What is Wrapped Bitcoin (WBTC), and How Does it Work?

Project Reviews / 17.11.2020

Bitcoin is the oldest and largest cryptocurrency on the market. It has colossal support from the entire crypto industry and several billion US dollars in liquidity reserves. Even those who are strangers to the world of digital assets know that Bitcoin is King.

Nevertheless, for those who have a deep understanding of the Crypto Universe, Bitcoin is showing signs of lethargy regarding getting with the times. While the BTC token is still riding high and close to establishing a new ATH, the blockchain that it runs on has many catching up to do.

The biggest hype of 2020 so far has been the boom of DeFi protocols on the Ethereum blockchain, which has better support for a broad range of crypto use cases through smart contracts. On the other hand, the Bitcoin blockchain cannot even dream of reaching the modern standards that would nurture such applications.

So, how do you get the massive user base from the Bitcoin blockchain to the hip and emerging sector of decentralized finance on the Ethereum blockchain?

The answer comes from Wrapped Bitcoin (WBTC), which spurs from the joint effort of various entities in the crypto industry that managed to build a bridge of fast interoperability between the two blockchains.

If you are curious to know what WBTC is and how it works, this short guide should clear the air just as Wrapped Bitcoin clears the way for Bitcoin holders to engage in DeFi applications.

What is Wrapped Bitcoin?

Wrapped Bitcoin (WBTC) is the tokenized version of Bitcoin (BTC) running on the Ethereum (ETH) blockchain.

The idea behind Wrapped Bitcoin is to make the primary cryptocurrency by market cap available on the blockchain that supports almost all the DeFi protocols. As an ERC-20 token, WBTC allows Bitcoin users to access a wide range of decentralized finance applications, including crypto lending, decentralized exchanges, and prediction markets.

WBTC is pegged to Bitcoin at a 1:1 ratio through a network of automatically monitored merchants and custodians. These entities guarantee BTC liquidity before transfers between the Bitcoin blockchain and the Ethereum blockchain occur.

With Wrapped Bitcoin, the Bitcoin blockchain participants can engage in smart contracts and fast transfers on the Ethereum blockchain. They also benefit from faster transaction times, which take roughly 15 seconds on the Ethereum chain, and do not depend on the 10-minute block formation time on the BTC chain.

Who is behind Wrapped Bitcoin?

Wrapped Bitcoin is the joint initiative of several companies in the crypto space, including BitGo, Compound, Dharma, Kyber Network, MakerDAO, Ren, and the Set Protocol.

Their goal is to increase the interoperability between blockchains and attract the big Bitcoin holders into the decentralized finance sector.

The Republic Protocol, Kyber Network, and BitGo announced Wrapped Bitcoin on October 26, 2018, and officially launched it on January 31, 2019, as “the first ERC20 token backed 1:1 with Bitcoin.”

BitGo is a cryptocurrency custodian company co-founded in 2013 by American computer scientist and entrepreneur Mike Belshe. As a co-initiator of Wrapped Bitcoin, BitGo is responsible for guarding the WBTC tokens and the elements necessary for their issuance.

Kyber Network is an on-blockchain liquidity protocol in the DeFi ecosystem. As part of the WBTC community, this entity serves as a merchant, and it is responsible for burning tokens to maintain the 1:1 ratio of tokens to BTC reserves.

Republic Protocol (REN) is an open protocol for asset trades across blockchains and has similar responsibilities as the Kyber Network in the WBTC community.

WBTC Token Facts & Figures

Since WBTC is pegged to BTC at a 1:1 ratio, there can only be a maximum number of Wrapped Bitcoins of 21 million, which is equal to the entire amount of Bitcoins that will ever be minted.

WBTC minting and burning occur whenever users buy or sell them for BTC through the system of merchants and custodians present in the Wrapped Bitcoin network.

All the WBTC tokens are under the protection of their parent blockchain, Ethereum.

As of November 2020, WBTC has a market capitalization of $2,005,468,067. There are 124,260 WBTC in circulation, and one WBTC is trading for roughly 16,000. Wrapped Bitcoin reached its all-time high (ATH) in August 2019 at $40,826.50 per unit.

At the time of this writing, WBTC is the 3rd-largest DeFi platform by the value of locked protocols with over $2 billion in custody.

Wrapped Bitcoin is available for purchase on crypto exchanges like Binance, Uniswap, OKEx, Huobi, and the Kyber Network.

Since WBTC is an ERC-20 token, you can store it in Ethereum-compatible wallets like Ledger Nano S or Trust Wallet.

How does Wrapped Bitcoin work?

Wrapped Bitcoin gathers under its ever-expanding umbrella a network of crypto entities and organizations that have distributed among them the responsibilities of keeping the entire WBTC up and running. As a result, three different entities have emerged in the WBTC ecosystem:

  • Custodians

The WBTC custodians are the organizations that hold the Bitcoin reserves to which all the WBTC tokens correspond.

  • Merchants

The merchants in the WBTC space regulate the issuance, distribution, and burning of Wrapped Bitcoin tokens.

  • Users

These entities hold, transact, and engage in various decentralized finance transactions running on top of various Ethereum chain protocols.

When a Bitcoin holder wants to convert his BTC into WBTC, he requests a merchant to step in and checks the Anti-Money-Laundering (AML) and Know-Your-Client (KYC) procedures. If they are valid, the merchant proceeds to mint and then burn the WBTC tokens equivalent to the Bitcoins in the user’s request. Next, a custodian checks the merchant’s request and validates it before the WBTCs are ready for redistribution to the initial user.

The security of the WBTC network is guaranteed by its decentralized autonomous organization (DAO) status. The cooperation of all the entities in the WBTC ecosystem is possible through multi-signature smart contracts. Each decision about its progress comes into effect only if the members reach a consensus.

The WBTC tokens available in circulation have the backing of underlying assets through the Proof-of-Reserve (PoR) mechanism, which allows all users to verify the number of BTC backing WBTC at any given time.

The Bottom Line – What is Wrapped Bitcoin (WBTC), and how does it work?

The DeFi boom of 2020 has brought many decentralized finance protocols into the limelight and has proven that these platforms can enhance the overall crypto market’s credibility and appeal.

Wrapped Bitcoin is just one of the many such protocols that make buying and selling cryptocurrencies much easier and available for regular investors. It offers a solution to the interoperability issue between two of the industry’s primary blockchains, Bitcoin and Ethereum. Furthermore, it makes the best of both networks’ strengths to facilitate the emergence of more and better cryptocurrency use cases.

avatar
A creative writer in the field of content writing for the past 7 years. Iulian is passionate about his work and his interest in areas such as technology, travel, sports, literature and gastronomy have aided him to the research quality in articles that reflect these themes. Recently, he discovered the Bitcoin and the blockchain technology and he’s a big fan now.