There’s no denying that Wrapped Bitcoin (wBTC) could relatively be a new concept. However, it could prove essential to bring liquidity to Decentralized Finance (DeFi).
Wrapped tokens have hit the market, and almost everyone is talking about them. In fact, the prime example is Wrapped Bitcoin (wBTC), and it seems that these wrapped tokens are beneficial to all.
But what exactly is wrapped Bitcoin, and how is it significant?
Ideally, the concept of wBTC was brought forth to improve the functionality and usability of Bitcoin. However, the tokens have proved to offer more interesting financial services to traditional Bitcoin holders.
By using digital and innovative technology, Wrapped Bitcoin (WBTC) is a new method of utilizing Bitcoin on the universal Ethereum blockchain.
In January 2021, by market capitalization, Wrapped Bitcoin became one of the top ten digital assets. This great breakthrough has paved the way for Bitcoin holders in the Defi markets.
Wrapped Bitcoin (WBTC) is an ERC20 token that has a direct proportional representation of bitcoin on a 1:1 ratio. WBTC as a token gives bitcoin holders the leverage to trade in Ethereum apps on decentralized exchanges. WBTC has full integration in smart contracts, DApps, and Ethereum wallets.
In this article, we’ll take you on a tour of WBTC, why it’s unique, how to switch from BTC to WBTC, its advantages, etc.
What is Wrapped Bitcoin (wBTC)?
Simply put, wBTC is an Ethereum-based token created from Bitcoin in a 1:1 ratio that can be used on Ethereum’s growing ecosystem of Decentralized Finance applications.
Therefore, it means that with Wrapped Bitcoin, the Bitcoin holders can easily engage in yield farming, lending, margin trading, and several other hallmarks of DeFi. There is every need to outline both the pros and cons of Bitcoin on Ethereum platforms to maximize its influence.
For users who place more concern on security, placing their BTC in a more secured non-custodial wallet is a better option. With the existence of WBTC for some years now, it has served as a safe asset to exchange and trade on Ethereum platforms.
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It provides institutions, traders, and Dapps a connection to the Ethereum network without losing exposure to Bitcoin. The objective here is to bring the price value of Bitcoin into play and then combine it with the programmability of Ethereum. The wrapped Bitcoin tokens follow the ERC20 standard (fungible tokens). Now, the question is: why BTC on Ethereum?
The answer is relatively not trivial. But it’s based on the fact that with most investors, profits from owning Bitcoin (in the long run) are more attractive than when compared with the altcoin market.
As a result of the “limitations” in the Bitcoin blockchain and its scripting language, investors are drawn to decentralized finance profits above Ethereum. Remember, on Ethereum, one can earn interest in merely a non-fiduciary way simply by staying in the extended position on Bitcoin.
It means that wBTC offers a range of flexibility for a user to effortlessly bounce between BTC and wBTC to suit an investment strategy.
What are the Benefits of Wrapped Tokens?
So, why would you want to convert your BTC to wBTC?
The benefits of one wanting to wrap BTCs are unlimited; for instance, the elephant advantage is the fact that it offers integration to the Ethereum ecosystem, which has arguably the largest ecosystem in the cryptocurrency world.
Here are some of the significant benefits;
One of the significant benefits of wrapping Bitcoin is scalability. The idea here is that wrapped tokens are on the Ethereum blockchain and not directly on Bitcoins’. Therefore, all the transactions that are conducted with wBTC are faster, and they usually cost less. Furthermore, one has different trade as well as storage options.
Also, wrapped Bitcoin brings greater liquidity to the market given that the Ethereum ecosystem is spread. Therefore, it means that there can rise a point whereby the decentralized exchanges and other platforms could lack the required liquidity for optimal functionality.
The effect of low liquidity on an exchange, for example, is that users are unable to trade tokens faster and also can’t change the amount a user desires. Fortunately, wBTC serves to close such a gap.
Staking Wrapped Bitcoin
The rewards are up for grabs, thanks to wBTC! With several staking protocols available as decentralized financial functionality, users can take advantage and get some tips. For instance, all that’s required is a user to lock cryptocurrency into the smart contract over a given period.
Therefore, it’s a next-gen protocol that users (those who convert BTC to wBTC) can take advantage of.
Also, several other New Functionalities wrapped Bitcoin provides, unlike regular Bitcoin. For instance, wrapped Bitcoin can leverage Ethereum’s smart contracts (self-executing pre-programmed protocols).
Why Was Wrapped Bitcoin Created?
Wrapped Bitcoin was created to ensure complete integration on the Ethereum blockchain between bitcoin tokens (such as WBTC) and bitcoin users. It enables easy migration of Bitcoin value to the decentralized ecosystem of Ethereum.
Before its creation, lots of people seek for a way to transform their bitcoins and trade in the Defi world of Ethereum blockchain. They had several challenges that cut into their money and time. They have much to lose before they can transact on the Ethereum decentralized market. WBTC emerged as the tool that satisfies this need and brings that interface with smart contracts and DApps.
What Makes Wrapped Bitcoin Unique?
Wrapped Bitcoin is unique as it creates the leverage for Bitcoin holders to maintain the crypto as an asset. These holders will also have the privilege of utilizing Defi apps to either lend or borrow money. Some of the apps include Yearn Finance, Compound, Curve Finance, or MakerDAO.
WBTC has made an extension of the usage of Bitcoin. With traders who are focused on ‘only Bitcoin’, WBTC acts as an open door and brings in more people. This results in increased liquidity and scalability in the DeFi market.
Wrapped Bitcoin on an Upward Trajectory
The benefits that one can gain from wrapping BTC are indeed many, and they are at the core of the rise of the new sector. It’s the reason that most investors are now turning their attention to utilize the wBTC services. In fact, over a short period, there’s already more than $1.2 Billion in wBTC that actively circulates across the globe.
Therefore, it’s a no-brainer that wrapping Bitcoin is indeed on the race, and it has taken an upward trajectory.
Several Bitcoin wrapping models are used in the sector, and each of them is different somehow, but the results are similar. The most commonly wrapping protocols include;
Here, the user relies on the firm to maintain the value of their assets, meaning a user has to provide the BTC to a centralized intermediary. Now, the intermediary locks the crypto in the smart contract and then issues the corresponding ERC-20 token.
However, the only disadvantage with the approach is that the user ultimately depends on that firm to maintain the BTC.
Synthetic assets are also slowly but steadily gaining momentum, and here, one is required to lock their Bitcoin in a smart contract and then receive a synthetic asset that’s of the exact value.
However, the token is not directly backed by Bitcoin; instead, it supports the asset with native tokens.
Another advanced way that you can wrap Bitcoin is through a decentralized system, whereby users are offered wrapped Bitcoin in the form of tBTC. Here, the centralized responsibilities are in the hands of smart contracts.
The user BTC is locked in the network contract, and the platform is unable to adjust without their approval. Therefore, it provides them with a trustless as well as an autonomous system.
Should I invest in wBTC?
If you’re considering investing in Wrapped Bitcoin, you should go ahead. It’s a good investment to make in the world of crypto. With a market capitalization of over $4.5 billion, WBTC has become one of the biggest digital assets through total market value rating. This tremendous rise in WBTC pushes forward as a good business venture to tap from.
In its functionality, Wrapped Bitcoin as a digital asset inculcates the Bitcoin brand into the Ethereum blockchain’s flexibility.
Thus, WBTC provides a whole token that is highly in-demand. There’s a direct link in the price of Wrapped Bitcoin to that of asset, the Bitcoin. So, as a user, believer, or holder of cryptocurrency, you will understand the value that Wrapped Bitcoin is worth.
Is wBTC A Fork?
You need to understand that a fork occurs as a result of the diverging of a blockchain. This will lead to a change in protocol. Where parties that maintain a blockchain with common rules disagree, it can lead to splitting. The alternative chain that emerges from such a split is a fork.
In the case of Wrapped Bitcoin, it’s not a fork of Bitcoin. It’s an ERC20 token that matches Bitcoin on a 1:1 basis and creates the possibility to interoperate both WBTC and BTC in the Ethereum platforms using smart contracts. When you have WBTC, you’re not in possession of actual BTC.
So Wrapped Bitcoin as a chain tracks Bitcoin price and gives the users to leverage of trading in Ethereum blockchain and still retain their Bitcoin asset.
Switch From BTC to WBTC
The operations of Wrapped Bitcoin are simple and easy to track. It allows bitcoin users to exchange their BTC for WBTC and trade.
Through the use of a User Interface (cryptocurrency exchange), you can deposit your BTC and make an exchange for WBTC on a 1:1 ratio. You will get a Bitcoin address that BitGo controls they receive the BTC. Then, they will block and lock the BTC from you.
Afterward, you will receive an issuance order of WBTC that is of the same amount for the BTC you deposited. The issuance of the WBTC takes place in Ethereum since WBTC is an ERC20 token. This is facilitated by smart contracts. You can then transaction on Ethereum platforms with your WBTC. The same process is applicable when you want a switch from WBTC to BTC.
Alternatives to WBTC
Though WBTC is a great project that gives amazing possibilities in the world of Defi, there are other alternatives to it. One of such alternatives is REN. This is an open protocol that inculcates not only Bitcoin into Ethereum and Defi platforms. Also, REN supports exchanges and trading for ZCash and Bitcoin Cach.
With the use of REN, the users operate with renVM and smart contracts. The users will then create renBTC following a decentralized procedure. There is no interaction with any ‘merchant’.
Pros of wBTC
Bitcoin, as the most secure cryptocurrency in the world, will yield nothing except you utilize it. Wrapped Bitcoin offers you the opportunity to earn with your Bitcoin by investing in Ethereum DeFi platforms. You can use wBTC to take out loans.
Also, with wBTC, you can trade on Ethereum platforms such as Uniswap. There’s also the possibility of earning from trade fees on such platforms.
You may also consider the option of locking your wBTC as a deposit and be earning from the interest. A platform such as Compound is a good ground for such deposit earnings.
Cons of wBTC
Going by the main core of the Bitcoin network, security is the watchword. To lock Bitcoin in Ethereum Blockchain poses a risk that cancels Bitcoin’s main purpose. There’s the possibility of exploiting the smart contracts guarding Bitcoin. This will invariably lead to huge losses.
Also, with the use of WBTC, cases of frozen wallets can hinder users’ access and in redeeming Bitcoin.
Other Flavors of Wrapped Bitcoin
Wrapped Bitcoin comes in different types. Though all the types are ERC20 tokens, their differences come from their wrapping by different companies and protocols.
Among all the types of Wrapped Bitcoin, WBTC is the largest. It was the original and the first of the Wrapped Bitcoin, managed by BitGo.
BitGo as a company has a good record of security. Hence, the fear of any possible exploitation is out of the way. However, BitGo operates as a centralized company and controls both the wrapping and the unwrapping single-handedly.
This monopoly on the part of BitGo is giving leverage for other Wrapped Bitcoin protocols to rise. These include RenBTC and TBTC. Their decentralized nature of operations is triggering their upward surge.
Is Wrapped Bitcoin Safe?
It just has to be safe, right? Fortunately, that’s the case; however, nothing goes without some risks, literally. Therefore, before you convert BTC to wBTC, you should be aware of these risks. For instance, with the trust-based model, the risk is that the platform might somehow unlock real Bitcoin and then leave the token holders with only fake wBTC. Also, there’s the issue of centralization.
How to Wrap Bitcoin
Some platforms make your work a little easier to wrap BTC. For instance, with Coinlist, all you have to do is register with them, and once you’re signed up, you click on the “Wrap” button in your BTC wallet.
After that, the network pulls up a prompt that will ask you to enter the BTC amount that you want to convert into wBTC. Once you’ve entered the amount, now you click on the “confirm Wrap” button for the transaction to be processed. You’re done! Easy, right?
Buying Wrapped Bitcoin
Just like converting Bitcoin into wrapped Bitcoin, buying is equally a walk in the park. First, the token has built a reputation, and it has been in operation for quite some time now. Therefore, several significant exchanges offer the token.
For instance, Binance offers several wBTC trading pairs. All you have to do is to start by registering an account (which is quick and easy), but you’ll be required to verify your identity before you start trading.
What is the Future of Wrapped Bitcoin?
The benefits are there for everyone to see, and for that reason, developers are working hard to ensure that the concept expands further. For instance, there’s already the work in progress to introduce wBTC into more complex decentralized finance concepts.
Therefore, it’s easy to say that the future of wrapped Bitcoin has only just but started, and in the future, it looks bright.
The fact that DeFi sector has been taken wholly by Ethereum. Given that several other blockchains are now attempting to break in. Moreover, it’s only a matter of time before wBTC starts to appear on several different blockchains.
The use of a wrapped asset is an excellent breakthrough in the world of DApps. It offers the opportunity for holders of the former asset to conveniently trade and earn on DApps. Also, it’s a means of profit for DApps providers as an increase of capital in the stock market.
Scanning through the operations of WBTC, one can confidently see it as a building block for DApps.
Nevertheless, wBTC is only gaining momentum, and for good reasons (liquidity, scalability). Moreover, it offers long-term Bitcoin holders an opportunity to earn some passive rewards. Therefore, it seems that the writing is on the wall already that wBTC will only get into the market even more as we advance.