What Is Wrapped Bitcoin? WBTC And The Relationship With Ethereum Explained

The cryptocurrency industry and both the Bitcoin and Ethereum ecosystems are rapidly evolving, and have come to the point of converging together as Wrapped Bitcoin (WBTC). Wrapped Bitcoins represent an interesting junction of the two top cryptocurrency technologies and unlock even more potential in Bitcoin itself through Ethereum’s smart contracts, as this guide will explain.

Here is an in-depth resource related to Wrapped Bitcoin, which will break down its uses, what it is, how it functions, and why it matters to the cryptocurrency market.

Introduction To Wrapped Bitcoin (WBTC)

Before we get started with what Wrapped Bitcoin is, for those relatively new to the cryptocurrency industry, we’ll first take a step back and explain Bitcoin – the world’s most valuable cryptocurrency by market capitalization.

Bitcoin is a new financial technology designed by a mysterious person or group called Satoshi Nakamoto, that is today presumed to be deceased or has disappeared completely. They created Bitcoin and with it blockchain technology, and gave birth to the entire cryptocurrency industry.

Bitcoin was designed with certain key features, such a hard capped 21 million BTC supply, secure electronic peer to peer transactions, and decentralization to avoid a third-party altering the open source protocol.

After the success of Bitcoin, other projects were created with similar features. Eventually, Ethereum was created with the goal of acting as a decentralized supercomputer that can run decentralized applications or Dapps, such as DeFi protocols, DEXs, and more.

Ethereum does this through an addition called smart contracts. Smart contracts are executable code that trigger an agreement between two participants, bound by distributed ledger technology. It is through these smart contracts that things like deploying flash loans, borrowing networks, liquidity mining, yield farming protocols, decentralized derivatives, and even ERC-20 tokens are possible.

What Are Wrapped Tokens? Pegging One Token For Use For A Different Blockchain

A wrapped token in a sense is another new crypto token that is pegged to the value of another cryptocurrency, for the sake of porting the cryptocurrency over to work with a different blockchain. 

The reason for this is because each unique blockchain offers a variety of benefits, yet not all blockchains and assets can talk to one another or offer cross-functionality. However, by wrapping tokens this way, the smart contract will provide the cross-functionality users are seeking.

What is Wrapped BTC? What Does Tokenizing Bitcoin Offer?

Wrapped BTC is a form of tokenized Bitcoin for us on Ethereum’s blockchain. It is essentially a way to use Bitcoin on Ethereum. Users convert BTC over to WBTC for use within the Ethereum network and related protocols.

How Does Wrapped Bitcoin Work?

Wrapped BTC begins with tokenizing Bitcoin through a smart contract. Through the WBTC DAO, users can convert 1 BTC for 1 WBTC. The 1 BTC is then stored in a smart contract through a fully reversible, transparently verifiable“proof of reserve” system.

Wrapped coins like this can be used within a variety of decentralized financial products or services.

Benefits of Wrapped Tokens

Wrapped tokens of any kind, including Bitcoin, offer all the benefits of any type of ERC-20 token. This includes:

Loans

By wrapping Bitcoin in a smart contract, users can take out loans against their WBTC within certain DeFi applications. The WBTC is locked in another smart contract as collateral according to the protocol conditions. If the loan cannot be paid, the collateral is liquidated.

Liquidity Provisioning 

BTC holders can wrap their Bitcoin and send WBTC to an automated market making platform like Uniswap and lock the token up within a liquidity pool and trading pair. In exchange for doing so, the user will earn a variable rate of rewards back.

Governance Tokens

Locking up WBTC in some protocols will earn the holder a return via rewards in the protocol’s governance token. Governance tokens then provide the holders with additional voting rights within the protocol, or other benefits according to the code.

Decentralized Derivatives Trading

Many new protocols have appeared that allow for using WBTC within decentralized margin trading protocols. These platforms act like other margin trading platforms and offer leverage, however, trading volumes are currently very low comparatively. The other difference is that the WBTC is stored within an Ethereum wallet the user custodies, versus a wallet an exchange controls on a centralized platform.

How To Use WBTC In DeFi

Using WBTC in DeFi all starts with wrapping Bitcoins. Certain wallets will allow a user to wrap their BTC.

Wrapping BTC will lock it in a smart contract held by BitGo, in exchange the user will receive an equal amount of BTC. BTC will not be sent to a WBTC wallet and vice versa.

Once the WBTC has been received in exchange for wrapping BTC, the user can then send the WBTC to any Ethereum wallet for use within DeFi applications. After a user has connected their Ethereum wallet to a decentralized application, a list of ERC-20 tokens will appear, which will include the WBTC.

At this point, it is up to the user how much WBTC to use and how they want to put it to work for them. Simply holding WBTC doesn’t really make sense, as a user might as well hold the more trustworthy BTC. However, if getting the most out of your crypto assets is the goal and using DeFi applications is attractive, then wrapping coins might make more sense to you.

Users can also unwrap their WBTC at any time, unlock their BTC from the smart contract, and receive an equal amount of BTC back in their wallet.

The Future of Wrapped Bitcoin (WBTC) 

WBTC has exciting implications for all aspects of the cryptocurrency industry. At the surface, it allows Bitcoin to be used in all sorts of other financial applications such as loans, lending, yield generating, and so much more. Even more interesting, is what wrapped Bitcoin can’t do just yet and developers will eventually cook up. 

Bitcoin, Ethereum, DeFi, and crypto are still young and by wrapping Bitcoins, the cryptocurrency gains many more advantages and future proofs the coin from other competing blockchains. Among the biggest complaints over Bitcoin is that it cannot be used in such applications, but wrapping it on Ethereum removes such barriers and makes the coin more versatile overall.

With more benefits to Bitcoin, it increases the cryptocurrency’s long term value proposition. Even more interesting, is that by taking more BTC out of the circulating supply, there is a much higher chance for demand to cause supply shocks that send prices shooting up in a parabolic curve.

In such an example already happening today, more than 1% of the entire BTC supply is said to have been wrapped for us within DeFi applications and other services. This takes a full 1% out of the already low BTC circulating supply, and means less coins that can be sold at market prices at any given time.

Wrapped BTC lets Bitcoiners take advantage of all the potential that Ethereum and DeFi have to offer for the long term.

Summary: Why Wrap Bitcoins And What Else To Do With BTC

Wrapping Bitcoins is a must if the user desires to take advantage of any of the benefits DeFi has to offer. However, there are better ways to make money with BTC that are a lot more tried, true, and trustworthy.

Wrapping each BTC involves storing BTC in a smart contract held by BitGo Trust. This requires the user to trust that BitGo Trust will custody their coins properly. BitGo uses a proof of reserve system that offers full transparency into the allocation, however, anything is possible.

Part of what makes Bitcoin so valuable is that it doesn’t need a third-party intermediary involved to work. However, WBTC does. This in a sense dampens the value of what Bitcoin is supposed to be all about.

If a crypto holder wishes to make more money with their Bitcoin, then there are other more trustworthy ways. Take PrimeXBT, for example. The award-winning margin trading platform has never been hacked, always reliable and ready for trading. 

Secure crypto accounts offer two-factor authentication and address whitelisting, and unlike most trading platforms, PrimeXBT utilizes a unique cold storage solution that ensures the highest level of customer fund safety possible.

Deposits are made to a secure BTC wallet or ERC-20 wallet. Margin accounts are available in BTC, ETH, and ERC-20 versions of USDT and USDC. Each base currency offers its own benefit to users, but any can be used to trade more than 50 different CFDs on forex, commodities, stock indices, crypto and more.

Using these CFDs, users can go long or short, set stop loss orders, and so much more. The platform offers the most fine tune control, customizations, built-in charting software, and a free smartphone app.