Wrapped Bitcoin, often abbreviated as WBTC, is a representation token. But what exactly does that mean?
To understand WBTC, one must first grasp the fundamental nature of Bitcoin (BTC) itself. WBTC was developed to enable Bitcoin holders and their BTC to participate in activities on the Ethereum blockchain. This guide will explore what WBTC is, its purpose, how it's used, and other essential details.
What Is Wrapped Bitcoin (WBTC)?
Wrapped Bitcoin (WBTC) is an Ethereum token that represents Bitcoin on the Ethereum blockchain. It is crucial to emphasize that WBTC is not Bitcoin itself; the two should never be confused.
WBTC is a distinct ERC-20 token specifically designed to track the value of Bitcoin. Its primary purpose is to encourage Bitcoin investors to engage with popular decentralized finance (DeFi) applications built on Ethereum.
Through WBTC partners, a specific amount of Bitcoin can be exchanged for an equivalent amount of Wrapped Bitcoin (WBTC), and vice versa, facilitating a bridge between the two ecosystems.
Understanding the WBTC Token
As mentioned, the WBTC coin is fundamentally a token. It acts as a unifying element, merging Bitcoin with the relatively new and independent world of decentralized finance (DeFi) projects.
This mechanism allows BTC's value as a digital asset to be ported into decentralized financial applications. Consequently, the use of the digital WBTC coin within the digital realm of DeFi platforms has significantly expanded Bitcoin's utility and reach.
The Purpose and Whitepaper of WBTC
Functioning as an Ethereum token, WBTC aims to be a bridge between two distinct worlds. Launched with this core objective, let's examine the key information and goals outlined for this coin.
WBTC Whitepaper and Key Information
- WBTC was originally proposed in January 2019 to add more liquidity to the Ethereum ecosystem.
- It was released to circulate on the Ethereum network.
- WBTC is a token that represents BTC and has a price pegged exactly 1:1 with Bitcoin.
- As an ERC-20 token, WBTC can be transferred much faster than BTC. However, its main advantage is its accessibility within the Ethereum world: it can interact with DApps, wallets, and smart contracts.
- Its most significant disadvantage is the considerable gap that exists between the Bitcoin and Ethereum arenas, a gap that is not anticipated to close soon.
- These two ecosystems are not in direct communication or interaction with each other.
- Therefore, for BTC to be transferred into the Ethereum universe as WBTC, it requires the involvement of a person or institution, not just programming code.
Who Founded Wrapped Bitcoin (WBTC)?
Identifying a single founder for Wrapped Bitcoin (WBTC) is not straightforward. The project is not as personal as Satoshi's Bitcoin; instead, its creation is attributed to a collaboration between three key companies.
1. BitGo
Founded in 2013 by U.S. entrepreneur and computer engineer Mike Belshe, BitGo is a institutional-grade digital asset custody and financial services company.
BitGo is not only a leading developer of WBTC but also serves as the primary custodian, responsible for holding the Bitcoin reserves that back the Wrapped Bitcoin tokens.
2. Ren
The second key player, Ren, is a major company focused on cross-blockchain integration for crypto assets and DeFi platforms through solutions like RenBridge and RenVM.
It was founded in 2017 in Asia by Taiyang Zhang and Loong Wang.
3. Kyber Network
Kyber Network is the third founding entity of WBTC.
It is a blockchain liquidity protocol that provides integration for various crypto coins and tokens into DeFi applications.
Founded in 2017 by Loi Luu, Victor Tran, and Yaron Velner, and headquartered in Singapore, Kyber Network is responsible for minting and burning WBTC to ensure its supply always matches the held BTC reserves.
How Many Wrapped Bitcoin (WBTC) Coins Are There in the Market?
Do not assume that the supply of WBTC is as vast as Bitcoin's supply simply because their values are identical. That would be a significant misconception.
It is not reasonable to expect an equal number of every product that has the same price. The supply metrics of WBTC support this. The total supply, maximum supply, and circulating supply are all equal, with a total of 261,565 WBTC in existence, dynamically changing based on minting and burning activities.
How Does Wrapped Bitcoin (WBTC) Work?
Naturally, there are major differences in how a native coin like BTC and a token like WBTC operate. Therefore, it's not feasible for them to work on the same principles. To answer the question of how WBTC works, we've outlined its operational mechanics:
- The WBTC system is managed by a network of Merchants and Custodians, with overarching governance authority held by the WBTC DAO.
- Crypto investors holding BTC who wish to convert it to WBTC contact a Merchant.
- The Merchant first verifies the investor's identity (KYC/AML) and initiates the transaction process.
- Custodians receive the investor's BTC and proceed to mint the equivalent amount of WBTC on the Ethereum blockchain.
- Once WBTC is minted, the original BTC is held in custody by these Custodians as collateral.
- When an investor wants to convert their WBTC back to BTC, the process reverses, and the investor's BTC is returned to them.
Why Is Wrapped Bitcoin (WBTC) Important?
When the Ethereum ecosystem, one of the most significant developments following the initial Bitcoin wave, introduced WBTC, it created a massive gateway for all Bitcoin investors. WBTC allowed BTC technology to be utilized within Ethereum's expansive domain.
The importance of WBTC stems from this very interoperability and its utility within DeFi markets. To elaborate further:
- WBTC is important because it serves as infrastructure and foundational layer for DeFi applications.
- A prime example of this importance is products on platforms like TokenSets, which offer automated trading strategies between WBTC and ETH.
- Initially, by enabling trading on Ethereum, WBTC allowed Bitcoin to interact with a much broader and more diverse ecosystem.
- It specifically provided the functionality of transacting as if using Bitcoin directly on the Ethereum network.
- It paved the way for Ethereum's growth by enabling Bitcoin's use within its DeFi protocols, increasing transaction volume and utility.
- Particularly as transaction capacity (volume) increased, WBTC became listed on several other alternative exchanges.
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Wrapped Bitcoin (WBTC) Use Cases
The term "Wrapped" can be translated as "packaged" or "bundled." However, its use cases are far removed from culinary contexts. As a financial instrument, WBTC's applications are always confined within the Ethereum network.
- WBTC is used to make Bitcoin compatible with ERC-20 smart contracts, allowing for coordinated work between the two.
- This facilitates the building of smart contracts through the integration of Bitcoin transfers, a process that ensures investors' BTC is not lost or stuck on the wrong chain.
- These processes can seem complex because they typically require running nodes, which demands immense computational power.
- WBTC, through its partners, runs several different nodes, allowing investors to navigate this operational process more easily and without the need for personal, high-powered infrastructure.
How to Store Wrapped Bitcoin (WBTC)
Based on everything outlined above, we can confidently state that buying WBTC tokens is, in essence, economically equivalent to buying BTC. The single most important difference that must not be overlooked is that you can use and spend your WBTC coins utilizing services offered by the Ethereum network.
Wrapped Bitcoin (WBTC) can be bought and sold on numerous major exchanges. It is always recommended to store WBTC in a secure wallet that supports ERC-20 tokens, such as:
- MetaMask
- MyEtherWallet (MEW)
- Ledger Nano (Hardware Wallet)
- Trezor (Hardware Wallet)
- Trust Wallet
Frequently Asked Questions
What is the main difference between BTC and WBTC?
BTC is the native cryptocurrency of the Bitcoin blockchain. WBTC is an ERC-20 token on the Ethereum blockchain that represents Bitcoin and is backed 1:1 by BTC held in reserve. WBTC allows Bitcoin to be used in Ethereum's DeFi ecosystem.
Is Wrapped Bitcoin (WBTC) safe to use?
WBTC operates on a custodial model where reputable companies like BitGo hold the underlying Bitcoin. While this introduces a degree of centralized trust, the project is managed by a DAO, and its reserves are publicly verifiable on the blockchain, which adds transparency and mitigates risk.
Can I directly convert my BTC to WBTC myself?
No, individual users cannot mint or burn WBTC directly. You must go through an authorized Merchant partner who handles the identity verification and initiates the process with a Custodian, who then mints the WBTC for you.
What are the benefits of wrapping my Bitcoin into WBTC?
The primary benefit is gaining access to the vast array of decentralized applications (DApps) on Ethereum, particularly in DeFi. This allows you to lend, borrow, trade, and earn yield on your Bitcoin holdings within the Ethereum ecosystem.
Where can I check the current BTC reserves backing WBTC?
The WBTC project emphasizes transparency. The total amount of Bitcoin held in reserve is publicly auditable and can be viewed on the Bitcoin blockchain. You can also often find this information displayed on the official WBTC website or through blockchain explorers.
Does wrapping and unwrapping WBTC incur fees?
Yes, the process typically involves network transaction fees (gas fees on Ethereum) and may also include service fees charged by the Merchant and Custodian involved in the minting or burning process.