What is a Wrapped Bitcoin?

What is a Wrapped Bitcoin?

What Is Wrapped Bitcoin?

Wrapped Bitcoin, known as WBTC, is an innovative way of bridging Bitcoin, the world’s most popular cryptocurrency, with Ethereum-friendly DeFi and Dapps. Simply put, Wrapped Bitcoin allows you to explore opportunities created by different blockchains without selling your Bitcoin.

We prepared a guide that will help you to understand what Wrapped Bitcoin is, how it works, and the benefits of using WBTC.

How Does Wrapped Bitcoin Work?

Wrapped bitcoin is not really Bitcoin. It is an ERC-20 token based on the Ethereum network. Wrapping is a way of converting your BTC to WBTC and vica-versa. 1 WBTC is always equal to 1 BTC, which means you can convert your BTC to WBTC and reverse it easily without changing the number of coins you hold or the value of your Bitcoin assets.

You might think that wrapped bitcoins are not very special. After all, you can always sell your Bitcoin and buy Ether (ETH) to use for Dapps and Defi. What is the difference? Well, the neat thing about wrapped Bitcoins is that you don’t actually have to sell your BTC. Instead, your Bitcoin funds are held in reserve by a custodian which allows you to exchange your WBTC to BTC at any time without worries.

Converting BTC to WBTC is a fairly transparent operation. A protocol known as proof-of-reserve verifies that 1 WBTC is minted for 1 BTC that is being reserved by custodians. The custodianship was originally started by BitGo, Ren, and Kyber, and now it is maintained by the WBTC Decentralized Autonomous Organization (DAO), which has multiple members representing different organizations.

WBTC is backed by Bitcoin.This means that when 1 Bitcoin is reserved, 1 WTBC is minted through the blockchain. Conversely, when a token is redeemed for 1 Bitcoin, the token is “burned” to prevent re-use. Blockchain transparency makes it possible to verify minting and burning operations. WBTC custodians regularly perform audits to provide transparency and secure the public’s trust.

WBTC is a two-for-one solution. Since most DeFi apps are based on the Ethereum Network, the introduction of WBTC allows Bitcoin owners to participate in the decentralized finance (DeFi) and decentralized application (Dapp) markets, without having to sell their Bitcoin. Since Bitcoin is the most widely used cryptocurrency in existence, the interoperability of Bitcoin with Ethereum-based assets delivers a much-needed liquidity to DeFi and Dapp markets.

How Is Bitcoin Converted to Wrapped Bitcoin?

The process of “wrapping” bitcoins is initiated once a Bitcoin user requests WBTC, the special ERC-20 token, from a merchant in exchange for BTC. After receiving this request, the merchant verifies the identity of the Bitcoin owner and sets up a transaction with the custodian. The custodian is authorized to mint the new WBTC tokens. The merchant receives the newly minted WBTC, and sends the BTC to the custodian. In the last step, the merchant and the Bitcoin owner trade the BTC for WBTC either through a centralized cryptocurrency exchange or by performing an atomic swap.

In order to convert  WBTC to Bitcoin, another request is made to the merchant. The Bitcoin owner receives the same number of bitcoins they traded and the WBTC is sent to the merchant. The used WBTC is then “burned” on the blockchain, which means it is deducted from the merchant’s account, reducing the total number of WBTC on the network.

How to Buy WBTC

In order to buy WBTC, you need an account on a cryptocurrency exchange site that supports Wrapped Bitcoins. Pick a trustworthy exchange with a good reputation to open an account if you don’t already have one. Buy or deposit Bitcoin to your account. With Bitcoin in your account, you can order WBTC through these exchanges.

You might want to get a software or hardware wallet to transfer your WBTC token from the exchange wallet it arrives at. This will be the safer storage option for security purposes.

Note that it is possible to swap the Ethereum tokens you already own for Wrapped Bitcoin using a decentralized exchange service.

You pay merchant and custodian fees for converting BTC to WBTC. You can check the fees on the exchange you are using to convert Bitcoin to Wrapped Bitcoin.

What Are the Benefits of Wrapped Bitcoin?

The DeFi market has grown exponentially since its launch, paralleling the ubiquitous rise of Bitcoin in the last years. However, Bitcoin and DeFi Markets each grew separately from one another, and often have been compared to each other as competitors. Intense market speculation agitated the rivalry between Ethereum and Bitcoin supporters and fed the maximalist perspectives that predicted total domination of the market by their favored blockchain.

With the introduction of Wrapped Bitcoin, the rivalry between the Bitcoin and Ethereum blockchains turned into a collaboration that benefits both sides. Thanks to WBTC, decentralized exchanges and DeFi applications gain much needed liquidity resources from Bitcoin users. On the other hand, Bitcoin holders who are reluctant to sell their digital assets are now able to engage in decentralized finance and earn interest without losing their bitcoins. Since the introduction of Wrapped Bitcoins, more and more merchants and exchanges have started to accept WBTC. A new and fruitful ecosystem of finance is growing out of this collaboration.

One particular advantage WBTC has over Bitcoin is speed. Wrapped bitcoins transactions are accomplished through the Ethereum blockchain. The Bitcoin blockchain validates a new block of transactions every 10 minutes on average, while Ethereum is able to validate a block every 15 seconds. This means that WBTC transfers take a shorter time compared to Bitcoin transactions.

What Can You Do With WBTC?

WBTC is one of the largest and fastest growing digital assets. Once converted, wrapped bitcoins can be used for numerous Dapps. The DeFi market provides many opportunities for WBTC holders.

You can use WBTC as collateral to borrow crypto loans from DeFi platforms thanks to smart contracts. 

Another possibility is to put WBTC to decentralized lending pools. WBTC brings precious liquidity to lending pools and holders are able to make interest on their investments.

There are also liquidity pools which accept WBTC. You can deposit WBTC to these pools for yield farming. There is a higher risk to these operations, but the payouts are much more rewarding. 

You can also margin trade with WBTC on decentralized derivative trading platforms. These exchanges are non-custodial and work through smart contracts that ensure the security of funds during trades.

A Few Words Before You Go…

Wrapped Bitcoin is an innovative solution that allows Bitcoin holders to participate and bring liquidity to decentralized finance operations. It links Ethereum and Bitcoin, two of the most popular blockchains in the world, and facilitates the growth of DeFi operations in general. Bitcoin holders have the opportunity to explore the Dapp and DeFi platforms rising on the Ethereum blockchain without having to sacrifice their digital assets.

The transparency provided by WBTC Community and WBTC DAO make this a trustworthy alternative to cryptocurrency trading between ETH and BTC. Bitcoin holders can easily swap Bitcoin for Wrapped Bitcoin to make investments and earn an interest. They could also use it to borrow loans from DeFi platforms for their businesses. The opportunities for WBTC grow rapidly, as more exchanges and merchants start to accept WBTC. If you are a Bitcoin holder and you want to dip your fingers in the DeFi and Dapp markets, but you don’t know where to start, Wrapped Bitcoin is an excellent choice to test the waters.

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