Bitcoin is the world’s first, largest and most recognized crypto-asset. Since its creation over 10 years ago, the technology behind the revolutionary “peer-to-peer electronic cash system” has remained the same. However, innovation continues to be made in other parts of the blockchain ecosystem with the rapidly evolving world of DeFi being a prime example. WBTC tries to combine the best of both worlds by taking Bitcoin’s value, liquidity (money) and making it usable in the world of DeFi.
This article will help you understand how WBTC brings Bitcoin to the Ethereum network.
What is WBTC?
WBTC stands for Wrapped Bitcoin and is simply an ERC20 token that represents Bitcoin. We have the conversion formula: 1 WBTC = 1 BTC. Accordingly, BTC can be converted to WBTC and vice versa. As an ERC20 token, WBTC is transferred faster than regular Bitcoin, but the main advantage of WBTC is that it can be integrated into the world of wallets, dapps and smart contracts on the Ethereum network. To date, there are over 900 WBTC in circulation.
Who Invented WBTC?
Wrapped BTC was launched on the Ethereum mainnet in January 2019, is a collaborative project between major players in the DeFi ecosystem such as BitGo, Ren, Dharma, Kyber, Compound, MakerDAO and Set Protocol in an effort to bring liquidity. Add more to the Ethereum network by embedding Bitcoin. The project is currently controlled by a decentralized autonomous organization (DAO) named WBTC DAO.
WBTC is not the only project to bring BTC to the Ethereum network. The imToken project has created an ERC20 token called imBTC, which is also worth the equivalent of 1 BTC. To date, there are over 460 imBTC in circulation.
What is special about WBTC?
Many of the most popular DeFi applications on Ethereum require the use of collateral. Products like MakerDAO and Compound force users to lock this crypto in order to borrow other cryptocurrencies. Since the overall value of Ethereum is significantly smaller than that of Bitcoin, that limits how much the protocol can grow. By bringing Bitcoin to the network, protocols increase liquidity and thus can create more collateral for their dapps. Wrapped Bitcoin also allows Bitcoin holders to continue holding it as an asset while being able to use DeFi dapps like Compound to borrow or lend money.
Since Ethereum is still far away from Bitcoin, chains cannot naturally communicate with each other. Compared to BTC, WBTC will never have the same level of security or reliability as it depends on people and organizations to manage the system instead of pure code.
In order to increase trust and transparency, Wrapped Bitcoin must be regularly audited and published all on-chain transactions, verifying the Bitcoin and Ethereum networks. Users can independently verify the amount of BTC that has been sent to a WBTC address on the Bitcoin blockchain, and then check if those transactions match the creation of WBTC tokens on the Ethereum blockchain. The reverse burning of WBTC in exchange for BTC can also be tracked on-chain.
How are WBTC tokens produced?
The executive members of the WBTC DAO decide on major upgrades and changes to the protocol and who can take on the role of Merchant and Custodian managing the system.
Users who have BTC and want to convert to WBTC must interact with the Seller. The merchant initiates the process of minting or burning WBTC tokens by performing verification processes to confirm the user’s identity. Custodian holds the actual WBTC and does minting and burning of tokens on the Ethereum blockchain. When WBTC is burned, BTC is returned to the user from Custodian custody. When there is a new WBTC, BTC is taken from the user and stored by Custodian.
How to get WBTC tokens?
Since WBTC is an ERC20 token, it is possible to trade it on decentralized exchanges like Kyber or Uniswap. If you want to exchange BTC for WBTC, it can be through one of the WBTC Sellers: Dharma, Kyber, Set Protocol, GOPAX, AirSwap, Prycto, Ren and ETHfinex.
What can you do with WBTC?
Wrapped Bitcoin can be borrowed and loaned using Compound or used WBTC to participate in margin trading on bZx’s Fulcrum dapp.
The future is not how individuals use WBTC but what developers build with WBTC. As a permissionless ERC20 token, WBTC becomes another building block for DeFi applications. The best example is TokenSets, which has created products that automatically trade between WBTC and ETH for the best returns in both assets in the 2 best crypto worlds.
Dislaimer: This information is provided as a personal blog, not general information or investment advice. We are not responsible for your investment decisions.
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