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.
WBTC Background
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.
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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.
Liquidity
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.
Staking
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.
Yield Farming
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.
Additional Functionality
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.
Margin Trading
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.
Recommended: Guide to Margin Trading Crypto
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.
The Takeaway
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, Cardano, Dogecoin, and Litecoin with as little as $10. Plus, you can manage your account from the convenient mobile app.
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