Custodial Wrappers Offer Borrowers a Way Around Selling Their Bitcoin
Bitcoin holders have an alternative to selling their coins when they need cash. They can borrow against their Bitcoin, using it as collateral for a loan, without having to sell the underlying asset.
This solution comes with its own set of complications. Many blockchain lending applications run on Ethereum, while the Bitcoin network is separate. This means that an Ethereum application cannot directly take a borrower's BTC as collateral.
To overcome this issue, custodians hold the Bitcoin in safekeeping and issue digital tokens that can be accepted by lending applications. These tokens represent the underlying Bitcoin and can be traded on other networks.
Circle, Coinbase, and WBTC offer competing versions of this arrangement, each with their own terms and conditions. While they provide a way for borrowers to keep exposure to Bitcoin's price, they also introduce new risks and dependencies.