the project was owned by Alameda Research from 2021. When Alameda collapsed in November 2022, the original Ren network was wound down and renBTC lost its peg. The collapse demonstrated that if the entity guaranteeing the peg fails, the wrapped token can lose its value whatever happens to bitcoin itself; holders had only a limited window to redeem.
  6. Every wrapped bitcoin is an IOU. Its safety depends on the custodian or signer set and the smart contracts governing it. Users accept this risk to access liquidity in ecosystems like Ethereum DeFi. The trade-off is clear: convenience and composability come at the cost of trusting a third party with custody, a fundamental departure from bitcoin’s self-sovereign model.

    7. Part IIBridges and their risks

  7. A bridge connects two isolated ledgers by locking an asset on Chain A and minting a representation on Chain B. The original token does not travel; it is held in escrow or burned, while the derivative circulates freely elsewhere. This mechanism enables interoperability but introduces a critical dependency: the security of the value on Chain B rests entirely on who controls the release of funds on Chain A.
  8. The primary custodians vary by design. Some bridges use centralized custodians holding private keys. Others rely on multisignature schemes, where a threshold of signers must approve withdrawals. Validator sets offer another model, where network participants collectively verify state transitions. Finally, light clients allow one chain to mathematically verify the consensus rules of another, eliminating external trust but demanding significant computational overhead.
  9. In March 2022, attackers compromised five of nine validator keys for the Ronin bridge, draining about $620 million in ether and USDC from the bridge serving the game Axie Infinity. The FBI attributed this to North Korea’s Lazarus Group. Two months earlier, a signature-verification flaw in the Wormhole protocol let an attacker mint 120,000 wrapped ether on Solana without depositing anything, worth about $320 million. Ronin’s validator set was less decentralized than it looked: one company controlled four of the nine keys, and an old allowlist entry gave the attacker a fifth. These incidents showed that audited code and multi-party key setups can still fail under coordinated attack or subtle implementation errors.
  10. Further losses followed throughout 2022. Harmony’s Horizon bridge lost roughly $100 million in June after a two-of-five multisig was compromised. In August, the Nomad protocol suffered a $190 million exploit when a faulty update allowed anyone to copy a working proof of validity. These four incidents alone accounted for over $1 billion in losses, highlighting bridges as prime targets due to their concentration of high-value assets and complex security perimeters.
  11. Bitcoin presents unique challenges because its consensus rules do not natively verify the state of other blockchains. Consequently, bitcoin bridges rely on federations of trusted signers or newer cryptographic designs like BitVM, which uses challenge-response games to prove state validity without executing foreign code. These approaches trade speed and simplicity for reduced trust assumptions, though they remain complex to implement and audit effectively.
  12. Bridge security is a spectrum, from a single company holding keys to designs that verify the other chain directly. Practices commonly described for reducing exposure include preferring bridges with long track records, not leaving large balances in bridged form, and revoking token approvals that are no longer needed. The trade-off persists: less trust usually costs speed, convenience or capital efficiency.

Key facts

  • WBTC launched in January 2019 as an ERC-20 token backed by custodied bitcoin.
  • BitGo moved WBTC custody into a joint venture with BiT Global in August 2024.
  • Coinbase launched cbBTC, its own wrapped bitcoin, in September 2024.
  • tBTC uses randomly selected signer groups with threshold signatures instead of a single custodian.
  • renBTC collapsed after Alameda Research failed in November 2022.
  • Wrapped tokens are IOUs whose value depends on the underlying custody.
  • Bridges lock assets on one chain to issue representations on another, making security dependent on the release mechanism.
  • The Ronin bridge hack in March 2022 resulted in approximately $620 million in losses after five of nine validator keys were compromised.
  • Wormhole lost about $320 million in February 2022 due to a signature-verification flaw in its smart contract.
  • Harmony’s Horizon bridge lost roughly $100 million in June 2022 when a two-of-five multisig was attacked.
  • Nomad suffered a $190 million exploit in August 2022 after a faulty update allowed copyable validity proofs.
  • Bitcoin bridges rely on federations or cryptographic designs like BitVM because Bitcoin cannot natively verify other chains’ states.

Exercise nine, six, three, one

9CollectList 9 wrapped or bridged assets from different chains. Note who holds the original asset and what mechanism secures the peg.
6ClusterGroup the 9 into 6 by their trust model: single custodian, multi-custodian federation, MPC signer set, algorithmic bridge, burn-and-mint issuer, or other.
3DistillReduce the 6 to 3 core risks that cause wrapped assets to depeg or collapse.
1CrystallizeWrite 1 sentence defining the difference between holding native bitcoin and holding a wrapped version.

Fact check

Dates, figures and claims checked against the published sources listed below.

Open in the interactive academy →

PT ES ZH JA KO RU DE FR MS