Crypto
Bybit Learn
Bybit Learn
Intermediate
15 июля 2022 г.

Wrapped Bitcoin (WBTC): Why It Matters

While decentralized finance (DeFi) may promise endless opportunities, some issues could stop it from achieving its aim of rivaling the current centralized economic system. One of these is the incompatibility of the premier cryptocurrency, Bitcoin, with major decentralized applications that make up the decentralized ecosystem.

This is where Wrapped Bitcoin (WBTC) comes in. The basic idea is to develop a digital currency that represents Bitcoin on the Ethereum blockchain. Read on to learn how it works.

What Is Wrapped Bitcoin (WBTC)?

Wrapped Bitcoin (WBTC) is an ERC-20 token with its value pegged to Bitcoin. This means that it’s a representation of Bitcoin that can operate on the Ethereum blockchain. It’s one of the most prominent wrapped tokens available in the DeFi ecosystem, due to Bitcoin’s reliability.

Assets are “wrapped” in order to be used on other blockchain networks where they can’t function. Just as astronauts need to be wrapped up in thick suits to be able to survive outside their natural habitat, Earth, one has to wrap BTC to make Bitcoin work on other blockchains.

Wrapped tokens are essential because of the features and applications that different blockchains offer. For example, unlike Bitcoin, Ethereum’s blockchain contains smart contracts which allow decentralized apps (DApps) to be launched on it. Yet, native tokens can only be used within native blockchains. Wrapping tokens serves to facilitate the use of crypto assets in non-native blockchains.

Wrapped Bitcoin (WBTC) vs. Bitcoin (BTC)

The relationship between Wrapped Bitcoin and Bitcoin is similar to that between Tether (USDT) and the U.S. Dollar: The value of USDT is tied to that of the U.S. Dollar.

So why do we need USDT if it has the same value as the U.S. dollar?

Although they have the same value, the U.S. Dollar is a fiat currency issued by a sovereign body, the United States government, through the Treasury Department — which means that you can’t use it for cryptocurrency transactions. Therefore, the crypto version of the U.S. fiat, the USDT stablecoin, is introduced, which can work on blockchain networks.

The same is true for Wrapped Bitcoin and the “normal” Bitcoin that everyone knows — except both are used for crypto transactions. However, the importance of Wrapped Bitcoin lies in the cross-chain functionality it offers Bitcoin holders.

For instance, if any BTC holders want to deposit their bitcoins in a DeFi platform (for instance, Aave) to earn interest, they need to use Wrapped BTC because AAVE tokens are used only on the Ethereum network, and Wrapped BTC are ERC20 tokens. In the way, the wrapped tokens can be used on Ethereum.

How Does Wrapped Bitcoin Work?

There are two ways to obtain WBTC tokens. You can either mint them, or buy them from a decentralized or centralized exchange (which generally means a higher fee).

The process of minting a Wrapped Bitcoin involves two main transactions — minting and burning.

To mint a WBTC, you have to submit a request and make payment to a WBTC merchant, such as Loopring or DeversiFi. The merchant will then make a transaction with the custodian that mints the token by sending Bitcoin in exchange for WBTC. The custodian locks the Bitcoin in a reserve and holds it in custody.

To redeem your bitcoins, you’ll need to pay another small fee to the merchant, which will then proceed to initiate a burn transaction with the custodian. The custodian will release the Bitcoin and burn the WBTC.

The transaction is tracked and verified on the Ethereum blockchain, and can be viewed publicly through a block explorer such as Etherscan.

The problem created by the excess supply of Wrapped Bitcoin is solved through the process explained above. With the maximum supply of Bitcoins capped at 21 million coins, the total supply of wrapped cryptocurrencies possible is also capped at that amount — because WBTC tokens can only be minted when the ownership of the corresponding Bitcoin has been verified. So each token is tied to a respective Bitcoin.

This procedure follows the lending process of institutionalized banks, in which users who need loans have to temporarily grant ownership of their assets of equal or greater value to a bank. When the loan is repaid, the ownership of the asset is restored. But in this case, the value of the two assets is tied, so any depreciation or appreciation in value reflects on both assets.

WBTC Tokenomics

Wrapped Bitcoin price chart from June 15 to July 15, 2022

Source: CoinMarketCap

Note: Figures below are accurate at the time of writing and approximated up to two decimal places.

Max Supply — Not Available

Circulating Supply 0.24 million WBTC

Market Value — $20,884.47

Market Cap$4.99 billion

24-Hour Trading Volume — $258.80 million

Pros

Faster Transaction Speed

Wrapped Bitcoins don’t run on the Bitcoin network. Therefore, their block speed — the network speed — is based on the Ethereum blockchain, and not on that of Bitcoin. Ethereum takes considerably less time to validate blocks to be added to the blockchain, so transactions on the network are faster.

In this way, WBTC helps its holders to carry out their transactions faster than those using real Bitcoin.

Lower Fees

Transaction fees with Ethereum are lower than those of Bitcoin in order to encourage the network’s use by developers. WBTC holders can thus carry out transactions at cheaper rates than those who hold BTC.

For example, if a user intends to make multiple funds transfers, they would prefer to use WBTC because of the fees they would pay per transaction. The fee discrepancy is due to the congestion level on Bitcoin. Transactions on the Bitcoin network get clogged, leading to higher charges for the blocks to be cleared, while Ethereum has a faster clearance rate.

Interoperability

WBTC offers the chance to move one’s crypto holdings between blockchains easily. The interoperability problem has been a formidable recurring issue for crypto users, especially those in the DeFi space.

However, wrapped cryptocurrencies, including WBTC, are viable solutions to this problem via their interoperability. This feature means users don’t have to sell parts of their Bitcoin holdings to access DeFi services on Ethereum. At any time, when they wish, they can get back their coins, even after “changing” them into Ethereum tokens.

Cons

Safety Concerns

As the minting process for wrapped cryptocurrency is similar to that of centralized bank lending, users have to trust that custodians won’t run away with their bitcoins. This defeats the purpose of a decentralized system, which is the raison d’être behind crypto.

Recently, emerging blockchain technology has helped overcome this security concern. BadgerDAO, a decentralized autonomous organization (DAO) dedicated to simplifying the use of Bitcoin, aims to resolve this issue with its Badger Bridge, which allows cross-chain bridging of assets to seamlessly swap BTC for WBTC. Its wrapping process is fully decentralized, just like that of Wrapped Ether (WETH), which can be minted through smart contracts. The Threshold Network presents another form of wrapped BTC with its tBTC that not only bridges BTC to Ethereum, but other blockchains such as Celo, in a decentralized manner.

Is Wrapped Bitcoin (WBTC) a Good Investment?

Wrapped Bitcoin’s benefits of faster transaction speed, lower cost, and most important, cross-chain operability are sure to drive growth in DeFi, as users are able to make payments and access financial services and general utilities easier, faster and cheaper. Using WBTC is an impressive way to make DeFi as straightforward as centralized financial services without sacrificing Bitcoin’s permissionless nature.

Even if another innovation turns out to be a better solution to interchain transactions, wrapped cryptocurrencies effectively solve the interoperability conundrum and will be prominent for a long time. Which wrapped token looks more promising than Wrapped Bitcoin, a derivative of the largest cryptocurrency by market cap?

Buying WBTC

Step 1: Create a verified Bybit trading account (for new users)

Step 2: Log in and purchase USDT, either through Bybit Express, P2P trading or credit/debit card

Step 3: Visit the spot market section and search for the WBTC/USDT pair

Step 4: Input the amount of WBTC tokens you wish to buy

Step 5: Click Buy using a limit order

Step 6: Confirm the transaction and wait for your WBTC tokens to be credited to your account

WBTC/USDT spot trading on Bybit

Source: WBTC/USDT | Bybit

Closing Thoughts

The crypto world keeps marching toward better efficiency, flawlessly secure transactions, easily accessible services and simplicity that will enable it to leave the fringes of the economy and dominate the world economic stage.

Therefore, innovations are constantly needed to overcome obstacles or challenges that impede its path to mass adoption. Wrapped cryptocurrencies are one of these innovations.

The idea that one can duplicate assets for transactions on other blockchains without leading to their overproduction is a sign that DeFi can, without any doubt, solve the problems many fear might stop it in its tracks.

Truly decentralized finance is here to stay — and what better sign do we have of that, than the representative asset of Bitcoin itself?