Bitcoin (BTC) is the biggest and most respected cryptocurrency. Since launching in 2009, Bitcoin has not only grown its status as a financial disruptor, but it has introduced a whole new asset class.
And with the rise of Ethereum and DeFi, we have seen many more use cases for crypto assets, such as ERC20 token WBTC.
What is WBTC?
WBTC (Wrapped Bitcoin) is an ERC20 token that represents Bitcoin on the Ethereum blockchain.
A bit like a Bitcoin-stablecoin: 1 WBTC is worth 1 BTC exactly.
Launched in January 2019, WBTC was a collaborative project between BitGo, Ren, Dharma, Kyber, Compound, MakerDAO, and Set Protocol, whose aim was to bring more liquidity to the Ethereum eco-system.
WBTC is now controlled by a Decentralized Autonomous Organization (DAO), known as the WBTC DAO.
BTC can be converted into WBTC, which lives on the Ethereum network.
Anyone wanting to redeem their BTC, simply burns the WBTC and their BTC is placed back in their BTC address.
WBTC transactions are faster and cheaper than Bitcoin transactions, and the key advantage of WBTC is its integration with Ethereum wallets, dApps and DeFi.
At the time of writing there are 900 WBTC in circulation.
What’s The Idea Behind WBTC?
WBTC aims to bring more liquidity into the Ethereum DeFi eco-system.
DeFi dApps require users to lock up crypto assets to borrow other crypto assets, and because the value of Ethereum and its eco-system is significantly less than Bitcoin, this limits the protocols’ growth potential.
By bringing Bitcoin over, developers believe it will give a a boost in liquidity.
WBTC will also allow Bitcoin hodlers who are interested in Ethereum products, to keep hodling and use it as a stake towards getting Ethereum DeFi loans.
How Are WBTC Created?
WBTC DAO governing members decide on major upgrades to the protocol, and decide on the rights of becoming the Merchants and Custodians that manage the system.
Users who want to convert their BTC to WBTC first have to interact with Merchants, who then initiate the process of minting WBTC. It’s also the same way WBTC is burned when a user is wanting to redeem their BTC.
The Merchants will verify the identity of a user, and once this has been verified, they will pass on the information to Custodians, who hold onto BTC, and perform the wrapping of BTC and minting of new WBTC.
When WBTC is burned the Custodians carry out the same process but in reverse, and once completed the BTC is returned to the user.
It’s Not Bitcoin and Doesn’t Have The Security of Bitcoin
Obviously Bitcoin and Ethereum are completely different blockchains with completely different networks, so WBTC doesn’t enjoy the same level of security as Bitcoin.
There’s a degree of trust needed in the nascent WBTC network, too. Unlike BTC which relies on code, WBTC still relies on people and organizations to manage the network, for now.
However, to make things more transparent, WBTC receives regular audits and all transactions on both the Bitcoin and Ethereum networks are published on the WBTC network.
As well as this, anybody can verify how much BTC has been wrapped in any single transaction. And burning WBTC, when a user wants to redeem BTC is also auditable.
WBTC – An Eco-System For The Future
WBTC isn’t just a temporary fix until the Bitcoin and Ethereum networks are interoperable. It offers a programmable economy built into the fastest growing industry within the decentralized space.
WBTC is a permissionless ERC20 token that can speak with all DeFi platforms, and opens up many possibilities for WBTC-ETH platforms.
Like all new eco-systems it will take time to gain trust and traction, but there are 900 BTC already wrapped in the WBTC eco-system, and as DeFi keeps growing we should expect WBTC to do the same.
Author: Pablo Clarke