Bitcoin first disrupted the financial industry in 2009 but has since been followed by other cryptocurrencies trying to do the same.
Some have been more innovative than others, while we do still see tokens like BCH and BSV succeeding, many questions whether these tokens are credible for just forking from Bitcoin. Then came Wrapped Bitcoin, but there is a massive difference between these Bitcoin variants.
What is Wrapped Bitcoin?
Tokens like BCH and BSV were launched to be better than Bitcoin, while debatable to this day, Wrapped Bitcoin was created to allow Bitcoin to be used on other blockchains. Wrapped Bitcoin's goal has never been to be Bitcoin, to be better than Bitcoin, or to take Bitcoin’s community. Wrapped Bitcoin was simply created to provide more utility to those using Bitcoin within the Ethereum blockchain ecosystem.
What are Wrapped Tokens?
Wrapped tokens provide users with the opportunity to use cryptocurrencies like Bitcoin and Ethereum on other blockchains, while their prices remain pegged ("wrapped" tokens) to that of the original coin essentially creating a more tradable version of the coin.
For instance, with Wrapped Bitcoin tokens, Bitcoin can now be used within the Ethereum ecosystem and wrapped Ethereum-based altcoins can be used on the Solana network or any DeFi applications. There is also a Wrapped Ether which can be traded on decentralized exchanges or decentralized finance (DeFi) applications.
Let’s see how WBTC came to be, what benefits it offers, and why it is gaining popularity in the crypto assets space.
The beginning of Wrapped Bitcoin
It is widely conceded that stablecoins (the likes of Tether) were the first wrapped tokens to come into existence, due to their pegging to a fiat currency. However, the first crypto-based wrapped token, Wrapped Bitcoin, was launched in January 2019, roughly 10 years after Bitcoins' initial release.
Wrapped Bitcoin is an ERC-20 token on the Ethereum mainnet (therefore requiring Ethereum wallets for storage) and is backed at a 1:1 ratio to the original cryptocurrency, meaning 1 WBTC is equivalent to 1 BTC.
A key benefit of Wrapped Bitcoin over Bitcoin is its integration within decentralized finance protocols, Ethereum's blockchain and ETH-based dapps, wallets, and smart contracts. To convert your BTC to WBTC, you would need to wrap the token using a bridge.
Wrapped Bitcoin came from the collective efforts of major players within DeFi, including projects like MakerDAO, BitGo, Dharma, Set Protocol, and more. Wrapped Bitcoin is now under the control of a DAO, a decentralized autonomous organization, by the name of WBTC DAO. The ultimate goal was to bring more liquidity into Ethereum’s network through Bitcoin.
There may be more liquidity within Ethereum’s network now, but there are more benefits to Wrapped Bitcoin than just that. Let’s take a deeper look.
The benefits of using Wrapped Bitcoin tokens
When purchasing or converting your BTC into Wrapped Bitcoin you can expect a whole new world of advantages, some of the benefits you can expect are:
- Access to ecosystem
- Smart contract functionality
- DeFi protocols
- Faster transactions
- Relatively lower fees
This is not to say Wrapped Bitcoin is better than Bitcoin, Wrapped Bitcoin does not provide the same security or trustlessness as Bitcoin as it relies on organizations to maintain the system as opposed to code. In some ways, it is better, in some ways it's not, but overall it is an interesting option.
How to get and use Wrapped Bitcoin WBTC
The only way to acquire WBTC is to trade it on a decentralized exchange (DEX) by swapping your BTC for WBTC.
The process of minting WBTC tokens is done through verification procedures concluded by merchants. WBTC is created by storing funds in a custodian wallet in return for WBTC. When users want to convert their WBTC to BTC, the tokens are burnt and the BTC is returned from the wallet. It is a fairly simple process when done through a trustworthy source.
WBTC gives you the ability to interact with the whole Ethereum network, inclusive of dapps, games, smart contracts, wallets, and more. WBTC will also allow you to be a part of a greater DeFi ecosystem, enabling you to partake in yield farming, token swapping, liquidity pools, lending, borrowing, and more. The utility is endless as Ethereum continues to evolve.
The future of the Wrapped Token (WBTC)
This is just the start of Wrapped BTC, it may have launched in 2019 but it is finally getting the attention and interest it deserves.
Is it extremely innovative? Maybe not. Does it bridge the gap in allowing Bitcoin holders to utilize and benefit from other blockchains' synergies? Yes. It has more use cases than it is given credit for, which is why we wanted you to learn more about it.
This is not financial advice, but a look at some of the possibilities and projects out there finding success. There is no saying whether Wrapped BTC will be as big of a success story as BTC, especially since it's a wrapped version of BTC. One thing we do know is that wrapped tokens present additional benefits on top of existing tokens, and that's something you should know too.