What is Wrapped BTC?

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  • Author: Gunavarshini
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WBTC stands for Wrapped Bitcoin, simply an ERC-20 token that represents Bitcoin—one WBTC equals one BTC. A BTC can be converted into a WBTC and vice-versa. Being an ERC-20 token makes the transfer of WBTC faster than normal Bitcoin, but the key advantage of WBTC is its integration into the world of Ethereum wallets, decentralized apps (dapps), and smart contracts.

Quick facts

  1. WBTC was created to enable Bitcoin holders to participate in decentralized finance (DeFi) applications on the Ethereum blockchain.

  2. WBTC is a 1:1 pegged token, meaning that each WBTC token is backed by an equivalent amount of Bitcoin held in custody by a network of approved custodians.

  3. The process of minting WBTC involves sending Bitcoin to a custodian, who then mints an equivalent amount of WBTC on the Ethereum blockchain.

Who invented WBTC?

Wrapped Bitcoin, also known as WBTC, was introduced to the Ethereum blockchain in January 2019. It was developed as a collaborative effort among several significant players in the decentralized finance (DeFi) space, including BitGo, Ren, Dharma, Kyber, Compound, MakerDAO, and Set Protocol. Their goal was to add more liquidity to the Ethereum network by using Bitcoin assets. To make it possible, they created an ERC-20 token, which is a type of cryptocurrency token that follows specific technical standards on the Ethereum blockchain.

The WBTC project is now governed by a Decentralized Autonomous Organization (DAO) called the WBTC DAO, which means that decisions about the project are made collectively by the members of the organization, rather than a central authority.

How does WBTC work?

To use many of the popular DeFi dapps on Ethereum, users need to have collateral. This means they have to lock up some crypto assets to borrow other crypto assets. However, Ethereum has less value than Bitcoin, which limits the growth of these protocols. Wrapped Bitcoin was created to address this issue by bringing Bitcoin into the Ethereum network. This gives a boost in liquidity to these protocols and creates more sources of collateral for their dapps.

Moreover, Wrapped Bitcoin allows Bitcoin holders to hold it as an asset while also using DeFi dapps to borrow or lend money. But there is still a gap between Bitcoin and Ethereum since these chains cannot natively communicate with each other. Thus, trust among people is required. Wrapped Bitcoin relies on people and organizations to manage the system, making it less secure than Bitcoin, which is powered by code.

To increase transparency and trust, WBTC undergoes regular audits and publishes all on-chain transactions and verifications for the Bitcoin and Ethereum networks. Users can verify how much BTC was sent to the WBTC address on the Bitcoin blockchain and check if those transactions match the creation of WBTC tokens on the Ethereum blockchain. The reverse process of burning of WBTC to redeem BTC can also be tracked on-chain.

What is WBTC used for?

One of the exciting things about WBTC is that it can be used in a range of decentralized finance (DeFi) applications.

DeFi is a new kind of financial system that operates on the blockchain, without the need for traditional banks or intermediaries. It allows users to lend, borrow, trade and earn interest on their cryptocurrency holdings in a decentralized, secure and transparent way.

WBTC is especially useful in DeFi because it allows Bitcoin holders to participate in these DeFi applications, which were previously only available to Ethereum holders. By wrapping Bitcoin in the form of WBTC, Bitcoin holders can now use their Bitcoin to earn interest, trade for other tokens or even borrow against their holdings.

Some of the most popular DeFi platforms that support WBTC include Aave, Balancer, Compound, Kyber Network, MakerDAO and Uniswap. These platforms allow users to lend and borrow WBTC, swap WBTC for other tokens, and even earn rewards by providing liquidity to WBTC pools.

What influences WBTC price?

The price of WBTC, like any other asset, is influenced by a variety of factors, including supply and demand, market sentiment, and overall market conditions. However, there are some factors that are particularly relevant to the price of WBTC:

1. Bitcoin price

Since each WBTC token is backed by an equivalent amount of Bitcoin held in custody, the price of Bitcoin has a direct impact on the price of WBTC. If the price of Bitcoin goes up, the value of the Bitcoin held in custody goes up, which can drive up the price of WBTC.

2. Ethereum price

WBTC is an ERC-20 token that runs on the Ethereum blockchain, so the price of Ethereum can also have an impact on the price of WBTC. If the price of Ethereum goes up, it can make WBTC more valuable as it becomes more expensive to mint new tokens.

3. Adoption and usage of DeFi

Since WBTC is primarily used in DeFi applications, the adoption and usage of DeFi can have an impact on the price of WBTC. If more people are using WBTC to participate in DeFi, it can drive up demand for the token and increase its price.

4. Trading volume

The trading volume of WBTC on exchanges can also impact its price. Higher trading volume can indicate increased demand and interest in the token, which can drive up its price.

5. Market sentiment

As with any asset, market sentiment can also influence the price of WBTC. Positive news or developments in the DeFi space or cryptocurrency market as a whole can lead to increased demand and a rise in price, while negative news or developments can have the opposite effect.

Wrapped Bitcoin vs Bitcoin : What's the difference?

Wrapped Bitcoin (WBTC) is a special kind of token that represents Bitcoin on the Ethereum blockchain. This means you can use your Bitcoin in Ethereum's DeFi ecosystem by exchanging it for WBTC.

To do this, you go to a trusted merchant who verifies your identity and makes sure everything is safe. The merchant then contacts a trusted third party called a custodian (currently BitGo), who issues the same number of WBTC tokens as the Bitcoin tokens you promise to provide.

Once the WBTC is sent to your Ethereum-compatible wallet, you swap your Bitcoin for WBTC with the merchant. You can then use the WBTC for DeFi transactions or dapps on the Ethereum blockchain. Your Bitcoin remains in reserve and is backing for the WBTC.

When you want your Bitcoin back, you can return to the merchant and exchange your WBTC for Bitcoin. The merchant then destroys the WBTC.

While the process may seem long, it's quick and secure. Plus, it eliminates the need for exchanges and their larger fees. Now, you can use your Bitcoin in Ethereum's DeFi ecosystem with ease.

How to buy Wrapped BTC?

Both Bitcoin (BTC) and Wrapped Bitcoin (WBTC) can be purchased on major centralized exchanges such as eToro and Coinbase Pro. However, not all exchanges offer storage or purchasing options for WBTC. You'll also need a crypto wallet that's compatible with different tokens.

Decentralized exchanges like Uniswap also allow you to purchase WBTC, but you may need to have some Ethereum (ETH) to do so directly.

If you want to create your own WBTC, you'll need to have enough BTC to complete the transaction. You can find a merchant and submit your request to the WBTC DAO, or you can use smart contracts to tokenize your BTC.

WBTC is the most popular type of wrapped bitcoin token, so it's easier to find liquidity when trading. If you know how to buy BTC, you can likely purchase WBTC as well.

Final Thoughts

A wrapped cryptocurrency is a tokenized version of a crypto asset that's backed by the original coin. Wrapped Bitcoin (WBTC) is a tokenized representation of Bitcoin that's held in reserve. Its purpose is to make Bitcoin work with Ethereum-based platforms.

When you're considering how to buy cryptocurrency, it's important to understand that while you can buy WBTC on the secondary market, the tokens are destroyed when they're redeemed with trusted merchants. Also, WBTC is tied to Bitcoin, so it won't be more valuable than Bitcoin.

Before investing in wrapped bitcoin, carefully think about your needs, goals, and the volatility of the market.

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