Wrapped cryptocurrencies like wBTC allow crypto assets such as Bitcoin to be used on other blockchains. This interoperability feature allows crypto asset holders to participate in decentralized finance applications. More participation in decentralized apps would subsequently mean an increase in the liquidity of smart contract platforms.
What Is Wrapped Bitcoin
Wrapped Bitcoin (wBTC) is an ERC-20 token that's backed by Bitcoin (BTC) on a 1:1 basis. Jointly launched by Kyber, Ren and BitGo in January 2019, wBTC is the first token that makes Bitcoin compatible on the Ethereum network. This allows Bitcoin holders to participate in activities such as lending, borrowing, margin trading and yield farming on decentralized finance (DeFi) applications.
There are other wrapped cryptocurrencies besides wBTC. In essence, all of them enable interoperability between different blockchains to ease value exchange. With the rise of Ethereum's DeFi movement, the need for interoperability has become more urgent.
Why Not Just Use Native Cryptocurrency
The lack of decentralized applications and smart contracts on the Bitcoin network means that there’s a limit to what you can do with your precious bitcoins. Instead of just hodling on to them, you can put them to work on DeFi protocols on Ethereum using wrapped bitcoins.
You can use native tokens on Ethereum, but now you also have the option to invest your bitcoins instead of exchanging or selling them for other lower value tokens.
Furthermore, using a different cryptocurrency token like wBTC would increase liquidity within DeFi protocols and contribute to their growth.
How wBTC Works
The Wrapped Bitcoin protocol is maintained by a decentralized autonomous organization i.e. WBTC DAO which consists of 16 stakeholders within the DeFi space. There are more than 40 participants in the wBTC ecosystem including DAO members, merchants, wallets and exchanges.
wBTC is minted by a custodian which in this case is one of the stakeholders, BitGo. It ensures that your token is secure. The merchants are the ones who initiate the minting process of wBTC and send bitcoin to the custodian. In return, the merchants receive wBTC tokens.
As a customer, you can buy wBTC via merchants like CoinList. They will perform KYC checks to verify your identity before wrapping your bitcoin.
To unwrap your bitcoin or essentially burn wBTC, you would also need to do it via a merchant. Similar to minting, merchants would request to burn wBTC and once confirmed, the custodian sends the equivalent amount of BTC to the merchant.
Benefits Of Wrapped Bitcoin
Wrapping bitcoin broadly benefits three parties:
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Traders
Moving bitcoin between exchanges in wBTC form is much faster than exchanging bitcoin to other DeFi-supported tokens. As a result, traders can participate in DeFi protocols with ease. This also increases liquidity in DeFi protocols as the type of collateral expands and trading volume increases. -
Institutions
Handling multiple cryptocurrencies across different nodes and transaction formats can be troublesome. And so with wBTC which is an ERC-20 token, only one Ethereum node is used thus simplifying transaction processes. -
Decentralized Applications
DeFi apps can now leverage bitcoin payments in smart contracts for various activities such as lending, fund management, prediction markets, and token sales.
Other Wrapped Cryptocurrencies
Knowing about this revolutionary interoperability solution, other entities have sought to create their own versions of wrapped cryptocurrencies.
Crypto exchanges and DeFi protocols like Huobi Global and Ren have launched their own versions of wrapped bitcoin namely Huobi BTC (hBTC) and Ren BTC (renBTC) respectively. The purpose remains the same as wBTC but the method of obtaining the wrapped bitcoin may differ.
While many wrapped cryptocurrencies exist on the Ethereum blockchain, there are those that live on other blockchains. On Binance Smart Chain, which supports smart contracts and DeFi applications, you can wrap various crypto assets such as:
Ripple (XRP): bXRP
Tether (USDT): bUSDT
Bitcoin Cash (BCH): bBCH
Polkadot (DOT): bDOT
How To DeFi
Now that you can participate in the decentralized finance realm with your wrapped bitcoins, why not learn more about the different kinds of DeFi applications available. You can start by reading the beginner's How To DeFi eBook. And when you're ready, you can explore the advanced version. Get the How To DeFi bundle to gain full insight into novel financial innovations.
Diyana helps you to make sense of the complicated stuff. Follow the author on Twitter @diyana_eco
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