WBTC stands for Wrapped Bitcoin, simply an ERC-20 token that represents Bitcoin. It can be said to be a modified version of bitcoin, equal to it in price, that can be used on the Ethereum blockchain. The token was created to allow users to interact with Ethereum’s decentralized finance (Defi) ecosystem. WBTC aims to combine the best of both worlds by bringing the value of liquidity (money) of Bitcoin to the dynamic and rapidly evolving world of Defi with an improved transaction speed that clears transactions faster than Bitcoin.
How does Wrapped Bitcoin work?
The DAO (Decentralized Autonomous Organization) comprises 17 members from the Defi space who hold a multi-signature contract to add or remove Wrapped BTC merchants and custodians. The merchants are administrators who trigger the minting process by sending a certain amount of BTC to the custodian and requesting the minting of an equivalent amount in wrapped tokens, according to investors’ and traders’ demands.
The custodians are like vaults that provide reliability and security to WBTC and ensure that all WBTC is fully backed and verified through on-chain proof of reserves. They mint BTC and send the equivalent amount of WBTC back to the merchant. In short, the merchant transfers the real BTC to a custodian address where it is locked. Once it receives the real BTC, the custodian address mints the equivalent amount in wBTC on Ethereum.
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Who are the Founders of Wrapped Bitcoin?
The initial developers of the wrapped bitcoin protocol were BitGo Inc, Kyber Network, and Ren, Dharma, Compound, MakerDAO. This consortium released the WBTC whitepaper on 24 January 2019 and launched on 31 January 2019 with eight merchants facilitating bitcoin-to-WBTC conversions. Currently, this project was controlled by a Decentralized Autonomous organization called WBTC DAO.
What makes Wrapped Bitcoin unique?
Many of the popular Defi on Ethereum require the use of collateral. Products such as MakerDAO and Compound require the use of lockup crypto assets to borrow other crypto assets. Because the overall value of Ethereum is lower than Bitcoin, this limits how much protocols can grow. By bringing the bitcoin over they increased the liquidity thus creating more sources of collateral for them. Wrapped Bitcoin also allows Bitcoin holders to hold it as an asset while using Defi dapps like Compound to borrow or lend money.
Wrapped Bitcoin’s Flow into Ethereum Network?
Some part of the Bitcoin-like corporate treasuries and exchange-traded investment in the form of Wrapped Bitcoin in circulation supply has flowed into the Ethereum Network in 2021. As of February 202 around $10.9 B worth of BTC is available on Ethereum Network. WBTC is also available on the Tron Blockchain, with a total value of $4.1M worth of Bitcoin.
How many Wrapped Bitcoin Coins Are There in Circulation?
Because Wrapped Bitcoin is always backed by Bitcoin at a 1:1 ratio, the number of tokens directly depends on the number of bitcoin reserves in the WBTC network. As of October 2020, the number of Wrapped Bitcoin was just over 94000 tokens worth approximately in total.
Why do we need WBTC?
We need WBTC because it brings greater liquidity to the Ethereum ecosystem including decentralized exchanges and financial applications. In current times the majority of trades take place on centralized exchanges with Bitcoin. WBTC changes this by bringing Bitcoin’s liquidity to DEXs and making it possible to use Bitcoin for token trades.
How are WBTC tokens produced?
The governing members of the WBTC DAO decide what should be the major upgrades or changes to the protocol of producing Bitcoin as well as who should assume the roles of the merchant’s custodian to manage the system.
The users who have Bitcoin and want to convert it into the Wrapped Bitcoin must interact with the merchants. After the user request, the merchant for conversion of Bitcoin to Wrapped Bitcoin the merchants initiate the process of minting and burning Wrapped Bitcoin by performing a verification procedure to conform to the user identity. Then the custodian who holds the actual Wrapped Bitcoin does the minting and burning of tokens on the Ethereum blockchain. When the WBTC is burned, Bitcoin is returned to the user from the custodian. This process is repeated when the new Wrapped Bitcoin is minted.
How do you get hold of the WBTC tokens?
Since Wrapped Bitcoin is an ERC- 20 token it can be traded on Decentralized Exchange(DEX) SUCH Kyber or Uniswap. If you want to swap and hold Bitcoin you can use several platforms including Atomic Wallet, Coin list, and Polonix.
What can you do with WBTC?
Wrapped Bitcoin can be used in different ways on the Defi platform which support WBTC for uses such as lending, borrowing, token swapping, yield farming, and liquidity pools.
Is WBTC safe?
The concept of WBTC is safe because the technology used in WBTC is sound. However, there were many risks of which you should be aware before converting your BTC to WBTC. One of the major concerns that arise is trust in the early WBTC platforms. There is always a risk that the platform somehow unlocks the real BTC and leave the token holders with the fake WBTC.
Are wrapped tokens a good investment?
It is regarded as a good investment in the crypto world where decentralized finance will play an important role. In just one year 800 million dollars worth of Bitcoin was converted into WBTC. It increases the liquidity and capital efficiency for both centralized and decentralized exchanges due to the facility to move the assets across multiple chains that would remain isolated otherwise.
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Other Wrapped Cryptos
Bitcoin and Ethereum are not the only wrapped bitcoin that is in circulation there were many other wrapped versions of crypto available like Bitcoin cash, Zcash, Filecoin, Dogecoin, Digibyte, Terra, and many other.
I think the future of WBTC can be based on how the developers make it simpler for the users to adapt to WBTC. As WBTC becomes another building block for Defi applications in the growing ecosystem of the financial world. We can say that as the use of the DeFi ecosystem grow the uses of WBTC will also grow.
Disclaimer: User Generated Content – Original Content created by a member of CoinDCX Ambassador Program – The Pathbreaker Initiative. The views and opinions expressed within this post belong solely to the author.
Author: Abhay Shrotiya