Part 2 / Page 11

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8A. Fundraising History

The genesis of Wrapped Bitcoin (WBTC) is deeply intertwined with the broader evolution of DeFi (decentralized finance). WBTC was created to solve the problem of liquidity fragmentation between Bitcoin and Ethereum, two of the largest cryptocurrencies with distinct ecosystems. As DeFi rapidly expanded, it became evident that bringing Bitcoin into the Ethereum network would unlock a plethora of new use cases, especially in decentralized lending, liquidity provision, and other DeFi applications.

However, this goal was not pursued through traditional fundraising mechanisms, such as an ICO (Initial Coin Offering), token sale, or public offering. Rather, WBTC was developed as a collaborative project between leading industry players in the blockchain and cryptocurrency space. The founding parties—BitGo, Kyber Network, and Ren Protocol—were all highly established and VC-backed companies with strong financial backing.

VC Support Behind Key Players

To understand WBTC's fundraising strategy, it’s essential to first recognize the venture capital investments behind its key components. Let's start with BitGo, which serves as the custodian for the Bitcoin reserves backing WBTC. BitGo has raised substantial venture funding to establish itself as a leading cryptocurrency custodian, securing $57.5 million in Series B funding in 2018, led by major investors such as Galaxy Digital, Redpoint Ventures, and Mike Novogratz's Crypto Fund. The company's security infrastructure is regarded as one of the most trusted in the industry, and this reputation made BitGo an ideal partner for managing Bitcoin reserves on behalf of WBTC holders (source: BitGo Series B Round, https://www.bitgo.com/blog/bitgo-secures-57-million-in-funding).

Additionally, Kyber Network—another integral player in the creation of WBTC—is a decentralized liquidity protocol. Kyber raised $52 million through its ICO in 2017, which allowed it to scale and integrate with a wide array of DeFi protocols. The project’s aim was to enable seamless token swaps in decentralized applications on Ethereum, and the introduction of WBTC greatly enhanced the use cases for Kyber’s liquidity pools. The liquidity provided by Kyber was crucial for facilitating the minting and redeeming of WBTC tokens in a highly efficient manner (source: Kyber Network ICO, https://www.kyber.network).

Lastly, Ren Protocol, which specializes in the cross-chain interoperability between Bitcoin and Ethereum, raised $34 million in 2018 through a private sale of its Ren token. Ren Protocol is responsible for providing the decentralized technology that powers the transfer of Bitcoin onto the Ethereum network. This was the key innovation that allowed Bitcoin to be tokenized as WBTC, essentially enabling the wrapped Bitcoin model for the first time (source: Ren Protocol Fundraising, https://www.renproject.io/).

As a collaborative project rather than a single entity’s fundraising effort, WBTC was able to leverage the financial resources and expertise of these key players to develop a secure, efficient, and transparent solution. This approach set the project apart from others that sought traditional fundraising rounds and token sales, offering a more organic growth model based on partnerships and the existing infrastructure of trusted crypto custodians and liquidity providers.

Key sources:

• BitGo Series B Round, https://www.bitgo.com/blog/bitgo-secures-57-million-in-funding
  
  
• Kyber Network ICO, https://www.kyber.network
  
  
• Ren Protocol Fundraising, https://www.renproject.io/
  

8B. Treasury Management

In a traditional blockchain project, a centralized treasury is used to fund development, operational expenses, and other growth initiatives. However, WBTC operates differently due to its collateralized structure. Rather than relying on a traditional treasury of native tokens or funds raised during an ICO, WBTC is backed 1:1 by Bitcoin, with BitGo acting as the custodian of these reserves. WBTC’s financial management hinges on the Bitcoin reserves, rather than having a traditional treasury that funds ongoing development.

Bitcoin Reserves and Multi-Signature Custody

The core of WBTC's treasury management is the management of its Bitcoin reserves. BitGo, a custodial service for cryptocurrencies, is responsible for managing the Bitcoin reserves that back the issued WBTC tokens. These Bitcoin reserves are stored using multi-signature wallets that require multiple parties to sign off on any action, ensuring that no single entity has full control over the funds. This multi-sig system greatly enhances the security of the Bitcoin reserves, reducing the risk of single points of failure and hack risks.

A 2-of-3 multi-sig wallet system is used, meaning that two of three trusted parties need to authorize any withdrawal or transaction from the Bitcoin reserves. The three key parties involved in managing these reserves include BitGo, WBTC merchants, and Chainlink oracles, which are responsible for feeding accurate and tamper-proof Bitcoin price data to WBTC’s smart contract. The multi-sig system ensures that the process of redeeming or minting WBTC requires the consensus of trusted entities, adding a layer of redundancy and security to the system (source: BitGo Multisig Protocol, https://www.bitgo.com/solutions/multi-sig).

The custodial nature of WBTC means that BitGo bears the responsibility of safeguarding the Bitcoin backing, and it operates with an insurance policy to cover losses or breaches that may occur. BitGo’s insurance coverage is up to $100 million for digital assets stored under its custody, which adds an extra layer of security to the WBTC ecosystem. This insurance coverage ensures that if an unforeseen event such as a hack or a system failure occurs, WBTC token holders are protected (source: BitGo Insurance, https://www.bitgo.com/solutions/insurance).

The financial model of WBTC differs significantly from traditional projects because it does not require funds for general development or marketing. Instead, it uses the fees generated through the minting and redeeming processes to cover the costs associated with the maintenance and growth of the project. These costs include audit expenses, security measures, and protocol improvements, ensuring that the system remains efficient and transparent.

Key sources:

• BitGo Multisig Protocol, https://www.bitgo.com/solutions/multi-sig
  
  
• BitGo Insurance, https://www.bitgo.com/solutions/insurance
  
  
• WBTC Proof of Reserves, https://www.wbtc.network
  

8C. Revenue Model

The revenue model for WBTC is relatively straightforward compared to many other DeFi tokens that rely on staking, liquidity mining, or block rewards. Since WBTC is not a traditional tokenized asset that generates block rewards or transaction fees, its primary revenue source comes from minting and redeeming fees. These fees are collected each time a user either mints WBTC or redeems it for the equivalent amount of Bitcoin.

Minting and Redeeming Fees

The process of minting WBTC occurs when a user sends Bitcoin to a WBTC merchant, such as BitGo or Kyber Network, who then issues an equivalent amount of WBTC on the Ethereum blockchain. For this process, a fee is charged, typically ranging from 0.25% to 0.5% of the transaction amount. Similarly, when a user redeems their WBTC for the equivalent amount of Bitcoin, the merchant processes the transaction and charges a redeeming fee.

This fee structure is essential to the WBTC revenue model as it allows the project to remain self-sustaining without the need for external funding. The fees collected from minting and redeeming are used to cover the costs of security audits, custodial services, and proof-of-reserves management (source: WBTC Minting Fees, https://www.wbtc.network).

WBTC and DeFi Growth

The WBTC ecosystem benefits greatly from the rapid expansion of DeFi, which has been a significant catalyst in the adoption of WBTC. As more DeFi protocols such as MakerDAO, Aave, Compound, and Uniswap integrate WBTC as collateral for loans, liquidity pools, and staking, the demand for WBTC tokens has grown significantly. As a result, WBTC transactions—both minting and redeeming—have seen increased volumes, directly translating to higher revenues for the ecosystem.

In addition, WBTC’s use in liquidity provision and as collateral in lending platforms continues to increase as the DeFi market matures. As more people use WBTC as a bridge between Bitcoin and Ethereum’s decentralized ecosystem, the transactional fees associated with minting and redeeming will continue to support the financial model and ensure long-term sustainability for the project.

WBTC’s Integration in Major DeFi Platforms

The growing adoption of WBTC in DeFi platforms contributes to its increasing revenue generation. WBTC’s use as collateral in lending platforms like Aave, Compound, and MakerDAO has expanded its role beyond simple tokenization of Bitcoin. Its use cases now include collateral for borrowing, liquidity provisioning, and a variety of decentralized trading strategies. The more WBTC is used in DeFi, the more minting and redeeming transactions are processed, thus increasing the fee-based revenue that sustains the project (source: Aave WBTC Collateral, https://www.aave.com).

Key sources:

• WBTC Minting Fees, https://www.wbtc.network
  
  
• Aave WBTC Collateral, https://www.aave.com
  
  
• WBTC Proof of Reserves, https://www.wbtc.network
  

8D. Burn Mechanisms

The burn mechanism of WBTC differs from the deflationary models of many ERC-20 tokens, where burning is used to reduce the circulating supply in order to increase token scarcity and value. Since WBTC is a Bitcoin-backed token, its supply is controlled by the minting and redeeming process.

In the WBTC ecosystem, the supply of tokens naturally fluctuates based on user demand. When users decide to redeem their WBTC for Bitcoin, the equivalent amount of WBTC is burned. This burning process occurs through redeeming transactions, where WBTC tokens are destroyed, and the user receives Bitcoin in exchange.

This burning mechanism ensures that the total supply of WBTC tokens remains equal to the amount of Bitcoin held in reserve. There is no need for an additional deflationary burning mechanism because the supply of WBTC is directly tied to the Bitcoin backing. If Bitcoin's price increases, the demand for WBTC may rise, leading to more minting of WBTC tokens. Conversely, if users decide to redeem their WBTC tokens for Bitcoin, the supply contracts accordingly (source: WBTC Burn Process, https://www.wbtc.network/redemption).

This model of burning through redemption is beneficial as it ensures that the WBTC supply remains aligned with the actual Bitcoin reserves, maintaining the 1:1 backing at all times. Unlike tokens that have a pre-determined burn schedule for scarcity purposes, WBTC’s burn process is demand-driven, making it a more flexible and organic mechanism for maintaining token stability.

Key sources:

• WBTC Burn Mechanism, https://www.wbtc.network/redemption
  

8E. Use of Funds and Runway

WBTC operates differently from traditional blockchain projects, primarily due to its collateralized nature. Since WBTC’s supply is backed by Bitcoin reserves, there is no central treasury holding native tokens for development, marketing, or operational expenses. Instead, its operations are funded through the fees collected from the minting and redeeming processes. This model is unique in that it does not require external venture funding or public offerings to sustain the project.

Fee-Generated Model for Operations

WBTC’s operational costs are covered by the minting fees and redeeming fees generated by user transactions. When users choose to mint WBTC (i.e., deposit Bitcoin to receive WBTC on the Ethereum network), the system charges a fee, usually between 0.25% and 0.5% of the transaction amount. Similarly, when users redeem WBTC to return to Bitcoin, a fee is charged by the merchant facilitating the transaction (source: WBTC Minting and Redeeming Fees, https://www.wbtc.network).

The funds raised from these fees are used to cover a wide range of operational expenses, including custodial costs, security audits, proof-of-reserves management, and technical upgrades. The custodian (currently BitGo) is responsible for the Bitcoin reserves and charges fees for managing the Bitcoin assets, ensuring they remain secure in cold storage wallets and under multi-signature control (source: BitGo Custody Services, https://www.bitgo.com).

Furthermore, WBTC does not rely on external venture funding beyond what has been provided by the founding partners, as the WBTC ecosystem is self-sustaining through its fee-based revenue model. This contrasts with other blockchain projects that depend heavily on VC funding for development or token sales for liquidity. WBTC operates with a revenue stream directly tied to the increasing demand for Bitcoin exposure within Ethereum-based DeFi ecosystems.

Custodial and Security Costs

The custodial costs are significant in ensuring the 1:1 backing of WBTC with Bitcoin. These costs are associated with managing the Bitcoin reserves held by BitGo. These funds are held securely in multi-sig wallets, and the cost of wallet management, security infrastructure, and insurance coverage is funded by the minting fees (source: BitGo Security Infrastructure, https://www.bitgo.com).

Additionally, WBTC must also account for security audits and proof-of-reserves mechanisms. These audits are critical to ensuring transparency and trust in the system, especially since WBTC operates as a bridge between Bitcoin and Ethereum, two blockchains that have distinct protocols and security features. The cost of conducting annual security audits and maintaining proof-of-reserves is covered by the revenue generated from minting and redeeming fees.

Impact of DeFi Growth on WBTC’s Finances

The DeFi space has seen exponential growth over the past few years, and WBTC has been a direct beneficiary of this expansion. As DeFi platforms have adopted WBTC as a key collateral asset, the volume of minting and redeeming transactions has increased, driving transaction fee revenues for the project. As WBTC is used in decentralized lending (such as Aave and MakerDAO), liquidity pools (like Uniswap), and collateralized debt positions, the demand for WBTC has grown significantly. The growth of WBTC directly correlates with the growing adoption of DeFi, and this has had a direct, positive impact on the project’s revenue model.

Sustainability of WBTC's Model

WBTC’s sustainability is linked to the DeFi market’s health. As long as DeFi continues to grow and attract new users, WBTC is positioned to benefit from an expanding DeFi ecosystem. This growth allows WBTC to remain self-sustaining, generating enough revenue from minting and redeeming fees to cover its operational costs.

However, it is important to note that WBTC’s revenue is subject to market fluctuations. For instance, if the demand for Bitcoin were to decrease, or if DeFi adoption stagnated, the volume of WBTC tokens being minted and redeemed could decline, which would reduce the transaction fee revenue generated by the project.

Key sources:

• WBTC Minting and Redeeming Fees, https://www.wbtc.network
  
  
• BitGo Custody Services, https://www.bitgo.com
  
  
• DeFi Pulse WBTC Usage, https://www.defipulse.com/
  

8F. VC Involvement and Influence

The involvement of venture capital (VC) in WBTC is indirect but significant. BitGo, Kyber Network, and Ren Protocol, the three founding entities behind WBTC, are all VC-backed companies with substantial financial backing from prominent investors. The project itself, however, does not have external VC funding directly in the form of equity investments or token sales, which makes it different from many other DeFi projects.

However, the influence of VCs can still be felt, particularly in the strategic decisions made by these founding companies. BitGo, which is the custodian of the Bitcoin reserves, has strong ties with institutional investors and VCs, who have been instrumental in funding its operations and infrastructure. For example, BitGo has secured funding from major VCs like Redpoint Ventures and Galaxy Digital, and it is these VCs who continue to shape the direction of WBTC through their influence on BitGo’s operations (source: BitGo Series B Funding, https://www.bitgo.com/blog/bitgo-secures-57-million-in-funding).

Similarly, Kyber Network and Ren Protocol have also received substantial VC backing, which has helped to propel WBTC’s adoption within the DeFi ecosystem. These companies' VC investors bring more than just capital—they bring strategic influence, networking opportunities, and access to key players in the DeFi and blockchain spaces.

The strategic decisions made by these VC-backed companies play a crucial role in shaping the future of WBTC, particularly in how it integrates into the DeFi ecosystem and how it adapts to regulatory challenges. As DeFi continues to grow, these VC-backed companies will continue to have a significant influence on WBTC’s development (source: Kyber Network ICO, https://www.kyber.network).

However, despite the VC involvement, WBTC has remained decentralized in its governance, with decisions being made by the WBTC DAO, a multi-sig governance model that requires consensus from key stakeholders to make significant protocol changes (source: WBTC DAO, https://www.wbtc.network/dao).

Key sources:

• BitGo Series B Funding, https://www.bitgo.com/blog/bitgo-secures-57-million-in-funding
  
  
• Kyber Network ICO, https://www.kyber.network
  
  
• WBTC DAO Governance, https://www.wbtc.network/dao
  
  

Thank you for taking the time to read this article. We invite you to explore more content on our blog for additional insights and information.

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