DeFi Lending Giant Sky Votes to Offload Wrapped Bitcoin Amidst Justin Sun Concerns

Sky, a lending protocol formerly known as MakerDAO, is set to vote on a proposal to completely ditch Wrapped Bitcoin (WBTC) from its ecosystem, according to an article published Thursday on the governance forum. This could be a significant development in the DeFi space, as the proposal would affect $200 million in loans backed by WBTC on the platform.

WBTC is a wrapped token pegged 1:1 to Bitcoin (BTC), allowing investors to utilize Bitcoin on other blockchains. The token plays a key role in DeFi lending as collateral, with a market cap of around $9 billion.

Last month, cryptocurrency custodian BitGo announced it was transferring its WBTC business to a multi-jurisdictional joint venture formed in partnership with Hong Kong-based custodian BiT Global, creating a “strategic partnership” between BitGo, the Tron blockchain ecosystem, and Tron founder Justin Sun. This news sparked concerns among some crypto market participants, suggesting potential challenges for the DeFi ecosystem.

Due to concerns about the connection between Justin Sun and the underlying asset custodian for WBTC, BA Labs, an influential DeFi risk management firm in Sky’s governance, had suggested reducing WBTC exposure. On Thursday, BA Labs proposed a five-step plan to gradually remove all WBTC exposure from collateral, starting on September 26th, with each step requiring a vote.

“We found that the legal due diligence did not provide sufficient assurance,” BA Labs stated in the proposal, suggesting alternative products should be introduced on the platform if the proposal passes.

According to BA Labs, there are approximately $73 million in loans backed by wBTC on SparkLend, a lending platform affiliated with Sky, and $127 million in WBTC-related debt in Sky’s Legacy Vaults. Sky recommends that users of Legacy Vaults and SparkLend who have WBTC collateral close out their positions.

The controversy surrounding WBTC has fueled the emergence of competitors offering alternatives, including dlcBTC, Threshold's tBTC, and FBTC backed by the Layer-2 network Mantle. Notably, U.S. cryptocurrency exchange Coinbase yesterday announced the launch of its own wrapped Bitcoin, cbBTC.

"If you are a user with WBTC collateral in Legacy Vaults (WBTC-A, WBTC-B, or WBTC-C) or SparkLend, please be aware of the WBTC offboarding proposal initiated by [@BlockAnalitica].

According to the plan outlined by [@BlockAnalitica], and pending governance approval, WBTC offboarding..."

— Sky (@SkyEcosystem) September 12, 2024

[Source: Coindesk]