If you are new to the crypto market, chances are that you are aware of Bitcoin but may have recently noticed another cryptocurrency called Wrapped Bitcoin currently ranking 20th on Coinmarketcap. You may also be wondering what it is and whether it should be in your portfolio. Here are some answers that will help you make sense of it.
By now you are probably aware that the Bitcoin blockchain is slow and relatively inefficient compared to other blockchains. Transactions can also be quite expensive, despite the development of solutions like the lightning network but some developers have been looking into other solutions. One of those solutions is Wrapped Bitcoin which is essentially tokenized Bitcoin. It is an Ethereum-based ERC20 token representing the original Bitcoin.
Interestingly, Wrapped Bitcoin or WBTC trades at the same value as the original Bitcoin. This is because it is backed by Bitcoin in a 1:1 ratio which means that 1 BTC exists in a custodial account for every 1 WBTC in existence. There are currently 189,061 WBTC in the circulating supply.
Because Wrapped Bitcoin is an ERC20 token, it creates an avenue through which Bitcoin can interact with the Ethereum network, which could have significant positive implications. For example, leveraging a faster and cheaper network means transactions will be significantly cheaper, making it possible to use it for regular transactions.
There are four key players necessary for the WBTC ecosystem to function as intended. They include the custodian, the merchants, the DAO, and users. The custodian holds the underlying asset and BitGo is the organization tasked with custodial services for Wrapped Bitcoin. Ren and the Kyber Network provide merchant services for WBTC. Their role is to mint, issue and burn the tokens. The users provide the BTC which is converted to WBTC by the merchants and the Bitcoin is sent to the custodial services once the Wrapped Bitcoin is issued to the user.
When the user wants to get back their BTC, they return the WBTC, which is then burnt. The DAO selects the merchants and custodians for the platform. This approach facilitates a decentralized experience. The method of swapping Bitcoin for Wrapped Bitcoin is akin to the gold standard where fiat money was backed by actual gold in reserves. WBTC’s easier and faster and cheaper transactions provide an easier method of using Bitcoin.
Another major benefit that comes with WBTC is that it makes it easy for BTC holders to participate in the DeFi ecosystem. For example, one can trade directly through Uniswap or the Kyber network. Wrapped Bitcoin holders can use their tokens to earn interest on lending protocols or to provide funding for liquidity pools on platforms such as Uniswap.
The Wrapped Bitcoin approach has been viewed as one of the best solutions for Bitcoin scaling and more importantly, it helps facilitate more liquidity for the cryptocurrency. So far there has been rapid adoption of WBTC by Uniswap and Kyber network and more DEXes will likely jump on board after seeing its advantages. This might provide more demand for Bitcoin in the future, thus contributing to its utility and value.
The ability to use BTC through the Wrapped Bitcoin approach is a great way of providing liquidity to a cryptocurrency that is becoming increasingly more difficult to move around as its value goes up. WBTC is also an important tool that could potentially accelerate the adoption of more DeFi solutions because it blurs the lines limiting the interoperability of Bitcoin with other networks. In a way, WBTC enforces the existence of the digital gold standard through Bitcoin in a user-friendly manner.
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