Wrapped Bitcoin (WBTC) exists as an ERC-20 token that is backed by Bitcoin (BTC) at a 1:1 ratio.
Put simply, wrapped bitcoin provides interoperability between Bitcoin and Ethereum. WBTC helps to bring the liquidity of Bitcoin to the Ethereum network, allowing people to combine the price value of Bitcoin with the programmability of Ethereum.
What is a Wrapped Cryptocurrency?
A wrapped cryptocurrency is an ERC-20 token that has the same exact value as the other asset it represents. The value can be pegged either through 1-to-1 backing with the underlying asset or through a smart contract that negotiates a stable value.
Wrapped bitcoin is the ERC-20 token that represents one bitcoin and can be used in decentralized applications (DApps). This gives users the ability to use Bitcoin in the Ethereum ecosystem where they otherwise wouldn’t be able to. DApps can process wrapped token transactions faster because there is no need for computation to happen across different blockchains, which is a difficult process.
The only thing required to transact on Ethereum using wrapped tokens is a small gas (ETH) fee.
There are currently several types of wrapped cryptocurrencies, including a handful of stablecoins like Tether (USDT) and Coinbase’s United States Dollar Coin (USDC). Private cryptocurrency Zcash also has a wrapped token. Other coins are coming out with wrapped versions as well, in an effort to stay relevant and usable during a period of rapid DeFi adoption.
Launched in January 2019, the WBTC protocol was designed to bring the liquidity of bitcoin to Ethereum. In the 18 months following its launch, users converted over $800 million in Bitcoin into WBTC.
The wrapped Bitcoin protocol is under the control of a decentralized autonomous organization (DAO) which consists of 17 stakeholders. The WBTC website states that there are over 40 participants, among them DAO members, exchanges, merchants, and wallets, as of December 2020.
How Do You Wrap Bitcoin (BTC)?
Using a merchant like Coinlist, 0x, AAVE, Maker, or Airswap, users can wrap and unwrap BTC easily. Users can also convert their WBTC back into regular BTC whenever they like. This makes it easy for investors to go back and forth between the traditional Bitcoin ecosystem and any decentralized application (DApp) on the Ethereum network.
All a user has to do is register on a platform like Coinlist and deposit some bitcoin. Then select the “wrap” button. The network will then display a prompt asking how much BTC a user would like to wrap. Once confirmed, simply click “confirm wrap,” and the process will be complete.
Alternatively, users could also buy WBTC on a cryptocurrency exchange.
Fees for wrapping Bitcoin can be as low as 0.025%. WBTC users also wind up having to pay Ethereum gas fees for transacting within the DeFi ecosystem.
Advantages of Wrapped Bitcoin
There are a large number of DApps, games, decentralized exchanges (DEXs), and various smart contract-driven platforms that users might need WBTC for. One use case in particular that has piqued interest for many is decentralized finance (DeFi). Users can borrow and lend funds in the DeFi ecosystem using Wrapped Bitcoin rather than having to sell their existing BTC for ETH or a stablecoin first.
Here are a few ways that WBTC helps make things easier for people who want to put their Bitcoin to use inside the Ethereum network.
One big reason WBTC is a useful tool is that it can enable greater market liquidity. The Ethereum ecosystem has a lot of different applications running on it. With funds spread across many areas, DEXs and similar platforms sometimes find themselves lacking the liquidity they need to function at optimum performance. WBTC increases liquidity by bringing in more money from Bitcoin holders who would rather not part with their Bitcoin entirely.
Among the most popular DeFi activities is staking tokens. Proof-of-stake protocols allow users to lock up their funds in a smart contract for a set period of time in exchange for a portion of the network’s block rewards. Exchanging BTC for WBTC can let users earn rewards on platforms like CoinList.
Another popular DeFi activity is yield farming. Yield farming is similar to staking but has shorter lockup periods. Many of these protocols let users make loans with their crypto and earn interest. Platforms like Compound allow crypto holders to earn passive income by lending out wBTC to other network users.
Because it exists as an ERC-20 token on Ethereum, WBTC offers greater functionality that regular Bitcoin can’t. Primarily, this means that WBTC can make use of smart contracts. Smart contracts are programmatic agreements that execute automatically when certain conditions are met. This tech underlies a great deal of new blockchain technologies. While it’s thought that Bitcoin could one day enable smart contract functionality, for now WBTC works as a substitute.
Advanced traders sometimes like to trade on margin. This refers to borrowing money to trade with. Trading on margin can provide leveraged returns, potentially leading to greater profits than would have been possible without borrowing. However, the opposite can also be true—and traders can lose even more than they invested.
With WBTC, DeFi traders can trade Bitcoin on margin using decentralized exchanges. Or, holders can earn a fee by lending out their WBTC to the protocol so others can use it for margin trading.
Is Wrapped Bitcoin a Good Investment?
Wrapped Bitcoin is more of a tool than an investment. The only reason someone would choose WBTC over BTC would be for some use case inside the Ethereum ecosystem. Aside from that, there’s no point in holding WBTC.
Investors looking for exposure to the price of Bitcoin can just buy Bitcoin on an exchange. Asking if WBTC is a good investment is kind of like asking if a gift card is a good investment—both are just money that has a specific use case.
Is Wrapped BTC Safe?
WBTC has only been around for a few years. It is likely to be as safe as any other ERC-20 token on Ethereum, but it’s hard to say for certain as all software can potentially have its flaws.
Wrapped Bitcoin is a form of Bitcoin that can be used on the Ethereum network.
This new invention is only a few years old and gives Bitcoin holders the ability to participate in decentralized finance applications and other DApps without having to liquidate their Bitcoin holdings.
Other cryptocurrencies are also coming out with wrapped tokens. In the end, WBTC is just Bitcoin in a form that can be used on Ethereum without the Bitcoin and Ethereum blockchains having to communicate with one another.
While WBTC is not really an investment, there are ways to get started investing in cryptocurrency. SoFi Invest® lets members get started trading crypto like Bitcoin, Ethereum, and Litecoin with as little as $10. Plus, you can manage your account from the convenient mobile app.
Photo credit: iStock/atdigit
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.