9mins read
Published on: Sep 19, 2024
#Blockchain
#Crypto 360
Wrapped Bitcoin (WBTC) is a unique cryptocurrency that allows Bitcoin to be used within Ethereum-based DeFi applications. WBTC enables holders to interact with Ethereum’s smart contracts, dApps, and many other products while mirroring Bitcoin's market value.
➔ WBTC is Bitcoin on Ethereum: Wrapped Bitcoin (WBTC) is an ERC-20 token representing actual Bitcoin held in custody on the backend. It is backed 1:1 by Bitcoin, meaning that users can participate in Ethereum’s DeFi ecosystem without selling their Bitcoin holdings.
➔ Increased Access to DeFi: As a token, WBTC has multiple DeFi use cases, including lending, borrowing, and trading. This enables Bitcoin holders to engage in DeFi without converting their BTC to ETH or any other cryptocurrency.
➔ Faster Transactions: These transactions are completed faster than the ones on Bitcoin as they are based on Ethereum’s blockchain, which solves blocks every 15 seconds instead of 10 minutes for Bitcoin.
➔ Secure and Transparent: WBTC is asset-backed and secured by Bitcoin, which is held in trust by companies such as BitGo. The system offers proof of reserve that anyone on the blockchain can check. It is also managed by a decentralised autonomous organisation (DAO) for accountability.
BTC, as the first cryptocurrency, is the most popular and most valuable digital currency in the market. However, it operates only within the Bitcoin network and BTC holders cannot easily engage in decentralised finance (DeFi), since it is mainly delivered on the Ethereum (ETH) platform. This limitation presented a need for a solution, which is where Wrapped Bitcoin (WBTC) came into the picture.
The WBTC acts as a bridge that enables Bitcoin to be used in Ethereum-based DeFi protocols for services like lending, borrowing, and trading while still holding on to Bitcoin. This article discusses what Wrapped Bitcoin (WBTC) is, who created it, and what opportunities the token opens up.
Wrapped Bitcoin, also known as WBTC or wBTC, is an Ethereum-based token representing an actual Bitcoin. It is an ERC-20 token backed by Bitcoin at a 1:1 ratio; for every WBTC token, an equivalent amount of Bitcoin is held in custody, and the WBTC mirrors the value of Bitcoin.
Image: Wrapped Bitcoin, by Bitcoinik
The concept of WBTC basically involves bringing the value of Bitcoin into the Ethereum ecosystem. Bitcoin’s original blockchain does not support smart contracts, which are a crucial part of DeFi. With WBTC, Bitcoin can now be integrated into the decentralised applications (dApps) and smart contracts, which were previously impossible.
Therefore, whether for the purpose of trading, lending, or earning interest, WBTC opens up more opportunities for Bitcoin holders. Introduced in January 2019, WBTC has become an essential asset in Ethereum’s DeFi ecosystem, which ensures higher liquidity and links Bitcoin and Ethereum.
Wrapped Bitcoin was created by a team of developers and organisations that wanted to bring Bitcoin into the Ethereum DeFi ecosystem. Its development was a joint effort between three main entities: BitGo, Kyber Network, and Ren (earlier called Republic Protocol).
BitGo, a trust company that deals with digital assets, is the main custodian of Bitcoin, which corresponds to WBTC, while Kyber Network and Ren are the decentralised liquidity providers that assist in wrapping and unwrapping. All these entities launched WBTC into the market in January 2019.
Besides these founding entities, WBTC is managed by a decentralised autonomous organisation (DAO). The WBTC DAO comprises participants from across the DeFi space to ensure that the protocol is managed transparently and democratically and oversees some of WBTC's most important functions, such as adding new merchants and custodians.
After creation, WBTC also involves the wrapping and unwrapping process, which is quite simple. Below is a breakdown of how WBTC is created and handled.
To get WBTC, a Bitcoin holder has to go through a merchant, such as CoinList or Kyber. The merchant then transfers the Bitcoin to a ‘custodian’ such as BitGo, who then places the Bitcoin in a vault. In simple terms, once the custodian locks down the Bitcoin, an equivalent amount of the WBTC tokens are created and transferred to the Ethereum network user.
With WBTC, users gain access to the Ethereum network. They can trade WBTC in decentralised exchanges, lend it in DeFi protocols like Compound, or use it as collateral for borrowing.
The process of redeeming WBTC for Bitcoin is simple. The user transfers the WBTC to the merchant, who “spends” them—that is, burns them. The merchant then asks the custodian for the original BTC, and the user gets their BTC back. This system guarantees that every WBTC in circulation is fully backed by a BTC, which can be confirmed through Bitcoin proof of reserve.
Wrapped Bitcoin has opened a myriad of opportunities, especially within the Ethereum DeFi space. This was not possible with Bitcoin because it could not communicate with Ethereum’s decentralised applications (dApps). Below are some of the most common use cases of WBTC today.
Image: Decentralised exchange, by Freepik
WBTC can be traded on decentralised exchanges (DEXes) such as Uniswap, SushiSwap, and Balancer, through which Bitcoin can be bought and sold without the need for centralised exchanges. Traders also have the advantage of quicker transaction handling through Ethereum compared to Bitcoin.
Another critical application of WBTC is that it can be locked as collateral to borrow other tokens, including DAI, USDC, and USDT. This enables Bitcoin holders to get liquidity from their BTC without having to sell it and earn interest.
Yield farming is a common model of earning passive income in the DeFi ecosystem. Bitcoin holders can stake their WBTC in staking or liquidity pools on platforms like Uniswap and yield rewards in return.
WBTC is commonly used as collateral to create stablecoins such as USDT. This means that Bitcoin holders can convert their WBTC by placing it in a smart contract and receive USDT that can be used for other investments or to hold.
As mentioned earlier, WBTC has been accepted as a medium of exchange in the DeFi space. Projects are working on decentralised payment systems that accept WBTC and allow people to make cross-border payments without using centralised, conventional financial systems.
Wrapped Bitcoin offers several advantages that make it attractive to anyone who wants to get the best of both worlds from Bitcoin and Ethereum. Below we will highlight some of the major benefits of WBTCs.
With the integration of Bitcoin on Ethereum, WBTC improves the liquidity of both networks. Higher liquidity results in more trading, lending, and borrowing opportunities, adding further value to the DeFi market.
WBTCs are based on the Ethereum network and thus have much faster transaction times than the Bitcoin network. To be more exact, WBTC transactions can be executed within 15 seconds, while Bitcoin transactions take an average of 10 minutes.
WBTC makes it easier for Bitcoin holders to interact with Ethereum’s DeFi system. Several DeFi applications provide lending, borrowing, and staking services previously unavailable to Bitcoin investors. With WBTC, they can also access the ecosystem without selling their Bitcoin.
WBTC is also a middleman between Bitcoin and Ethereum, two of the biggest blockchain platforms. This integration allows users to harness the specific strengths of each network, including Bitcoin’s security and Ethereum’s ability to facilitate smart contracts.
WBTC can be involved in various activities that generate yields, including yield farming, staking, and providing liquidity on DEXes, enabling Bitcoin holders to earn returns on their investments.
WBTC is a custodial token, where a trusted third-party custodian holds the Bitcoin that backs the token. This creates a certain degree of trust because users must trust that the custodian safely holds their assets.
WBTC is transparent since proof of reserves is posted on the blockchain. As with any system, there is always some risk involved; however, WBTC is quite a secure solution for those who want to connect the Bitcoin and Ethereum ecosystems if they trust the keepers and the protocol.
Image: WBTC enables users access to the ETH-powered DeFi ecosystem, by TechStory
Wrapped Bitcoin is quite popular in trading and lending on Ethereum’s DeFi platforms. By converting Bitcoin into WBTC, traders can leverage DEXes to trade their tokens without the need for centralised bodies. This enables more flexibility and the possibility of engaging in yield farming and liquidity mining.
Aave and MakerDAO, lending platforms, have adopted WBTC into their ecosystems, where users can borrow or lend WBTC with interest rates. Those who hold BTCs and may have kept them idle can now deploy them and get some returns without having to sell them.
This use of WBTC in DeFi increases liquidity and opens up new possibilities for Bitcoin holders who wish to engage in Ethereum-based projects.
It is hard to predict WBTC's future, but it certainly appears to be a bright one.
WBTC allows Bitcoin holders to interact with Ethereum’s DeFi applications and opens the door of interaction to two of the biggest blockchain networks. As the DeFi ecosystem grows, the requirement for interoperable assets, such as WBTC, is expected to increase.
In the future, more connections with Bitcoin and other blockchains will likely be made to enable cross-chain operations. WBTC's role in providing liquidity and acting as a bridge will only increase as the DeFi sector grows.
Wrapped Bitcoin (WBTC) is a wrapped, ERC-20-powered Bitcoin that enables BTC to be used in the decentralised finance (DeFi) ecosystem on the Ethereum network.
One WBTC is pegged to one Bitcoin, and for every WBTC in the market, a corresponding Bitcoin is held in the wallet of a custodian.
WBTC enables interaction with Ethereum’s decentralised finance, engages with smart contracts, buys and sells on decentralised exchanges, and earns through yield farming without selling their Bitcoin.
Yes, WBTC is considered safe to use. Some trusted custodians maintain the Bitcoin reserves backing WBTC, and the proof of the reserves can be easily audited on the blockchain.
To exchange Bitcoin for WBTC, you must go through a merchant such as CoinList or Kyber Network. The Bitcoin is transferred to a custodian, and the equivalent value of the WBTC is created on Ethereum.
With WBTC, you can trade on DEX, lend and borrow on DeFi protocols, stake and farm, and provide collateral for stablecoins such as DAI, USDC, or USDT.
To redeem the WBTC back to Bitcoin, you must return it to the merchant you initially received it from. The WBTC tokens then are burned, and the custodian unlocks the same amount.
Some of the most important advantages include:
• Bitcoin-based assets become more liquid.
• Allows Bitcoin network users access to the DeFi market.
• Earning interest or participating in Ethereum-based dApps without selling or converting Bitcoin.
No, WBTC is administered by a decentralised autonomous organisation (DAO), which includes many members and is not a centralised authority.
WBTC integrates Bitcoin into Ethereum’s DeFi space, where users can lend, borrow, trade, and farm yields, incorporating Bitcoin into the DeFi ecosystem.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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