Wrapped Bitcoin (WBTC) is an ERC-20 token that is fully backed by Bitcoin. As an ERC-20 standard token, it operates on the Ethereum blockchain. Since each WBTC is directly supported by an equivalent amount of Bitcoin, its value always matches that of Bitcoin. Therefore, 1 WBTC equals 1 BTC at all times.
The primary purpose of Wrapped Bitcoin is to bridge the gap between centralized and decentralized trading environments. Before WBTC, most centralized exchanges primarily used Bitcoin for trading, whereas many decentralized exchanges (DEXs) only supported Ether and other ERC-20 tokens. WBTC changed this by allowing Bitcoin holders to participate in Ethereum-based decentralized finance (DeFi) seamlessly.
The History of Wrapped Bitcoin
Wrapped Bitcoin was created through a collaboration between BitGO Inc., Kyber Network, and Ren (previously Republic Protocol). BitGO is a digital asset trust company specializing in security, Kyber Network is a decentralized liquidity protocol, and Ren is a cross-chain interoperability protocol.
The project began with the release of its whitepaper on January 24, 2019, which detailed its goals and technical mechanisms. WBTC officially launched on January 31, 2019. Initially, only eight merchants were authorized to convert Bitcoin to WBTC and vice versa. Over time, as adoption grew, so did the number of authorized merchants.
How Wrapped Bitcoin Works
WBTC relies on a structured process involving multiple actors to ensure transparency and a consistent 1:1 peg with Bitcoin.
Key Participants
- Custodian: BitGO holds the underlying Bitcoin reserves, issues new WBTC tokens, and ensures the 1:1 backing. They are responsible for minting and burning WBTC.
- Merchants: These are authorized entities that distribute WBTC to users. They handle customer interactions, including identity verification.
- Users: Individuals or entities that hold, trade, or use WBTC within the Ethereum ecosystem.
- DAO Members: A decentralized autonomous organization of 17 members governs the WBTC protocol. They manage a multi-signature wallet and participate in key decision-making.
Minting WBTC
Minting is the process of creating new WBTC tokens. Here’s how it works:
- A user requests WBTC from a merchant.
- The merchant performs Know Your Customer (KYC) and Anti-Money Laundering (AML) checks.
- After approval, the user sends Bitcoin to the merchant.
- The merchant requests that BitGO mint an equivalent amount of WBTC.
- After six Bitcoin block confirmations, BitGO issues the WBTC to the merchant, who forwards it to the user.
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Burning WBTC
Burning refers to redeeming WBTC for Bitcoin. The steps are:
- A user requests to exchange WBTC for Bitcoin.
- The merchant verifies the user’s identity via KYC/AML.
- The merchant initiates a burn request with BitGO.
- After 25 block confirmations on Ethereum, BitGO sends Bitcoin to the merchant.
- The merchant forwards the Bitcoin to the user.
Uses of WBTC
Wrapped Bitcoin unlocks numerous opportunities in the DeFi space, including:
- Yield farming on DeFi platforms.
- Earning interest through decentralized lending protocols.
- Margin trading on both centralized and decentralized exchanges.
- Providing liquidity in automated market maker (AMM) pools.
Risks and Benefits of WBTC
Advantages
- Interoperability: WBTC enables Bitcoin holders to use their assets on Ethereum-based applications.
- Earning Potential: Users can engage in DeFi activities like staking and lending.
- Price Stability: WBTC mirrors Bitcoin’s price, reducing exposure to unrelated market volatilities.
Disadvantages
- Centralization: BitGO acts as a centralized custodian, which contradicts the decentralized ethos of blockchain.
- Regulatory Risks: WBTC is subject to regulatory scrutiny due to its reliance on KYC/AML processes.
- Supply Control: The influence of large holders or partners could impact the token’s stability.
How to Acquire WBTC
To get started with WBTC, follow these steps:
- Choose a reputable cryptocurrency exchange that supports WBTC.
- Complete account registration and verification processes.
- Deposit funds or Bitcoin into your account.
- Purchase WBTC through the spot or market trade options.
- Withdraw your WBTC to an ERC-20 compatible wallet for DeFi use.
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Frequently Asked Questions
What is the difference between BTC and WBTC?
BTC is the native Bitcoin cryptocurrency, while WBTC is an ERC-20 token on Ethereum backed 1:1 by BTC. WBTC can be used in Ethereum dApps, whereas BTC cannot.
Is WBTC safe to use?
WBTC is generally considered safe due to its full Bitcoin backing and audited reserves. However, users must trust BitGO as the custodian.
Can I redeem WBTC for Bitcoin?
Yes, through authorized merchants, you can burn WBTC and receive Bitcoin in return after completing verification steps.
What is the supply of WBTC?
WBTC has a maximum supply of 21 million, mirroring Bitcoin, but only a fraction is currently in circulation.
Does WBTC require gas fees?
Since WBTC operates on Ethereum, all transactions incur gas fees paid in ETH.
Are there alternatives to WBTC?
Yes, other Bitcoin-backed tokens like renBTC and HBTC serve similar purposes but may differ in custody and decentralization.
Wrapped Bitcoin has become a cornerstone of the DeFi ecosystem, providing Bitcoin holders with access to Ethereum’s vibrant financial landscape. While it offers significant utility, users should remain aware of its centralized elements and regulatory considerations.