Everyone involved in the crypto world knows that different blockchains follow different protocols and have different functionalities which often makes them incompatible with each other. Wrapped cryptocurrency overcomes this limitation and makes it possible to use certain cryptos on non-native blockchains, like trading Bitcoin (BTC) on the Ethereum ecosystem.
Wrapped Bitcoin (WBTC) is one of the most widespread examples of a wrapped token. It allows its users to take advantage of crypto interoperability and get access to the decentralized finance (DeFi) ecosystem. In this article, we will provide you with a complete guide on wrapped bitcoin, outlining its main features, benefits and drawbacks, the key differences between BTC and WBTC, and more.
The article covers the following subjects:
What is Wrapped Crypto?
The concept of wrapped crypto is similar to stablecoins (USDT, USDC, BUSD, etc.). It implies that a token value is pegged one-to-one to an underlying cryptocurrency (for example USDT to USD price), thus making it possible to use that crypto on non-native blockchains. Knowing that there are many pitfalls related to the connectivity of various networks, wrapped crypto is a seamless solution that establishes a bridge between them, opens access to DeFi platforms, plus fosters its liquidity, and, as a result, its widespread adoption.
One of the most popular examples of wrapped cryptocurrency is wrapped Bitcoin (WBTC). It helps bitcoin holders overcome the crucial differences between the Bitcoin and Ethereum networks while reaping the benefits of their functionalities. WBTC is an ERC-20 token that stands for one BTC. However, in contrast to its underlying crypto asset, it can be used in the Ethereum blockchain and its system of decentralized applications (DApps).
As well as tokens wrapped for the Ethereum blockchain, there are tokenized versions of cryptos for other networks. For example, it’s possible to wrap BTC, ETH, XRP, etc. in the form of a BEP-20 token so that they can be used on the Binance Smart Chain (BSC).
WBTC launching
WBTC represents Bitcoin that can be used on Ethereum. Launched in January 2019 by Ren, Bitgo, and Kyber, it established the bridge between Bitcoin and Ethereum networks, providing its users with an opportunity to get access to the rapidly growing DeFi ecosystem and DApps. As of 10 August 2022, the current circulating supply of WBTC is 240,808.32.
The process of WBTC management includes 3 key participants: Decentralized Autonomous Organization (aka WBTC DAO), merchants, and custodians.
WBTC DAO is a regulatory body. It consists of 17 stakeholders and over 40 participants that involve merchants, decentralized exchanges, wallets, and others.
Custodians mint and unwrap WBTC tokens as well as ensure the security of BTC reserves.
Merchants have the role of wrapped bitcoin distributors. They communicate with custodians about Bitcoin transfers like wrapping and unwrapping and delivering the WBTC to the end user.
How Do You Wrap Bitcoin (BTC)?
If a user decides to wrap a Bitcoin asset, they need to follow these simple steps:
The user chooses the merchant who will manage the process of the transaction and submit the request.
The merchant commences the Know Your Customer (KYC) and Anti Money Laundering (AML) procedures. Once the user’s identity is verified, they send the bitcoins to a custodian.
The custodian mints (wraps) a particular amount of WBTC tokens (based on the received bitcoin price) and sends it to the merchant.
The user and the merchant conduct trade on centralized (CEX) or decentralized exchanges (DEX). As a result, the user takes the WBTC, while the merchant receives BTC.
After receiving WBTC, users get access to numerous DeFi platforms built on the Ethereum network such as MakerDAO, Compound, Uniswap, etc.
In the opposite situation, if users want to redeem Bitcoin for WBTC, they’ll have to pass through quite the same procedure.
The user finds the merchant and makes a request for BTC.
The merchant commences the burn (unwrap) transaction and contacts the custodian.
The custodian provides the necessary amount of BTC (depending on the amount of the wrapped bitcoin).
The user trades their Bitcoins back and the merchant destroys (aka burns) the received tokens.
Advantages of Wrapped Bitcoin
WBTC is an innovative technology that allows for Bitcoin and Ethereum blockchain interoperability. Thanks to this breakthrough, BTC users have received exposure to the DeFi ecosystem and multiple Ethereum-based DApps. Let’s have a look at the other significant benefits of WBTC.
Liquidity
WBTC is an efficient tool that increases liquidity on both centralized and decentralized exchanges. As the CEXs often use BTC, while DEXs opt for ETH, WBTC is the tool that eliminates the need to exchange bitcoin (BTC) for Ethereum (ETH) and allows its users to move their assets across networks smoothly. As a result, they can also take advantage of centralized and decentralized exchange functionalities and a wide range of decentralized applications.
Staking
Staking is a popular DeFi feature. It lets token users gain extra income by storing their assets in a certain pool and locking them there for an agreed time and reward. Although Bitcoin cannot be staked, its tokenized version, WBTC, allows bitcoin holders to benefit from staking protocols, increasing the efficiency of their assets. Of course, the height of the reward depends on the current price of the token as well as the amount that it was stored. One popular platform that lets users gain additional returns by staking WBTC is CoinList.
Yield Farming
WBTC yield farming is another way to earn additional income while holding long-term bitcoin investments. Despite some similarities with the above-mentioned staking, they are two different DeFi protocols. Yield farming allows users to lock their WBTC holdings for a shorter period. What’s more, it provides investors with an opportunity to lend their assets with a certain amount of interest, thus receiving extra passive returns. A couple of the popular platforms used for WBTC yield farming are Compound and Uniswap.
Additional Functionality
WBTC allows BTC holders to take advantage of the functionalities and advantages of DeFi. One of them is the ability to use smart contracts. Not only do they eliminate the need for third parties, thus making transactions more cost-effective and less prone to manual errors, but also increase their safety and speed.
Margin Trading
WBTC tokens can be used in margin trading. This strategy might be complicated for newbies, but experienced traders often use it to gain potentially higher returns while outlaying a much smaller amount of initial capital. However, it’s crucial to remember that margin trading implies significantly higher risks since both profits and losses are calculated from the total sum of the investment.
Wrapped Bitcoin (WBTC) vs. Bitcoin (BTC)
Wrapped Bitcoin (WBTC) is derived from Bitcoin (BTC). It’s a one-to-one representation of this asset that can be used on the Ethereum network. It’s crucial to underline that if it wasn’t for WBTC, the biggest and most widespread networks such as Ethereum and Bitcoin would still have huge compatibility and interoperability issues. With the introduction of this cutting-edge technology, bitcoin holders got access to DeFi and its numerous functionalities such as staking, yield farming, etc. What’s more, access to smart contracts made transactions faster, safer, and more cost-efficient.
However, WBTC is not the only tokenized version of Bitcoin. Huobi BTC (HBTC) is another token that is pegged 1:1 to Bitcoin price and plugs this crypto into the Ethereum blockchain and decentralized market.
Is Wrapped Bitcoin a Good Investment?
Wrapped Bitcoin can be a successful investment depending on the aims of your trading strategy. Being a strict representation of Bitcoin, WBTC can be considered more like a tool to get access to the Ethereum network and DeFi. Taking into consideration the rapid growth and development of decentralized solutions, wrapped Bitcoin is likely to gain even higher popularity in the near future.
Is Wrapped BTC Safe?
Although wrapped Bitcoin has proven to work well, like any other technology and investment that brings return, it comes with particular risks. For example, there is a possibility that WBTC token will diverge in value with its underlying asset (Bitcoin). What’s more, potential mistakes may appear during the transaction process on the side of custodians or merchants. Thus, once having decided to wrap BTC, it’s important to be aware of the potential risks and have a plan in case you need to mitigate them.
Conclusion
Wrapped bitcoin is a cutting-edge technology that established the bridge between two popular networks, Bitcoin and Ethereum, and allowed BTC holders to take advantage of decentralized finance and its fast-growing number of applications. Moreover, wbtc brings greater liquidity on both CEX and DEX, as well as improves capital efficiency.
Although this technology has proven to be rather safe, before opting for this solution, it’s still necessary to get a clear understanding of how WBTC works and learn more about the potential benefits and risks it comes with.
Wrapped Bitcoin FAQ
Wrapped Bitcoin (WBTC) is a tokenized pegged one-to-one version of Bitcoin (BTC). The main difference between them is that in contrast to its underlying asset, WBTC can be used on the Ethereum network and provide its holders with the functionalities and advantages of decentralized finance, as well as the wide range of DApps built on the Ethereum blockchain. Essentially, the WBTC helped BTC to achieve a larger market cap as well as a higher trading volume.
Wrapped bitcoin can be a good investment if it complies with the goals of the particular investment strategy. WBTC is commonly used by investors who want to access an Ethereum node from its network and use features such as staking, yield farming, etc. Moreover, as of 10 August 2022 the wrapped bitcoin’s current market cap is $ 5.52B USD.
Wrapped Bitcoin (WBTC) is quite a safe technology. However, that doesn’t mean that it’s completely protected from any pitfalls. It may be prone to some transaction mistakes or possible discrepancies with the bitcoin price. Thus, before wrapping your Bitcoins, it’s reasonable to learn more not only about its benefits but also WBTC's potential risks. You can buy wrapped bitcoin from some of the most popular cryptocurrency exchanges.
Wrapped cryptos allow users to trade on non-native blockchains. Wrapped bitcoin being an ERC-20 token created for use on the Ethereum network effectively builds the connection between the Bitcoin and Ethereum blockchains, exposing its holders to decentralized finance and decentralized applications. For example, it’s possible to use wrapped bitcoin to gain passive returns via staking or yield farming.
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