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Wrapped Bitcoin (WBTC) is an ERC-20 token pegged to the price of Bitcoin (BTC) that is intended to bridge the gap between the traditional Bitcoin blockchain and the Ethereum?blockchain.?
WBTC is sometimes classified as a stablecoin because it mirrors the price of Bitcoin in the same way that USD stablecoins are pegged to the USD.
By ‘wrapping’ Bitcoin in the form of an ERC-20 token, WBTC enables users to invest in Bitcoin while leveraging the benefits and functionality of the Ethereum network.
Wrapped Bitcoin (WBTC) Explained
WBTC was created because the Bitcoin blockchain is severely limited in terms of functionality compared to Ethereum.
Bitcoin, as the largest and most renowned cryptocurrency, dominates the market in liquidity and security. However, the simple, secure design of the Bitcoin blockchain limits what users can do with the coin.?
Ethereum innovated on Bitcoin’s design by combining similar security with dramatically better functionality. The developers behind Ethereum implemented smart contracts which allow its users to create new tokens on the network (e.g. ERC-20 tokens and NFTs), build decentralized applications (dApps) with nearly unlimited possibilities for utility, and more.??
However, Ethereum users still want easy access to Bitcoin investments for their security, popularity, and apparent value.
Wrapped Bitcoin serves as a solution by acting as a symbolic bridge between these two blockchain ecosystems. It allows users to trade and utilize Bitcoin’s value on the Ethereum network, harnessing the power and versatility of Ethereum’s decentralized finance (DeFi)?ecosystem.
How Does Wrapped Bitcoin (WBTC) Work?
The process of minting or ‘wrapping’ WBTC involves a collaboration between multiple entities known as merchants and custodians. These entities oversee the minting, custody, and distribution of WBTC tokens.?
A user who wishes to obtain WBTC sends their Bitcoin to a merchant, which then creates an equivalent amount of WBTC on the Ethereum network. This WBTC is backed in a 1:1 ratio with Bitcoin, ensuring its value and liquidity.
The Bitcoin sent to the merchant is custodied by the entity, maintaining transparency and accountability. The user is then issued an equal amount of WBTC on the Ethereum network.
These WBTC tokens can be freely transferred, traded, and utilized within the Ethereum ecosystem. You can also buy Wrapped Bitcoin on cryptocurrency exchanges.?
How Are WBTC Tokens Created?
The creation of WBTC tokens involves a collaborative process between merchants and users. Users who want to acquire WBTC can approach one of the merchants who serve as custodians for the Bitcoin backing WBTC.
The user would transfer their desired amount of Bitcoin to the merchant, following the specified guidelines. After receiving the Bitcoin, the merchant creates an equivalent amount of WBTC on the Ethereum network.?
Subsequently, these tokens are attributed to the user, representing their ownership of the underlying Bitcoin.
Additionally, the Bitcoin is kept in custody by the merchant until the user decides to redeem their WBTC.
History of Wrapped Bitcoin?
WBTC was first introduced in January 2019 as a collaborative effort between several leading players in the cryptocurrency industry.?
These included major digital asset companies?BitGo, DeFi protocol?Kyber Network,?Ren?(previously Republic Protocol), and other reputable entities in the blockchain space.?
The initiative was developed to address the demand for Bitcoin to be integrated into the thriving Ethereum-based DeFi ecosystem.
The project gained significant traction, as it provided a decentralized and trustless method of bringing the liquidity and value of Bitcoin to the Ethereum network.?
What Is Wrapped Bitcoin Used For?
WBTC offers several use cases within the Ethereum ecosystem.?
Firstly, WBTC serves as a convenient and efficient means of accessing Bitcoin’s value without leaving the Ethereum network. It enables users to engage in DeFi applications, including lending, borrowing, and?yield farming, utilizing the liquidity and price stability of Bitcoin.
Moreover, WBTC allows for seamless trading of Bitcoin on decentralized exchanges (DEXs), eliminating the need for traditional centralized exchanges.?
As Ethereum supports a vast range of tokens and dApps, users can also utilize WBTC to participate in token sales, decentralized trading, and more within the ecosystem. It is easier for an Ethereum user to keep their Bitcoin in the same wallet as their other investments as well.?
Advantages of Wrapped Bitcoin
There are several advantages of WBTC that make it a valuable asset within the cryptocurrency ecosystem. Here are some of the more notable ones:
| Access to DeFi Opportunities | Bitcoin investors can leverage WBTC to access a wide array of DeFi opportunities within the Ethereum ecosystem.
They can put their Bitcoin to work by participating in lending and borrowing platforms, yield farming, liquidity mining, and more, taking advantage of Ethereum’s extensive DeFi infrastructure. |
| Seamless Trading | WBTC allows for seamless trading of Bitcoin on DEXs?operating on the Ethereum network.
Users can easily and quickly trade their WBTC tokens for other ERC-20 tokens without the need to go through traditional centralized exchanges. |
| Compatibility with Ethereum Ecosystem | As an ERC-20 token, WBTC is compatible with the entire range of Ethereum-based applications, including wallets, dApps, and smart contracts. |
| Faster Transaction Confirmation | Ethereum’s faster block confirmation times compared to Bitcoin enable faster transaction settlements when utilizing WBTC.
This can be advantageous, particularly for users engaging in arbitrage, decentralized trading, or time-sensitive transactions. |
| Increased Liquidity | WBTC brings additional liquidity from Bitcoin investors to the Ethereum network, enhancing the overall liquidity within the ecosystem. |
| Cross-Chain Interoperability | WBTC serves as a bridge between the Bitcoin and Ethereum blockchains, allowing for cross-chain interoperability.
This paves the way for more innovation and collaboration between the two ecosystems. |
The Bottom Line
Wrapped Bitcoin plays a vital role in enabling the interoperability of Bitcoin and the Ethereum ecosystem. By wrapping Bitcoin in an ERC-20 token format, WBTC facilitates seamless integration into the Ethereum network. In addition, it gives Bitcoin holders the ability to put their coins to work using the vast array of DeFi applications and dApps on Ethereum.
Since its inception, WBTC has witnessed substantial growth and adoption, offering advantages to both Bitcoin and Ethereum users.?
With the increasing popularity of DeFi, WBTC is expected to continue serving as a bridge connecting these two prominent blockchain networks.
