Sky, the decentralized finance (DeFi) platform formerly known as MakerDAO, announced a proposal to completely remove Wrapped Bitcoin (wBTC) as collateral from its ecosystem. 

This decision, set to be debated in an upcoming governance vote on September 26, 2024, comes amidst growing concerns about the transparency and governance of wBTC’s underlying assets.

Background on Wrapped Bitcoin (wBTC)

Wrapped Bitcoin (wBTC) is a token that represents Bitcoin on the Ethereum blockchain, allowing BTC to be used in decentralized finance applications. 

With a market capitalization of $8.8 billion, wBTC plays a crucial role in DeFi as a collateral asset. Sky currently holds approximately $200 million in loans backed by wBTC, according to CoinDesk.

Concerns Over Transparency and Ownership

The proposal to offboard wBTC stems from concerns raised by BA Labs, a prominent risk management firm in the DeFi space. 

According to their report, there are significant transparency issues related to wBTC, particularly regarding its custodian, BitGlobal. 

BA Labs argue that wBTC's custodial setup, which recently transitioned to a joint operation with BitGlobal, poses risks due to Tron Founder, Justin Sun’s alleged involvement. The firm alleges that Sun may have control over BitGlobal through concealed ownership structures involving shell companies and nominee directors.

“We see there is a long history of concealment of ownership, movement of funds without clear authority, lack of transparency, and actions that could negatively impact end users or lead to impairment of assets or custodial services,” BA Labs stated.

The firm’s report suggests that Sun’s affiliations with other stablecoin and custodial products have been problematic, leading to concerns about the security and integrity of wBTC.

However, on Aug. 9, BitGo CEO Mike Belshe dismissed claims that Justin Sun's involvement in Wrapped Bitcoin will negatively impact its security or transparency, according to CoinTelegraph.

Additionally, Justin Sun addressed the controversy in an Aug. 11 post on X, emphasizing that WBTC hasn't changed and he hasn't been given direct access to funds.

Details of the Proposed Offboarding

The proposal to offboard wBTC will involve several steps, starting with an Executive Vote on September 26. If approved, Sky will begin the process of removing wBTC as collateral from its lending platforms, including Legacy Vaults and SparkLend. 

The timeline for this transition is set to unfold over multiple phases, with a full removal expected within 180 days.

The move also comes at a time when Coinbase is preparing to launch cbBTC, a new tokenized Bitcoin product that aims to challenge wBTC's dominance. cbBTC will be backed 1:1 by Bitcoin reserves and managed by Coinbase, presenting a direct competitive threat to BitGo’s wBTC, which currently holds a 96.6% market share in the Ethereum ecosystem.