- Wrapped Bitcoin is backed by one bitcoin locked in a smart contract.
- Wrapped Bitcoin is backed by one bitcoin locked in a smart contract. wBTC is good for several purposes like collateral for securing crypto-backed loans for generating yield from yield farming or posted as margin on decentralized derivative exchanges.
- If you wrap your Bitcoin, however, if you’re basically giving them away to a third party.
Wrapped Bitcoin is an ERC-20 representation of Bitcoin, allowing Bitcoin to be leveraged for DeFi. wBTC, a specific tokenized Bitcoin, is a token backed by Bitcoin. As the website for wBTC summarizes: “The power of Bitcoin with the flexibility of an ERC20 token.” wBTC might be seen as a form of Bitcoin exported to the Ethereum network and which is compatible with the Ethereum protocol. wBTC can be sent quicker than Bitcoin at certain times, in part because Ethereum blocks are created more quickly than Bitcoin. wBTC can also be used as collateral on DeFi protocols. If you wrap your Bitcoin, however, if you’re basically giving them away to a third party.
Wrapped Bitcoin is backed by one bitcoin locked in a smart contract. wBTC is good for several purposes like collateral for securing crypto-backed loans for generating yield from yield farming or posted as margin on decentralized derivative exchanges. Holders tokenize bitcoin through Huobi BTC (HBTC), renBTC, and more.
Wrapped tokens represent various assets, including art, collectibles, commodities, crypto assets, debt instruments, and equity shares, assets with payable interest, and Bitcoin. Now you can conduct transactions on Ethereum with Bitcoin via the proxy that is wBTC. Alternatives to Wrapped Bitcoin can be found on Binance Smart Chain, Cardano, Ethereum, Polkadot, Solana, as well as Ethereum Layer 2 scaling solution Polygon.
Members of the wBTC decentralized autonomous organization (DAO) hold the keys to the multi-signature contracts, and therefore have the power to add or delete merchants and custodians and bring them into the wBTC system and kick them out, as well.
Merchants of wBTC create and destroy wBTC. A holder who wishes to exchange Bitcoin for a wrapped version thereof sends their Bitcoin to a merchant, who holds the BTC with a custodian. In exchange, the merchant sends wBTC. In short, you send your Bitcoin to a merchant, and they mint wBTC and give it to you. To do the opposite, you would send the merchant your wBTC in exchange for Bitcoin. The three players include DAO, the merchants and custodians, the latter of whom hold the actual bitcoin backing the wBTC.
On the wBTC network site, an order book demonstrates how many wBTC exist and the BTC backings, allowing on chain validation to see Bitcoin held by certain addresses and public addresses related to the wBTC network. Click on Proof of Assets for the custodian addresses of those holding the wBTC so you can prove the wBTC remains backed by real Bitcoin. Once you have your wrappedBTC, you can go to Compound, a lending and borrowing protocol, and loan out crypto to earn interest rates.
wBTC can be deployed not only on Ethereum, but also on Binance Smart Chain. Like on the Ethereum blockchain, BTCB allows users to hold BTC while leveraging a DeFi ecosystem. wBTC is useful for bitcoiners to leverage their BTC holdings and profit without having to sell their holdings, while still participating in DeFi on BSC with the wrapped BTC tokens. Institutions and professional traders might use wBTC to maximize profits and optimize overhead costs.
BitGo Trust holds the Bitcoin backing the wBTC, the amount of wBTC is public and the holdings at BitGo provable. The WBTC.network launched in January 2019. Platforms such as MakerDAO, Dharma, Compound, and the Kyber Network allow borrowers to use WBTC as collateral. Unlike Bitcoin, wBTC can be locked into a smart contract with crypto loans usually paid out using the DAI stablecoin on the Ethereum ecosystem. The Wrapped Bitcoin project is overseen by the WBTC DAO.
WBTC was created by Bitgo, Kyber, and Red, and was launched in 2019. Obtaining wBTC entails requesting a token from a merchant—Kyber, DeversiFi or Airswap—who then carry out Know Your Customer (KYC), and Anti-Money Laundering (AML) checks to verify your identity. The merchant then initiates a transaction with a custodian, who mints wBTC tokens and sends them to merchants. Swap your bitcoin for wBTC with the merchant and the centralized exchange, decentralized exchange or atomic swap. Only the merchants can redeem wBTC for BTC.
Other Versions Of Wrapped Bitcoin
Huobi Global, a crypto exchange, launched its own version of wrapped Bitcoin called Huobi BTC (hBTC). Every hBTC is backed by one BTC. Acquire an hBTC by first depositing BTC into your Hobi Global exchange account and then withdrawing HBTC. Redeem BTC on the platform by depositing your hBTC into your account and then withdrawing BTC. HBTC is much different than wBTC, which is redeemable by merchants. WBTC and HBTC, however, are rather centralized approaches to wrapping bitcoin.
Ren, which was launched in 2020, provides a more decentralized alternative to wBTC and hBTC with its renBTC. In order to obtain renBTC, you must send bitcoin to Ren’s protocol, which will lock it up in a smart contract. The protocol then verifies the details of the transaction and returns a minting signature, which then allows you to mint renBTC, an ERC-20 token representing bitcoin. With Ren, you can burn your renBTC in order to redeem locked Bitcoin.
There are still other wrapped bitcoin tokens. PieDAO’s BTC++, ACoconut’s acBTC, and mStable’s mBTC are backed by a basket of ERC-20 tokens representing bitcoin. They are backed by other wrapped versions of bitcoin. AcBTC is backed by sBTC, wBTC, pBTC, and imBTC.
Bitcoins locked on the Ethereum blockchain with wrapped bitcoin, a DeFI protocol leveraged to convert BTC to ERC-20 tokens, increased to a record 189,000 BTC, according to Arcane Research’s weekly note—a 4x increased in the past 12 months to a record 1% of bitcoin’s circulating supply of 18.73 million.
There are today hundreds of millions of dollars of Total Value Locked in second layer smart contracting systems. Certain projects are working on second layers atop Bitcoin which could make smart contracting on Bitcoin possible. Even then, to make Bitcoin compatible with layer two technologies, a wrapped implementation would be required.
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