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What Is Wrapped Bitcoin (WBTC)?

Updated on :  

08 min read.

Different blockchains come with varying features, functions and protocols. This makes it difficult for various blockchains to interact with one another. Surely this helps increase the safety and security of blockchains and various blockchain-based assets; it can hamper the process of creating an interoperable system in which data of any digital coin gets transferred to another. 

To resolve the issue of the communication gap and information exchange between Ethereum and Bitcoin exchanges, Wrapped Bitcoin came into play. Interoperability is essential for quick and successful transactions on DeFi networks, and WBTC plays a crucial role here. 

Here’s more on this.

Wrapped Bitcoin (WBTC)

A wrapped Bitcoin is an ERC-20 token with the exact value of the asset it represents. It means that the value of WBTC can be fixed at 1:1 to a Bitcoin or through a smart contract that keeps a stable value. 

A great advantage of this cryptocurrency is that you can use it in the Ethereum ecosystem, wallets, Decentralised apps (DApps) and smart contracts. 

Dealings via WBTC are much quicker. This is because DApps can process token transactions faster as there is no need for computation across different blockchains. In addition, you only have to pay a small gas fee for transacting on this network.

How to wrap Bitcoins?

You must request WBTC tokens from a merchant to get your Bitcoins wrapped. Several reputable merchants get services from Kyber, DeversiFi, Airswap, Hodlnaut, etc. 

Let’s take the example of Hodlnaut for your convenience. You can easily swap your Bitcoins for WBTC in the following ways.

  • Login to your Hodlnaut account 
  • Select Token Swap from the Dashboard
  • Choose a token of your choice (WBTC in this case)
  • Enter your desired amount
  • Review the quote
  • Place your order

There are certain pointers to keep in mind while doing such transactions. They are as follows:

  • You must fill out a KYC form the first time you open an account.
  • The merchant will also conduct an Anti-Money-Laundering (AML) check to verify your identity.
  • You can also swap your Bitcoins for WBTC using centralised exchange (CEX), decentralised exchange (DEX), or atomic swap.
  • You can also easily swap WBTC for Bitcoins in the manner mentioned above.
  • Bitcoin wrapping fees can be as lower as 0.025%. However, you also have to pay gas fees for transactions within the ecosystem.

Advantages of WBTC

  • Liquidity

The main purpose of WBTC was to bring the liquidity of Bitcoins to Ethereum. After 18 months from its inception, over $800 million worth of Bitcoins were converted to WBTC. The interoperability between Bitcoins and Ethereum helps you invest and participate in the Ethereum ecosystem and diligently use your crypto assets.  

  • Use of smart contracts

With WBTC, you can also use smart contracts on the Ethereum system. They are programmatic agreements that execute themselves when certain given conditions are met. Apart from saving time, smart contracts also save a lot of hassles.  

  • Borrowing on DeFi platforms

Decentralised Finance platforms enable you to get loans by keeping cryptocurrencies as collateral. Earlier, you would have needed Ether to get such facilities as most of the DeFi platforms are based on the Ethereum blockchain. However, with the advent of WBTC, you can now use your Bitcoin investments to get loans from these platforms.  

  • Staking

On platforms like CoinList, you can lock up your crypto assets in a smart contract for a set period and get a section of the network’s block rewards. With the help of WBTC, you can invest your Bitcoin assets on such DeFi platforms.   

  • Yield farming

Some platforms allow you to lend your crypto assets to users in other networks. This process is known as yield farming. Compared to staking, it has a shorter lockup period. However, investors can earn huge passive income from this process. 

  • Margin trading

Some traders like to trade on margin, borrowing funds from any brokerage firm for trading. Using WBTC, you can trade Bitcoins on margin using decentralised exchanges. You can also lend out your WBTC for margin trading and earn fees. 

WBTC as an investment

WBTCs allow interoperability like never before. You can have your money invested in Bitcoins and Ether, but by converting the former to WBTC, you will gain additional power to pursue your interests in the Ethereum ecosystem. 

Moreover, WBTC has different wrapping models that you can choose based on your investment strategy. Some of the popular ones are:

  • Synthetic assets

In this model, you lock your Bitcoins in a smart contract and get a synthetic asset in return. Instead of Bitcoins, this system backs up your assets with its native tokens.  

  • Trustless

The Trustless model is a secure and more advanced way to wrap your Bitcoins. It is a decentralised way of changing your Bitcoins to WBTC in which the central custodian responsibilities are transferred to smart contracts. Your investment stays locked in a network contract and cannot be adjusted without your approval.  

  • Centralised

In this case, a firm handles your central custodian responsibilities. They maintain the value of your assets and lock your crypto up in a smart contract. After that, they issue a corresponding ERC-20 (WBTC) token. BitGo is a good example of such a platform. 

WBTC transactions are faster and cost less than Bitcoins transactions. Hence, you do not only get the advantage of different investment options on the Ethereum blockchain, but you also get more transactions and storage options. 

Security of WBTCs

No matter what method you choose to warp your Bitcoin to WBTCs, the final result is a token on the Ethereum system. As this network works on the principles of blockchain technology, your assets remain encrypted and highly secure. 

Furthermore, when it comes to the volatile nature of Bitcoin value, opting for a platform that uses smart contracts to maintain a stable value of your assets will help. 

Moreover, the wrapped Bitcoin protocol is under the authority of a decentralised autonomous organisation (DAO) with 17 stakeholders. So you can be assured that your assets are in safe hands.

WBTC has opened up new doors when it comes to cryptocurrency interoperability. The team behind this innovation is working towards creating more possibilities for investors like you in future.