What Is Wrapped Bitcoin (WBTC)?
Wrapped Bitcoin is a tokenized version of Bitcoin (BTC) that runs on the Ethereum (ETH) blockchain.
WBTC is compliant with ERC-20 - the basic compatibility standard of the Ethereum blockchain - allowing it to be fully integrated into the latter’s ecosystem of decentralized exchanges, crypto lending services, prediction markets and other ERC-20-enabled decentralized finance (DeFi) applications.
WBTC is also backed by Bitcoin at a 1:1 ratio via a network of automatically monitored merchants and custodians, ensuring that its price is pegged to Bitcoin at all times and allows users to transfer liquidity between the BTC and the ETH networks in a decentralized and autonomous manner.
Wrapped Bitcoin was first announced on October 26, 2018, and officially launched on January 31, 2019.
Who Are the Founders of Wrapped Bitcoin?
The Wrapped Tokens project, of which WBTC is a part, wasn’t founded by individuals but is rather a joint project of three organizations: BitGo, Kyber Network and Ren.
BitGo, co-founded in 2013 by American computer scientist and entrepreneur Mike Belshe, is an institutional digital asset custody, trading and financial services firm. In addition to being one of the developers of WBTC, BitGo also serves as its original custodian — the entity that holds WBTC tokens and the keys needed to mint more of them.
Kyber Network is an on-blockchain liquidity protocol that enables the integration of different cryptocurrency tokens and DeFi applications. It was founded in 2017 by Loi Luu, Victor Tran and Yaron Velner and is based in Singapore. Along with Ren, Kyber Network has helped create WBTC and still serves as a merchant on its network — the institution that mints and burns WBTC tokens to maintain the 1:1 ratio of tokens to BTC reserves.
Similarly to Kyber, Ren is a company focused on cross-blockchain integration of cryptocurrency assets and DeFi applications via solutions such as RenBridge, RenVM and others. It was founded in 2017 by Taiyang Zhang and Loong Wang.
What Makes Wrapped Bitcoin Unique?
By virtue of being the oldest and largest cryptocurrency on the market, Bitcoin can boast a massive user base and a liquidity pool of several dozen billion dollars. However, its blockchain functionality is relatively basic by modern standards.
Unlike Bitcoin, Ethereum was built from the ground up to support more advanced use cases by utilizing the technology of smart contracts, giving rise to an entire industry dubbed “decentralized finance.”
Ethereum and products derived from it offer their users such advanced financial instruments as lending and insurance, which do not rely on trusted intermediaries.
By “wrapping” BTC in the ERC-20 standard, WBTC enables full integration of a Bitcoin-like asset into this advanced environment of financial decentralized applications, bringing along the immense liquidity associated with the BTC market.
In addition, Wrapped Bitcoin makes the job significantly easier for exchanges, wallets and payment services that work with Ethereum: instead of having to run two separate nodes for ETH and BTC networks, they can support WBTC operations with just an Ethereum node.
Finally, Ethereum blockchain’s faster average blocktime — about 15 seconds vs 10 minutes respectively — increases the speed with which WBTC can be transacted, compared to actual bitcoins.
The Benefits of Wrapped bitcoin.
Wrapped bitcoin has brought more liquidity to decentralized exchanges (DEXs) and other DeFi applications operating on the Ethereum blockchain. As the number of merchants, exchanges, and wallets accepting wBTC grows, so does the amount of bitcoin being converted into wBTC Ethereum tokens. According to DeFi analytics hub DeFi Pulse, the total value of the wBTC market grew from $665 million to $848 million between August 1 and September 20, 2020.
Wrapping bitcoin for Ethereum interoperability has shattered both technical and conceptual boundaries. Prior to innovations like wBTC, the value and user base of Bitcoin were restricted from engaging in decentralized finance. Further, years of market speculation between BTC and ETH contributed to what are known as ‘chain-maximalist’ perspectives that tend to favor one blockchain at the expense of others. Tech like wBTC offers a way for Bitcoin as a technology and its holders to gain exposure to the Ethereum DeFi ecosystem and even earn interest on holdings — all without diminishing their overall BTC holdings. This has created a shared incentive between Ethereum and Bitcoin, thereby rolling back maximalist notions and increasing network effects, while reducing the hassle and perceived risk of trading tokens out of the Bitcoin network.
Another benefit of wBTC is speed. Wrapped bitcoin transactions clear more quickly than bitcoin transactions because wBTC is settled on the Ethereum blockchain, which adds a new block every 15 seconds, while BTC is settled on the Bitcoin blockchain, which adds a new block every ten minutes. Because of this functionality, wBTC can move between Ethereum wallets, exchanges, and services much more rapidly than BTC.
How Wrapped bitcoin Works ?
Wrapped bitcoin is created when you request Ethereum-based ERC-20 tokens from a merchant in exchange for your bitcoin. Upon receipt of the request, the merchant then carries out a Know Your Customer (KYC) and Anti-Money Laundering (AML) process to verify your identity and initiates a transaction with a custodian (BitGo is currently the only custodian for wBTC). The custodian then mints a certain number of wBTC and sends them to the merchant’s Ethereum address.
Next, you and the merchant either perform a trade through a centralized exchange (CEX) or a peer-to-peer transaction (known as an atomic swap) on a decentralized exchange, leaving the merchant with bitcoin and you with your wBTC. Once the transaction is finalized, you will then have the option to utilize your wBTC tokens on various DeFi platforms like Compound and MakerDAO. When you want to convert your wBTC back to bitcoin, you make a request again to the merchant and the wBTC is traded back. The merchant then destroys the wBTC in what is known as a burn transaction.
Who Created Wrapped Bitcoin?
The initial developers of the wrapped bitcoin protocol were BitGo Inc, Kyber Network, and Ren (formerly Republic Protocol). This consortium released the wBTC whitepaper on January 24, 2019, and on January 31, 2019 the token was launched with eight merchants facilitating bitcoin-to-wBTC conversions. Additional merchants followed thereafter.
The wBTC protocol is controlled by a decentralized autonomous organization (DAO). As of this writing, the wBTC DAO has 17 members representing stakeholders from around the DeFi ecosystem. Wrapped bitcoin DAO members each hold a key to the multi-signature wallet that secures the system. With these keys, members can vote to add or remove members and to make changes to the smart contracts on which the system is built. The public can view both the minting and burning of wBTC on the Ethereum and Bitcoin blockchains. As an additional safeguard, BitGo audits the system regularly and initiates a proof of reserve transaction on the Bitcoin blockchain, which allows individuals to verify that bitcoin reserves are valid. The development and use of wBTC is a sign that interoperability between Bitcoin and Ethereum facilitates DeFi’s growth and has the potential to add value for users in the rapidly maturing crypto ecosystem.
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