Unless you’re living in the dark ages you’ve probably heard of the “peer-to-peer electronic cash system” otherwise known as Bitcoin.
Even if you haven’t heard of Bitcoin yet (put your hand down Brian!) then be aware that Bitcoin is revolutionizing the world of Finance. But now we’re about to change what you know about Bitcoin.
The world of DeFi has now dropped a hip new single down on us known as, Wrapped Bitcoin (WBTC). While WBTC may not be an actual rap album, it brings with it the ability for loyal BTC holders to get involved in DeFi. Chiggy-chiggy-ow!
In this article we will cover:
What exactly is Wrapped Bitcoin?
Wrapped Bitcoin is a type of “wrapped token” that has the same value as a Bitcoin but functions as an ERC20 token.
Bitcoin may be the so-called “king” of crypto, but the Ethereum (ETH) blockchain has brought its fair share of innovations as well. DeFi is in fact one of the great gifts the ETH blockchain has given us.
DeFi has been reimagining the world of finance as a completely decentralized system. Since the circulated tokens on Ethereum based DeFi platforms are restricted to ERC20 tokens and stablecoins, BTC owners have been left out in the cold.
“But we want to get involved in DeFi too!” – BTC Holders
With WBTC, the worlds of ETH and Bitcoin join each other, twist together, and voila! We have the perfect combo of the value and liquidity of Bitcoin accessible by the DeFi infrastructure of the ETH blockchain.
Ultimately, WBTC has brought together Bitcoin and Ethereum, two giants of the crypto world. That’s just like Godzilla fusing with Ultraman to form Ultra Godzilla!
The value of WBTC is equal to one Bitcoin, and one Bitcoin equals one WBTC, allowing an equal exchange between them.
While their value is the same, WBTC behaves a lot like an ETH token, allowing for speedier block transaction times and acceptance on several decentralized platforms.
What are the benefits of using WBTC?
WBTC allows Bitcoin loyalists to finally be able to dabble in the DeFi world. What does this mean exactly?
Well since WBTC is basically an ERC20 token with the value of BTC, that means it can be used to provide liquidity to decentralized exchanges (DEXs). This opens opportunities for BTC holders to earn interest on their WBTC through liquidity pools and yield farming.
The world of DeFi is still developing and is fairly new. Liquidity problems are commonly found on decentralized exchanges, so these platforms incentivize liquidity providers (LPs) to help them.
BTC holders have an opportunity to earn a passive income by equally exchanging their BTC for WBTC and lending their WBTC to a liquidity pool to become an LP.
If you’re a BTC holder you’re probably also familiar with the rather long wait times (by crypto standards) for a transaction to complete. With WBTC, you’ll have all the benefits of quick transaction times provided by the ETH blockchain.
The ETH world also brings more benefits to WBTC holders allowing them to use WBTC tokens on ETH wallets, dApps, and smart contracts.
The most beautiful thing about WBTC is that it allows BTC holders to join in on the DeFi fun without having to exchange their BTC for ETH. The equal exchange rate between BTC/WBTC allows for a much easier exchange.
What is the difference between WBTC and BTC?
While BTC and WBTC have the same value, the composition of the cryptocurrencies and use cases are different.
First off, BTC is NOT an ERC20 token, so you cannot transfer it to an ETH wallet address, use it in swaps, provide liquidity with it, or otherwise participate in DeFi. Basically, both are tokens from two different worlds.
In the DeFi dimension, DEXs require collateral to be put down in order for traders to trade on it. Platforms like MakerDAO and Compound are two examples of such DEXs. Considering the volume of ETH is less than Bitcoin, these collateral requirements restrict the growth of the protocols on these platforms.
WBTC provides an entrance for the higher-volume Bitcoin to provide liquidity for the protocols on DEXs. These wrapped tokens lower the barrier to entry for BTC holders who wish to provide liquidity to these protocols and earn passive revenue.
Where can you get WBTC?
WBTC is currently traded on a variety of exchanges both centralized and decentralized. WBTC can be obtained on these exchanges in multiple ways. Buying with fiat, exchanging one crypto for WBTC, and conducting DEX swaps for it are a few methods.
What can you do with WBTC?
WBTC allows BTC holders to enjoy the benefits of DeFi without having to exchange their precious BTC for ETH. WBTC is capable of earning interest for their holders on Compound and also can be margin traded on the Fulcrum dApp.
BTC holders are no longer isolated from DeFi investments with WBTC in their corner.
How is Wrapped Bitcoin (WBTC) created?
Let’s take a trip to the magical WBTC factory to see how they are created.
Wrapped Bitcoin was originally created in a partnership between three wizards known as Kyber, Republic Protocol (Ren), and BitGo. The way they decided to create these wrapped tokens is similar to how stablecoins such as USDT and USDC were launched.
BitGo acts as an institution that holds Bitcoins that support WBTC. Kyber will send Bitcoins to BitGo where magical spells will be cast on them to turn them into WBTC. Then the WBTC will be sent from BitGo to Kyber’s account.
The WBTC tokens are then welcomed into the new world and sent off for merry traders to begin buying them.
Drawbacks of Wrapped BTC
While Wrapped BTC does sound super awesome and all, it isn’t short of a few drawbacks. The first is a very common issue most Ethereum users run into….GAS FEES!
You can run but you can never hide from gas fees when using the Ethereum blockchain, and WBTC is as immune to gas fees as Superman is to a bullet while wearing a necklace of kryptonite.
The other drawback is that WBTC and any other wrapped token for that matter rely upon a custodian to hold the funds required to create it.
In the previous example, BitGo is the source of the Bitcoin funds needed by Kyber to create the WBTC tokens. This puts reliance on a central power for these funds and without one, token production may cease.
Other types of wrapped tokens
WBTC isn’t the only wrapped token in existence, other cryptocurrencies have jumped on and created their own as well. Some other wrapped crypto tokens you can find include:
Wrapped ETH – WETH
Wrapped ZCash – WZEC
Wrapped BNB – WBNB
Wrapped Celo – WCELO
Wrapped Monero – WXMR
The wrap up
There is no pun intended here
- WBTC is a “wrapped token” that has the mirror value of Bitcoin but behaves like an ERC20 token.
- Bitcoin holders can conduct equivalent exchanges for WBTC using their BTC.
- WBTC opens the world of DeFi and ETH dApps up for BTC holders to participate in (liquidity pools, yield farming, ETH wallets, dApp platforms)
- Wrapped crypto tokens like WBTC all rely on a central custodian to provide the needed funds for the tokens to be created
How do you feel about WBTC and wrapped tokens now? Are you a BTC holder that is excited to get some for your DeFi needs?
The UpBots platform can help you get started with our DEX swaps that support the WBTC token! Those of you who are holding BTC can use our platform to easily exchange your BTC and get some WBTC right now on our free demo platform.
And now a meme from our community…