What is WBTC, or ‘wrapped’ bitcoin

Bitcoin is the first, largest, and most well-known cryptocurrency in the world. Since the creation of bitcoin over a decade ago, the technology behind the revolutionary peer-to-peer electronic cash system has largely remained the same.

But bitcoin is certainly not the end of cryptocurrencies. On smart contract blockchains like Ethereum, developers have created a successful decentralized finance (DeFi) ecosystem.

To use bitcoin within Ethereum’s DeFi ecosystem, it is necessary to create an ERC-20 token that represents it. This is wrapped bitcoin (WBTC), which aims to combine the best of both worlds by bringing the value and liquidity of bitcoin into the dynamic and rapidly evolving world of DeFi.

What is WBTC?

WBTC is short for wrapped bitcoin and is simply an ERC-20 token that represents bitcoin. One WBTC is equal to one BTC. BTC can be converted to WBTC and vice versa. The ERC-20 token standard makes the transfer of WBTC faster than regular bitcoin, but the key advantage of WBTC is its integration into the world of Ethereum wallets, decentralized applications (dapps), and smart contracts. At the time of writing this article, over 275,200 WBTC are in circulation.

Who invented WBTC?

Wrapped BTC was launched on the Ethereum mainnet in January 2019. The ‘wrapped’ bitcoin was brought into the world as 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 more liquidity to the Ethereum network by introducing bitcoin. The project is now controlled by a decentralized autonomous organization (DAO) called WBTC DAO.

What is so special about WBTC?

Many of the most popular DeFi dapps on Ethereum require the use of collateral. Products like MakerDAO and Compound require users to lock up crypto assets to borrow other crypto assets.

Since the total value of Ethereum is significantly lower than that of bitcoin, this limits how much these protocols can grow. By bringing bitcoin, the protocols gain a boost in liquidity and another valuable source of collateral for their applications. WBTC also allows bitcoin holders to still own it while simultaneously using DeFi applications like Compound to borrow or lend money.

What else is different?

Since there is still a gap between bitcoin and Ethereum, blockchains cannot directly communicate with each other, requiring trust in people. Compared to BTC, WBTC will never have the same level of security or trustlessness as the original, as it relies on people and organizations to manage the system instead of pure code. 

To increase trust and transparency, WBTC undergoes regular audits and publishes all transactions and checks on-chain on the bitcoin and Ethereum networks. Users can independently verify how much BTC has been sent to the WBTC address on the bitcoin blockchain and then check if those transactions match the creation of WBTC tokens on the Ethereum blockchain. The reverse process of burning WBTC to redeem BTC can also be tracked on-chain.

How are WBTC tokens created?

The governing members of the WBTC DAO decide on major upgrades and protocol changes, as well as who can take on the roles of merchants and custodians who manage the system. 

Users who have BTC and want to convert it to WBTC must communicate with merchants. Merchants initiate the process of creating or burning WBTC tokens by conducting verification procedures to confirm the user’s identity. Custodians hold the actual BTC that is ‘wrapped’ and perform the actual creation (minting) and burning of tokens on the Ethereum blockchain. When WBTC is burned, BTC is returned to the user from custody. When a new WBTC is minted, BTC is taken from the user and held by the custodian.

How to obtain WBTC tokens?

Since WBTC is an ERC-20 token, you can trade it on decentralized exchanges (DEXs) such as Sushiswap or Uniswap. If you want to swap BTC for WBTC, there are several platforms available, including Atomic Wallet, Coinlist, and Poloniex.

What can you do with WBTC?

WBTC can be used in DeFi; you can participate in DeFi activities such as lending, borrowing, token swapping, yield farming, and liquidity pooling. Some DeFi platforms that support WBTC include Aave, Balancer, Compound, Kyber Network, MakerDAO, and Uniswap.

Future

The future does not depend on how individuals will use WBTC, but on what developers will build using WBTC. As a permissionless ERC-20 token, WBTC becomes yet another integral part of DeFi applications in the growing ecosystem. As DeFi itself grows, so will the use and applications for WBTC.