Wrapped Bitcoin
Wrapped Bitcoin (WBTC) is a type of cryptocurrency token designed to represent Bitcoin (BTC) on other blockchain networks. WBTC is a token that is one-to-one backed by Bitcoin, meaning that for every WBTC token in circulation, there is an equivalent amount of Bitcoin held in reserve as collateral.
The creation of WBTC was driven by the interest to make Bitcoin more easily usable on other blockchain networks. While Bitcoin is the most well-known and widely used cryptocurrency, it is difficult to use Bitcoin to interact or participate with other blockchain ecosystems’ decentralized applications (dApps), due to Bitcoin’s inherent design.
The creation of WBTC, has allowed developers to make it possible for Bitcoin to be used on other blockchain networks that support the Ethereum blockchain's ERC-20 token standard. This provides functionality to users in trading and using Bitcoin on decentralized exchanges (DEXs) and other dApps that are built on Ethereum, without having to convert their Bitcoin into another cryptocurrency.
To create WBTC, Bitcoin is first deposited with a custodian, who then issues an equivalent amount of WBTC tokens on the Ethereum blockchain. These tokens can be used just like any other cryptocurrency, but their value is always tied to the price and value of Bitcoin.
Another benefit other than making it easier to use Bitcoin on other blockchain networks, WBTC also provides a way for Bitcoin holders to earn interest or other rewards by lending their Bitcoin to liquidity pools or other DeFi protocols that support the WBTC token.
What is Wrapped Bitcoin Used for?
By representing Bitcoin as an ERC-20 token on the Ethereum blockchain, WBTC allows Bitcoin holders to participate in decentralized applications (dapps) and decentralized finance (DeFi) protocols that are built on Ethereum.
Some common ways that WBTC is used include:
- Trading: WBTC can be traded on decentralized exchanges (DEXs) that support the Ethereum blockchain. This allows users to trade Bitcoin without having to leave the Ethereum ecosystem or convert their Bitcoin into another cryptocurrency.
- Lending: Users can lend their WBTC to liquidity pools or other DeFi protocols that support WBTC, to earn interest or other rewards.
- Collateral: WBTC can be used as collateral in decentralized lending protocols, where it can be leveraged in borrowing other cryptocurrencies or stablecoins.
- Payment: WBTC can be used as a payment method in dapps or other services that accept ERC-20 tokens.
Overall, WBTC provides a way to bridge the gap between Bitcoin and other blockchain networks, making it versatile and accessible for specific use cases.
How is Wrapped Bitcoin Used?
Wrapped Bitcoin (WBTC) works by representing Bitcoin (BTC) as an ERC-20 token on the Ethereum blockchain through a custodian, which then allows these WBTC tokens to then be used in representing the value of Bitcoin on the Ethereum blockchain and used in a variety of ways.
The process works as follows:
- Deposit of Bitcoin: A user who wants to obtain WBTC starts by depositing Bitcoin with a WBTC custodian. The custodian holds the Bitcoin in reserve and issues an equivalent amount of WBTC tokens on the Ethereum blockchain.
- Minting: The WBTC tokens are minted using a smart contract on the Ethereum blockchain, which ensures that each WBTC token is backed by an equivalent amount of Bitcoin held in reserve by the custodian.
- Redemption WBTC/BTC: If a user wants to redeem their WBTC for Bitcoin, they can do so by sending their WBTC tokens back to the custodian. The custodian then burns the WBTC tokens and releases the equivalent amount of Bitcoin to the user.
- Use of WBTC: WBTC can be used just like any other ERC-20 token on the Ethereum blockchain. This means that it can be used to participate in decentralized applications (dapps) or decentralized finance (DeFi) protocols that are built on Ethereum.
Statistics on Wrapped Bitcoin
- Circulating supply: As of March 13, 2023, the circulating supply of WBTC is 268,342 (CoinGecko).
- Market capitalization: The market capitalization of WBTC is over $10 billion USD as of March 13, 2023, making it one of the most valuable ERC-20 tokens.
- Liquidity: WBTC is one of the most liquid ERC-20 tokens, with over $1 billion USD in daily trading volume on decentralized exchanges (DEXs) like Uniswap and SushiSwap.
- Custodians: There are several custodians who hold the Bitcoin reserves for WBTC, including BitGo, Coinbase, and Genesis.
- Decentralization: While WBTC is an ERC-20 token on the Ethereum blockchain, it is not fully decentralized. The custodians who hold the Bitcoin reserves for WBTC have a significant degree of control over the token, although efforts are being made to increase decentralization through the use of multisig wallets and other mechanisms.
- Growth: WBTC has grown rapidly since its launch in 2019, has become a popular way to use Bitcoin on the Ethereum blockchain and is widely used in DeFi protocols and decentralized apps (dapps).
Examples and Adoption of Wrapped Bitcoin in the Industry
Wrapped Bitcoin (WBTC) has become increasingly popular in the Bitcoin and cryptocurrency industry, with a wide range of use cases.
WBTC has become an important tool for using Bitcoin in the Ethereum ecosystem and has enabled a wide range of use cases in the cryptocurrency industry, including:
- Trading: The token can be traded on decentralized exchanges (DEXs) which support the Ethereum blockchain. Popular DEXs that support WBTC include Uniswap, SushiSwap, and Curve.
- Lending: Users can lend WBTC to liquidity pools or other DeFi protocols that support WBTC, in order to earn interest or other rewards. This allows users to earn a return on their Bitcoin holdings without having to sell their Bitcoin or convert it to another crypto.
- Collateral: The WBTC token can be used as collateral in decentralized lending protocols to borrow other cryptocurrencies or stablecoins. This allows users to access liquidity without having to sell their Bitcoin or incur capital gains taxes.
- Payment: Wrapped Bitcoin can be used as a payment method in dapps or other services that accept ERC-20 tokens, such as with some online merchants and gaming platforms.
- Yield farming: WBTC can be used in yield farming, where users can earn additional crypto rewards by staking their WBTC in liquidity pools or other DeFi protocols. This has become a popular way to earn additional cryptocurrency rewards in the decentralized finance (DeFi) ecosystem.
Wrapped Bitcoin Related Terms
Ethereum: WBTC is an ERC-20 token on the Ethereum blockchain and is closely associated with Ethereum as a result.
Decentralized Finance (DeFi): WBTC is widely used in the DeFi ecosystem, which is a set of financial applications built on top of decentralized networks like Ethereum.
Tokenization: WBTC is an example of tokenization, which is the process of representing real-world assets as digital tokens on a blockchain.
Custodian: WBTC requires a custodian to hold the Bitcoin reserves that back the token. These custodians are typically large and well-established companies like BitGo and Coinbase, which play an important role in ensuring the legitimacy and stability of the token.
Cross-chain bridges: WBTC is an example of a cross-chain bridge, which enables assets to be moved between different blockchain networks.
Wrapped assets: WBTC is one example of a wrapped asset, which is a token that represents an underlying asset on a different blockchain. Other examples of wrapped assets include Wrapped Ether (WETH), which represents Ether on the Ethereum blockchain, and renBTC, which represents Bitcoin on the Ren blockchain.
