Wrapped Bitcoin is a relatively new concept, but one that could prove important to bringing liquidity to DeFi.
Wrapped Bitcoin is a fairly new innovation that effectively brings BTC to the Ethereum blockchain. One of the main use cases for WBTC lies in decentralized finance.
How Do WBTC Tokens Work?
Imagine you’re already familiar with Bitcoin and really keen to start using DeFi applications. But there’s a problem! There isn’t much of a cryptocurrency bridge connecting Bitcoin and Ethereum.
Wrapped BTC helps to solve this problem, and deliver some much-needed liquidity to DeFi protocols.
WBTC is an ERC-20 token that’s backed on a 1:1 basis with Bitcoin. (In some ways, they could be compared to stablecoins, even if Bitcoin itself isn’t always very stable.)
When Bitcoin is wrapped, the cryptocurrency is held in a reserve by the BitGo Trust. In an aim to be fully transparent (something that other other stablecoins have struggled with,) the amount of WBTC in circulation has been made public — with proof that Bitcoin, the underlying asset, is being securely held in custody.
WBTC can be wrapped (and unwrapped) in wallets such as those provided by CoinList.
What Are the Benefits of Wrapped Tokens?
In short, they give the owners of digital assets freedom to explore other blockchains.
A large chunk of the DeFi ecosystem (and DApps) are based on the Ethereum network rather than the Bitcoin blockchain. This can be extremely frustrating for BTC owners, as this means it’s near impossible for them to get involved unless they sell their crypto assets or buy others.
Since the WBTC.network launched in January 2019, many DeFi protocols — including MakerDAO, Dharma, Compound and the Kyber Network — have begun allowing borrowers to use WBTC as collateral. This can then be locked up into a smart contract, with crypto loans usually paid out using the DAI stablecoin on the Ethereum ecosystem.
The Wrapped Bitcoin project is overseen by the WBTC DAO. To jog your memory, DAO stands for Decentralized Autonomous Organization.
Why Can’t We Just Use Ethereum?
There’s nothing stopping you using ETH as collateral on DeFi platforms. But when measured in U.S. dollars, the market cap of Bitcoin is far greater. Broadening the types of collateral that can be accepted by DeFi applications is crucial, especially as the total value locked in these protocols reaches all-time highs. With trading volumes increasing, ensuring transactions can be executed quickly without significant price fluctuations matters.
The amount of BTC that has been converted into wrapped tokens is rising, too. According to DeFi Pulse, the total value locked in WBTC surged by 943% from mid-May to mid-August 2020.
How Can I Buy WBTC?
There are a number of official merchants who support Wrapped Bitcoin, including CoinList. In some cases, you may need to know through KYC checks where your identity will be verified. Alternatively, you could go through a DEX — that’s the shorthand for a decentralized exchange.
The process of minting WBTC is relatively straightforward as well.
In the world of cryptocurrencies, there have long been calls for better bridges between major blockchains such as Bitcoin and Ethereum. As we’ve seen, WBTC tokens help deliver that.