Wrapped Bitcoin is a digital token that has the same value as Bitcoin but is built on the ERC-20 protocol, which allows it to be used in the decentralized finance ecosystem.
Bitcoin and Ethereum are blockchain-based cryptocurrencies. Different blockchains now have a variety of functions, features, and protocols. They are unable to communicate with each other due to their differences. While this improves the security of a blockchain-based digital asset, it complicates the development of an interoperable cryptocurrency exchange or system where data from one crypto is moved to another.
But, data is shared from one cryptocurrency to another for decentralized finance to work. Some new blockchains, such as Polkadot, have tried to solve the interoperability problem, but the industry as a whole has yet to solve the communication problem between older and larger cryptocurrency networks, such as Bitcoin and Ethereum, so that decentralized exchanges can easily handle such operations.
Wrapped Bitcoin is a good example. Simply put, a wrapped token is a cryptocurrency based on a second blockchain and has the same value as the original cryptocurrency, but it can be used on non-native blockchains and then exchanged for the cryptocurrency. ‘origin. Over the past few days, the Wrapped Bitcoin or WBTC cryptocurrency has been gaining traction. Since WBTC is tied to Bitcoin, any increase in the price of Bitcoin automatically impacts the price of WBTC.
What is Wrapped Bitcoin?
The first Bitcoin Wrapped Protocol (wBTC), which debuted in January 2019, was designed to bring the potential and liquidity of Bitcoin to the Ethereum network while providing the flexibility of an ERC-20 token.
Although the original Bitcoin cannot be used for decentralized financial (DeFi) transactions, a wrapped Bitcoin can be used to transact within the DeFi ecosystem or any other decentralized Ethereum application.
The arrival of a shrouded Bitcoin in the cryptocurrency realm is significant. While wBTC has the same value as the original Bitcoin, the functional element has been significantly improved, increasing the possibilities of using Bitcoin for additional applications such as DeFi.
Simply put, a Bitcoin holder can lend Bitcoin using smart contracts by connecting their wallet to a decentralized platform and receiving a fixed annual interest rate. Borrowers use their cryptocurrency as collateral, which is immediately transferred to the lender in the event of default.
Another advantage is that wrapped bitcoin transactions are processed faster than unwrapped bitcoin transactions.
As previously reported, the price of Wrapped Bitcoin is equal to that of Bitcoin, so at the time of writing it is worth $41,000 and has a market capitalization of $11 billion, making it the 16th highest cryptocurrency. precious.
How does Wrapped Bitcoin work?
The digital asset works as follows: Kyber Network and REN are merchants that mint and burn WBTC tokens, while BitGo is the custodian that stores BTC and keys to mint WBTC tokens.
When a user intends to trade BTC for WBTC, they must first submit their BTC to a merchant. The Merchant will issue a WBTC mint request and transmit the user’s BTC to the Custodian. The corresponding WBTC will then be minted by the Custodian and transferred to the user via the Merchant.
When a user wishes to exchange their BTC for WBTC, the merchant will contact the custodian and transfer the user’s BTC to them, while the WBTC token will be burned.
Features of Wrapped Bitcoin
Wrapped bitcoin uses smart contract functionality for bitcoin transfers to enable bitcoin holders to access DeFi. As a result, Bitcoin’s higher liquidity is delivered to the DeFi market.
A trader makes a request to another entity, the custodian, for new WBTC to be issued or minted. According to the WBTC white paper, the trader gives the bitcoin to the custodian, who mints the WBTC and sends it to the trader’s Ethereum blockchain wallet. The wrapped bitcoin can then be exchanged for an identical number of bitcoins by the merchant with an end user. Implementing KYC and AML procedures with end users is the responsibility of merchants.
Entities that hold Bitcoin protection and mint the coin are called custodians. BitGo is the only depository for WBTC and Kyber Network and Ren were the first merchants to join, but many more joined later. Over 1% of bitcoin was reportedly held in packaged bitcoin tokens in June 2021.
Burning, a method that can only be done by a trader, is used to remove WBTC from circulation, for example, when a user wants to convert WBTC back to bitcoin. The merchant activates the “burn” mechanism in the governing contract, which reduces the merchant’s WBTC balance. The custodian can then return the held bitcoins to the merchant, who can reimburse the end user.
Is Wrapped Bitcoin safe?
A wrapped bitcoin token is technologically secure. It will likely be kept safe on Ethereum or Binance Smart Chain, and once converted to an ERC-20 coin, it will be in charge of network security.
One of the main concerns with wrapped BTC tokens is the requirement to trust the custodian holding the asset. Holders of wrapped BTC tokens would end up with a useless asset if the custodian unlocks and transfers the real Bitcoin to someone else.
The level of security provided by Bitcoin is determined by how it is stored. One entity that offers to mint ERC-20 tokens on Ethereum is a centralized custody bridge that holds Bitcoin. The centralized entity must be trusted to hold the BTC rather than steal it. Users should check that these companies are at least covered by warranties and insurance in case something goes wrong.
In the decentralized world of crypto, a smart-contract managed decentralized bridge would be the ideal option. There is no need to trust anyone other than immutable, timestamped smart contract code.
The security of wrapped BTC bridges has been a source of confusion in the DeFi community, as custodians must trust to keep real BTC locked.
Benefits of Wrapped Tokens
A significant part of the DeFi ecosystem is built on the Ethereum network, rather than the Bitcoin blockchain. This can be extremely inconvenient for Bitcoin holders, as it implies that they are unlikely to commit unless they sell existing digital currencies or buy new ones.
Since the launch of Wrapped Bitcoin in January 2019, several DeFi protocols, including MakerDAO, Compound, and Kyber, have allowed borrowers to use WBTC as collateral. Crypto loans are usually paid using the DAI stablecoin on the Ethereum environment, which can then be locked into a smart contract.
The Wrapped Bitcoin project is managed by the WBTC DAO (Decentralized Autonomous Organization).
In a nutshell, they allow digital asset owners to explore multiple blockchains.
Is Wrapped Bitcoin a good investment?
Wrapped bitcoins are becoming a popular investment option in the cryptocurrency world, where decentralized finance is sure to play a key role. About $800 million worth of bitcoin was traded for wrapped bitcoin in just one year, giving an estimate of the current value of the industry.
The amount of Bitcoin locked on the Ethereum blockchain soared to 189,000 Bitcoin in 2021, according to Arcane Research. Wrapped Bitcoin tokens are believed to be used in DeFi at a record 1% of Bitcoin’s circulating supply of 18.73 million.
Due to the ability to move assets through various chains that would otherwise remain isolated, Wrapped Bitcoins increase liquidity and capital efficiency for both centralized and decentralized exchanges.
Another benefit of Wrapped Bitcoin is that it offers faster transaction times and cheaper costs, which is especially beneficial for slow blockchains like Bitcoin or Ethereum.
Wrapped Bitcoin, unlike other assets, gives fractional ownership, allowing owners to acquire and hold a small portion of the asset.
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