Wrapped BTC (wBTC) allows Bitcoin to be used in Ethereum smart contracts. With over 50,000 holders, wBTC has solidified its position as one of the most useful tokens on the Ethereum network. But is this cryptocurrency’s elite utility going to last? Could wBTC continue to serve its purpose or will new technologies make it obsolete? In this article, we’ll answer these questions by explaining what wBTC is, how it works, and how it differs from other popular tokens. It took us countless hours of research to write this insightful article. Therefore, we can ensure that this guide will help you understand all there is to know about Wrapped Bitcoin.
In This Guide:
What Is wBTC?
wBTC is short for Wrapped Bitcoin. As the name suggests, it is a Bitcoin token that is wrapped or “tokenized” on the Ethereum network. In other words, wBTC is an ERC20 token that represents Bitcoin on the Ethereum blockchain.
Since wBTC is an ERC20 token, it can be stored in any Ethereum wallet. This makes it much easier to use Bitcoin in Ethereum smart contracts and decentralized applications (dApps). Previously, if you wanted to use Bitcoin in an Ethereum dApp, you would have to first convert your BTC to ETH using either a centralized or decentralized exchange. But with wBTC, you can simply send your BTC to a custodian who will then mint an equivalent amount of wBTC and deposit it into your Ethereum wallet.
Another use case of wBTC is to help Ethereum dApps that require Bitcoin payments to avoid the high fees and slow transaction times of the Bitcoin network. For example, a gambling dApp could allow users to bet with wBTC instead of BTC. This way, the dApp wouldn’t have to deal with Bitcoin’s congested blockchain and could provide a better user experience. By having a wrapped token, Ethereum native dApps can also offer their services to Bitcoin users without having to develop a separate dApp for the Bitcoin network.
Bitcoin has been known as the largest and most popular cryptocurrency since its inception in 2009. Ethereum, on the other hand, is a relative newcomer, launching in 2015. Despite this, Ethereum has quickly become the second-largest cryptocurrency by market capitalization. However, due to their different purposes, it’s not really possible to directly compare Bitcoin and Ethereum. While Bitcoin is primarily a digital store of value, Ethereum is a decentralized platform that allows developers to build dApps and issue their own tokens.
wBTC brings the best of both worlds by allowing Bitcoin to be used on the Ethereum network while still maintaining its own unique properties and advantages. By having an Ethereum-compatible token that is pegged to the value of Bitcoin, wBTC allows users to take advantage of Ethereum’s smart contract functionality while still being able to hold and trade Bitcoin.
How Does wBTC Work?
As we mentioned earlier, wBTC is an ERC20 token that represents Bitcoin on the Ethereum blockchain. When you want to convert your BTC to wBTC, you send your BTC to a custodian who then deposits an equivalent amount of wBTC into your Ethereum wallet.
Similarly, when you want to convert your wBTC back to BTC, you simply send your wBTC to the custodian and they will return an equivalent amount of BTC to your Bitcoin wallet. The wBTC is then burned to maintain the 1:1 peg.
The process is initiated by the merchant after a user requests for a BTC to wBTC conversion. The merchant verifies the user’s identity using KYC/AML procedures before completing the transaction. Once this is completed, the user and merchant exchange the assets via a smart contract. The merchant works with the custodian to write the smart contract after the merchant deposits the Bitcoin to the custodian’s reserves.
To ensure that the custodian doesn’t run away with your BTC, the wBTC system uses a decentralized network of exchanges, market makers, and custodians. These decentralized exchanges and market makers provide liquidity for wBTC and help to keep the price pegged to BTC.
The custodian that manages the wBTC supply is called a “mint”. The mint is responsible for creating a new wBTC and destroying wBTC when it is converted back to BTC. The custodians are responsible for holding the BTC and minting/burning wBTC in response to user requests.
This centralized approach has some advantages and disadvantages. On the one hand, it allows for a more stable peg since the custodian can control the supply of wBTC. On the other hand, it also makes wBTC more vulnerable to manipulation and fraud. To ensure that the merchants and custodians don’t cheat, the wBTC system uses a federated governance model.
A decentralized autonomous organization (DAO) manages the wBTC protocol. Under this model, there is a group of participants that governs the wBTC system. Through multi-sig, wrapped bitcoin each member holds a key that secures the system.
This system works for creating an Ethereum token that is backed by Bitcoin because the key holders can vote to add or remove custodians. They can also freeze wBTC tokens in the event of fraud or other emergencies. Simply put, Wrapped Bitcoin works because it is a community-governed system with multiple checks and balances. The key holders ensure that the custodians are honest and that the wBTC peg is maintained.
Through their proof of assets, users can also transparently see how much BTC is being held in reserve by the custodian. This provides a high degree of confidence that users will be able to convert their wBTC back to BTC when they want to. Currently, there is 253,438.3669 BTC in their custody while there is 249,880.4995 WBTC on the network. This means they have more than 100% backing. This on-chain validation shows that the custodian is not running a fractional reserve.
This token works for Ethereum users because it allows them to use Bitcoin on the Ethereum network. It also works for Bitcoin users because it allows them to take advantage of Ethereum’s smart contract functionality. Overall, wBTC is a great solution for those that want to use both Bitcoin and Ethereum.
Wrapped Bitcoin Fun Facts
- 50,051 Total Addresses
- Ranked #17 on CoinMarketCap
- wBTC is the first ERC20 token backed 1:1 with Bitcoin
- Wrapped Bitcoin also works with Tron blockchain
(Data as of 7/11/2022)
The Story of wBTC
wBTC was not created by a pseudonymous Satoshi Nakamoto or an anonymous group of developers. Rather, it was created by a consortium of companies that saw the need for a wrapped Bitcoin token on Ethereum.
The consortium consisted of Kyber Network, BitGo, and Ren. Kyber Network is a decentralized exchange that allows for the instant conversion of assets. BitGo is a cryptocurrency custody and wallet service. Ren is an open protocol that allows for the transfer of value between blockchains.
These companies came together because they all had a vested interest in seeing Ethereum succeed. These three entities understood that Ethereum needed a way to interact with Bitcoin if it was going to become the world’s leading smart-contract-based blockchain.
To make this happen, they created wBTC. The goal of wBTC is to bring the liquidity of Bitcoin to Ethereum. This is done by allowing users to convert their BTC into wBTC. Once they have wBTC, they can use it to trade on Ethereum decentralized exchanges or participate in Ethereum smart contracts.
The wBTC token was created in January of 2019. Since then, it has become one of the most popular ERC20 tokens. As of today, there is 249,980.39 WBTC circulating supply. This shows that within just a few years, wBTC has managed to gain a lot of traction. The use cases of wBTC will likely only increase in the future as more people become aware of its existence.
Currently, wBTC is used in a variety of ways. The most popular use case is for trading. However, Defi protocols have also started to use wBTC as collateral. This is because wBTC has real-world value and can be easily converted back to BTC. Many people prefer to store their value in Bitcoin long-term. But traditional finance has not been kind to those that wish to borrow against their Bitcoin. wBTC solves this problem by allowing users to put up their wBTC as collateral while still maintaining ownership of it.
In the future, wBTC could become the standard way to represent Bitcoin on Ethereum. This would allow for a more seamless experience for those that wish to use both blockchains. It would also increase the liquidity of Bitcoin and Ethereum, as each token could be easily converted into the other.
The story continues but as a review, wBTC is a wrapped Bitcoin token that exists on the Ethereum network. It was created by a consortium of companies to bring the liquidity of Bitcoin to Ethereum. Its innovative approach allows for functional utility. This system has proven to both be popular and useful.
As more and more people begin to adopt the Bitcoin standard and become accustomed to DeFi and Ethereum Dapps, wBTC will only become more widely used. Although new innovations may come along, wBTC has the first-mover advantage and is currently the most popular way to use Bitcoin on Ethereum.