What Is Wrapped Bitcoin (WBTC)?

Bitcoin (BTC) is the native cryptocurrency of the Bitcoin network, while Wrapped Bitcoin (WBTC) is its wrapped version. But what is a wrapped crypto? In simple terms, cryptocurrencies can be moved from one blockchain to another. Through a procedure known as “wrapping,” cryptocurrencies can function on another chain. This opens up a world of new use cases and utilities for cryptocurrencies, including Bitcoin (BTC).

Wrapped cryptocurrencies enable a much higher utility on blockchains not native to them. This higher level of interoperability has brought BTC to other blockchains. If wrapped, Bitcoin can enable access to decentralized finance (DeFi) and decentralized application (DApp) support. Furthermore, BTC is a coin, while WBTC is a token. Intrigued? Here’s everything you need to know about WBTC.

TL;DR

• WBTC is a version of Bitcoin that's been modified to operate on the Ethereum network. This allows users to access the decentralized finance and smart contract capabilities of Ethereum.

• Introduced in 2019, WBTC has a 1:1 ratio of BTC support, and is governed by a decentralized autonomous organization (DAO).

• Interoperability with Ethereum, smart contracts, and improved utility in DeFi applications can all be provided.

• More centralized than BTC, WBTC relies on the security of the Ethereum network.

• WBTC enhances the ability to transfer assets between Bitcoin and Ethereum quickly and efficiently, broadening the potential of DeFi.

What Is Wrapped Bitcoin (WBTC)?

Bitcoin is the first, largest, and most well-known cryptocurrency. Bitcoin is also a blockchain. However, Bitcoin doesn't have support for smart contracts natively. Competing blockchains, such as Ethereum, introduced these technologies. As such, they create a vast ecosystem of decentralized applications (DApps).

A cryptocurrency must follow the ERC-20 token standard to use the ecosystem. It’s here that WBTC comes into play. WBTC is an ERC-20 token that represents Bitcoin on the Ethereum blockchain.

One WBTC equals one BTC in terms of value. BTC can be converted into WBTC, and WBTC can be converted into BTC again. WBTC is faster than regular Bitcoin and can be integrated into Ethereum wallets, DeFi applications, smart contracts, and wider DeFi activities. Because it follows the token standard, WBTC can be stored in any Ethereum blockchain-supporting wallet.

BTC backs WBTC at a 1:1 ratio. A network of automatically monitored merchants and custodians allows the crypto to be fully integrated into Ethereum.

However, this means both cryptocurrencies have a different circulating supply.

How does it work?

WBTC was launched on top of Ethereum in January 2019. WBTC was created as a collaborative project between Compound, MakerDAO, BitGo, Ren, Dharma, Kyber, and Set Protocol.

The goal was to bring a higher level of liquidity to Ethereum by bringing Bitcoin to the network. However, the project is controlled by a Decentralized Autonomous Organization (DAO) known as the WBTC DAO.

For someone to obtain WBTC, they need to request the tokens from a merchant. These merchants will then carry out know your customer (KYC) and anti-money-laundering (AML) checks to verify a user's identity.

A merchant can then start a transaction with a custodian. The custodian mints the WBTC token and sends them to the merchant. The circulating supply of WBTC depends on how much WBTC is minted. There’s also a specific process for minting and burning the tokens.

This process is completed through centralized exchanges (CEXs), decentralized exchanges (DEXs), or atomic swaps. It's important to remember that only merchants can redeem WBTC for BTC. WBTC has a higher level of utility on a cryptocurrency exchange as a result.

Advantages of WBTC

WBTC brings many advantages, including:

• The WBTC token has a higher level of interoperability.

• The token can be used with and interact with different blockchain protocols.

• The token follows the ERC-20 token standard and can be used in DeFi and within DeFi applications.

• WBTC has full smart contract support and can be used across an entire ecosystem, such as Ethereum.

• Wrapped cryptocurrencies such as WBTC can be used in non-native blockchains.

• Crypto holders can use WBTC to trade, stake, add liquidity, borrow, or lend.

Disadvantages of WBTC

WBTC isn't without its drawbacks, however. These include:

• WBTC is more centralized than Bitcoin.

• A custodian will typically be a centralized platform.

• When BTC is wrapped, it'll take on the security measurements of the new network it's connected to, such as Ethereum.

• WBTC isn't as well-known or as widely held by traders as BTC is.

WBTC vs BTC

Let's explore the differences and similarities between BTC and WBTC, highlighting how each plays a unique role in the broader context of blockchain technology and DeFi.

Foundations

• BTC: Bitcoin, the pioneering digital currency, is built on the Bitcoin blockchain.

• WBTC: A variation of Bitcoin that runs on the Ethereum blockchain, allowing for Bitcoin to be integrated into the greater Ethereum environment.

Usage and functionality

BTC:

• Used for transactions and as a reward for miners who validate transactions on the Bitcoin network.

• This product provides fundamental capabilities while having restricted operations on the Bitcoin blockchain.

WBTC:

• Provides enhanced utility in the Ethereum network, including involvement in smart contracts.

• It can be used in many DeFi applications, such as staking, borrowing, lending, and exchanging for other ERC-20 tokens.

Network and consensus mechanisms

• BTC: Mining is required to verify transactions on the proof-of-work (PoW) consensus platform, in which miners must solve complex puzzles.

• WBTC: Uses Ethereum's proof-of-stake (PoS) consensus, enabling stakeholders to earn rewards by safeguarding the network.

Accessibility and liquidity

• Both BTC and WBTC are available for purchase on cryptocurrency exchanges.

• WBTC enhances liquidity in the Ethereum ecosystem, allowing for seamless transactions with other ERC-20 tokens.

Minting and burning process

• The transformation of BTC to WBTC and vice versa involves minting (creation) and burning (destruction) of WBTC tokens.

• The public ledger is monitored and verified rigorously to guarantee that this process is transparent and trustworthy.

Advantages of WBTC

• Increased transaction speed compared to BTC transactions on the Bitcoin network.

• Enhanced liquidity in the Ethereum ecosystem.

• Greater utility, especially in the context of DeFi applications and smart contracts.

How to wrap Bitcoin?

Wrapping Bitcoin is a simple procedure, and there are three ways to do so. All methods require users to lock BTC or another digital asset to receive tokens pegged to the value of BTC.

The first approach, centralized wrapping, uses an intermediate process governed by third parties. They send a specific amount of BTC to a centralized custodian platform. The platform locks up the BTC in a smart contract and then mints an equivalent amount of tokenized Bitcoin on Ethereum. The merchant then transfers the WBTC to the user’s cryptocurrency wallet.

The second approach is called trustless wrapping. With this method, users don't need to trust a centralized entity. As such, users can directly send the Bitcoin to a smart contract programmed to mint tokenized Bitcoin. The amount will be equivalent to a locked BTC.

The third approach is known as synthetic wrapping. This solution lets users receive synthetic assets pegged to the value of BTC. Depending on the protocol, users can lock a combination of digital asset options and mint synthetic Bitcoin. Additionally, WBTC can be bought with BTC from most major exchanges.

The impact of WBTC and its future

Many cryptocurrencies, including WBTC, have seen high levels of utility on Ethereum. Each project introduces a wrapped variation of the original cryptocurrency to follow the ERC-20 token standard.

Wrapped cryptocurrencies, such as WBTC, have improved liquidity and increased the cross-chain flow of assets. Meanwhile, WBTC has ultimately benefited the DeFi ecosystem and enhanced the interconnection between the two leading blockchains.

The final word

Ever wondered what sets WBTC apart from the original BTC? WBTC is a transformative version of Bitcoin designed to operate on the Ethereum blockchain. The token enhances Bitcoin's utility by allowing it to interact with Ethereum's vast DeFi ecosystem and smart contracts.

It's important to note that WBTC, being more centralized than BTC, carries different risks and advantages. Its introduction has significantly improved the liquidity and flow of assets between Bitcoin and Ethereum, opening up new possibilities in the DeFi space.