What is a Wrapped Bitcoin (WBTC)?
WBTC is a token based on Ethereum’s ERC-20 standard that acts as a representation of Bitcoin and is capable of being exchanged for BTC on a one-to-one basis.
Holders of BTC may use WBTC instead to participate in the decentralized financial (Defi) environment that Ethereum has developed. Bitcoin was the first cryptocurrency ever created, and it is still the biggest and most well-known digital asset today. Since its inception more than a decade ago, the ground-breaking “peer-to-peer electronic currency system” that Bitcoin is based on has used technology that has, for the most part, stayed unchanged.
What is Bitcoin? However, Bitcoin is not the only cryptocurrency in existence. It is only the most well-known one. A flourishing decentralized finance (Defi) ecosystem has been developed by developers using smart contract blockchains such as Ethereum.
It is required to generate an ERC-20 token that represents Bitcoin to utilize it inside the Ethereum Defi ecosystem. This token must be compatible with the Ethereum blockchain. Wrapped Bitcoin (WBTC) is an initiative that was developed to introduce the value and liquidity (money) of Bitcoin to the dynamic and fast-developing realm of decentralized finance. Wrapped Bitcoin intends to integrate the best aspects of both spheres. Read more
What exactly is a WBTC?
Wrapped Bitcoin (abbreviated as WBTC) is a simple ERC-20 token that stands for Bitcoin; one WBTC is equivalent to one BTC. It is possible to switch between BTC and WBTC and vice versa. The fact that WBTC is an ERC-20 token makes its transfer quicker than that of standard Bitcoin. Nonetheless, the primary benefit of WBTC is its integration into the ecosystem of Ethereum wallets, decentralized applications (apps), and smart contracts. There were around 280,000 WBTC in circulation at the time this article was written.
Who was the inventor of WBTC?
In January 2019, Wrapped Bitcoin was first made available on the Ethereum main net. Wrapped Bitcoin is the result of a collaborative effort between several major players in the Defi ecosystem and Set Protocol. The goal of this project was to increase the liquidity of the Ethereum network by drawing from Bitcoin. Wrapped Bitcoin was introduced to the world because of this effort. The WBTC DAO is the name of the decentralized autonomous organization that currently exercises authority over the project.
What makes it stand out from other things?
The usage of collateral is required by a significant number of Ethereum’s most popular Defi decentralized applications (apps). Users of some products, such as MakerDAO and Compound, are required to stake some of their cryptocurrency holdings to borrow further cryptocurrency.
The potential for expansion of these protocols is severely hampered by the fact that the total value of Ethereum is a lot less than that of Bitcoin. By transferring Bitcoin over, protocols get an increase in liquidity, and as a result, they can generate additional sources of collateral for their decentralized applications (apps). Wrapped Bitcoin also enables Bitcoin users to keep it as an asset while also utilizing Defi apps like Compound to borrow or lend money. Wrapped Bitcoin is a decentralized alternative to traditional financial services.
What other differences can you identify?
People need to be able to trust one another since there is still a gap between Bitcoin and Ethereum, which results in the chains not being able to natively communicate with one another. Wrapped BTC will never have the same degree of security or trust lessness as BTC since it depends on people and organizations to administer the system rather than pure code. This means that wrapped BTC will never have the same level of trust lessness as BTC.
To promote confidence and transparency in the cryptocurrency industry, WBTC submits itself to regular audits and publishes all on-chain transactions and verifications for the Bitcoin and Ethereum networks. Users can independently verify how much BTC was delivered to the WBTC address on the Bitcoin blockchain, after which they can check to see whether those transactions are matched with the generation of WBTC tokens on the Ethereum blockchain. On-chain monitoring is also available for the reversal process, which consists of burning WBTC in exchange for BTC.
Exactly how do the WBTC tokens get made?
This DAO’s governing body makes key protocol updates and adjustments, as well as decides who may take merchant and custodian responsibilities.
Merchants must be contacted by users who want to exchange BTC for WBTC. WBTC tokens are created or destroyed by merchants that execute identity verification processes to verify the users’ identities. To mint and burn tokens on the Ethereum blockchain, custodians must store the real BTC being wrapped and perform the actual minting and burning of tokens. The custodian returns BTC to the user when WBTC is burnt. The custodian takes BTC from the user and stores it when fresh WBTC is issued.
What is the process for acquiring WBTC tokens?
Decentralized exchanges may trade WBTC since it is an ERC-20 token. To exchange BTC for WBTC, there are several sites to choose from.
To use WBTC, how many confirmations are required?
As of writing, the WBTC network needs 14 confirmations. WBTC conducts frequent audits and publishes all on-chain transactions for the Bitcoins and Ethereum blockchain networks to increase trust and transparency.
What does the future hold for WBTC?
It is less important how people use WBTC than what developers can build with it that will influence how the future unfolds. Since WBTC is a permissionless ERC-20 token, it may be used as an extra building block for DeFi applications that are part of the growing ecosystem of “money Lego.” The breadth of use cases and applications for WBTC will continue to broaden in tandem with the development of DeFi itself.
The Bottom Line
Therefore, now that you know what bitcoin is, so the goal of WBTC and all other wrapped tokens is to provide a method for using cryptocurrencies on cross-blockchain platforms, which will, in turn, improve the liquidity of DeFi protocols. As a result, wrapped tokens might be a means of bringing better decentralized finance to the world.