Many decentralised applications (exchanges, credit protocols, blockchain games) run on the Ethereum network. Still, Bitcoin has its separate blockchain, so there is no way to use it for such applications. This is the problem that WBTC solves.
As of mid-2023, more than 150,000 wrapped bitcoins are in circulation, and the market capitalisation exceeds 4.7 billion. This puts this token in the 16th place at the top among all coins and indicates its demand.
Features of Wrapped BTC
WBTC is an ERC-20 token on the Ethereum blockchain, the rate of which is always as close as possible to the speed of real Bitcoin. This makes WBTC a stablecoin, as its rate is tied to the underlying asset. Still, the critical difference from dollar-based stablecoins is that the coin adopts the volatility of Bitcoin.
Previously, bitcoin holders have yet to access the possibilities of decentralised finance. Meanwhile, DeFi offers the broadest range of ways to earn money and manage assets. WBTC tokens, on the other hand, can be freely used as collateral in credit protocols, for profitable farming in liquidity pools (e.g. when supplying liquidity to decentralised exchanges), etc.
The advantages of such a solution are:
- Wrapped Bitcoin brought additional liquidity to decentralised applications. This noticeably accelerated the development of the whole sphere - gradually centralised exchanges and wallets also added this crypto-asset to their listings for users' convenience.
- Removal of several technical and conceptual boundaries. Technology allows Bitcoin holders to access the Ethereum ecosystem without reducing the amount of BTC in their investment portfolio. There is no need to make a hard choice by selling one asset in favour of another; one can combine these solutions flexibly and conveniently.
- Increased speed of transactions. Wrapped BTC is transferred much faster than plain BTC due to the technicalities of the blockchain. The original Bitcoin adds a new block every ten minutes, while Ethereum adds a new block every 15 seconds.
WBTC tokens can be moved faster and cheaper between exchanges, wallets, and other services to be a flexible alternative to the original Bitcoin.
Who controls the protocol
WBTC is controlled by a decentralised autonomous organisation (DAO) whose participants represent stakeholders of the DeFi ecosystem. Each has a multi-signature wallet key that protects the system.
Members can vote to add or remove members of the DAO and make changes to the smart contracts on which the system is based. Essentially, the public is responsible for minting and burning Wrapped Bitcoin. As an additional safeguard, the custodian (custodian company) regularly checks the system and ensures that the original BTC backs all minted tokens.
How Wrapped Bitcoin works
New WBTC are created when a user sends their bitcoins to a merchant, and the merchant mints a corresponding number of ERC-20 tokens based on them. The Wrapped Bitcoin platform works according to the KYC/AML concept, which requires the user to provide sensitive data.
The official custodian of the platform is BitGo, which securely stores the bitcoins received from users in its custody to give them back upon request.
Now that many wallets and exchanges support WBTC, buying them without going directly to the issuing company has become more manageable. And on decentralised marketplaces, you can even do it without KYC. Also, WBTC can be found in many cryptocurrency exchanges that allow you to anonymously purchase tokens for various payment methods - cards and e-wallets.
Once you have WBTC, you can use it on DeFi platforms like Compound, Uniswap or MakerDAO.
Wrapped Bitcoin is not the only covered cryptocurrency but the most popular. Users have come to love the ability to work with BTC in decentralised finance. These kinds of assets have provided the necessary interconnectivity between the different ecosystems of the blockchain community, making new forms of linking and collaboration possible. The prospects of WBTC depend primarily on what other uses for it emerge in the industry.