What Is Wrapped Bitcoin?

Last Updated on January 9, 2023 by

what is wrapped bitcoin What is its role in the cryptocurrency community?

There has recently been a lot of buzz around wrapped tokens and their impact on the cryptocurrency market. Wrapped Bitcoin(WBTC) in particular continues to prove why wrapped tokens could be the future of the industry.

So what is wrapped Bitcoin exactly?

Initially, WBTC was launched to increase the usability and functionality of Bitcoin, but currently, traditional bitcoin holders are using them to access sophisticated financial tools. Wrapped bitcoin has been among the top ten most traded digital assets in the world.

There are many ways how you can get into cryptocurrency trading and Wrapped Bitcoin is a rather new concept.

If you were wondering what they really are then you will enjoy reading our ultimate guide to Wrapped Bitcoin in Australia.

What Is Wrapped Bitcoin?

The concept of wrapped bitcoin was first revealed in late 2018, but it was officially launched at the end of January 2019. This makes WBTC relatively new in the cryptocurrency industry, but it could help increase liquidity on DeFi platforms.

Wrapped bitcoin is not actual bitcoin but is an ERC20 token that effectively connects BTC to the Ethereum blockchain. In the past, crypto traders that only owned bitcoin couldn’t access DeFi dApps that were being launched on the Ethereum blockchain.

WBTC was launched as a financial instrument to act as a bridge between the Ethereum network and traders, with the aim of combining Ethereum’s programmability with the price value of bitcoin.

How Does Wrapped Bitcoin Work?

WBTC brings bitcoin to the Ethereum network, thereby delivering liquidity to DeFi protocols. It is backed 1:1 by bitcoin, which means that you can use a trusted partner to convert 1WBTC to 1 bitcoin and vice-versa.

It’s, however, important to note that even though the token’s minting mechanism is similar to that of bitcoin when you hold WBTC, you’re not actually holding BTC coins.

Through the tokenization of BTC into WBTC, some of the bitcoins features are lost, including;

  • The ability to use the Lightning network to make instant payments.
  • The Bitcoin security network.
  • Some privacy aspects of BTC.

WBTC, however, comes with new possibilities, such as the ability to participate in the decentralized finance market that’s rapidly growing. This is also one of the major reasons why DeFi users have been receptive to this tokenized bitcoin.

Currently, the market capitalization of WBTC is over $6.7 billion, and this can be attributed to Bitcoin’s success and the booming DeFi market.

How to Mint WBTC and Receive the Tokens

You have to use trusted merchants such as WBTC.cafe and AirSwap to tokenize your BTC into wrapped bitcoin. This also ensures that your bitcoin is held by custodians. Here’s a step-by-step guide to minting WBTC.

  1. Choose a merchant of your choice and begin the transaction.
  2. The merchant will start a transaction to give the custodians the go-ahead to mint wrapped bitcoin into their Ethereum address.
  3. The merchant sends your bitcoin to the custodian, who then has to wait for 6 confirmations of the BTC transaction.
  4. The custodian initiates the transaction to mint new wrapped bitcoin tokens on the Ethereum network.
  5. You request the merchant to send WBTC.
  6. The merchant complies with the regulatory KYC and AML procedures on your data.
  7. You and the merchant use an exchange where they send you WBTC in exchange for your bitcoin or conduct an automatic swap.

It’s also possible for Ethereum users to swap Ethereum-based tokens for WBTC on decentralized exchanges such as Uniswap.

How Can You Utilize WBTC?

There are 4 main applications of WBTC in today’s DeFi market;

  1. To earn interest in decentralized lending platforms: WBTC holders can deposit their tokens on decentralized exchanges as liquidity suppliers so as to earn interest. On some platforms, you can earn interest ranging from 0.02% to 0.09% APY.
  2. For margin trading on decentralized derivatives exchanges: if you’re an experienced trader, you can use WBTC to trade on derivatives exchanges such as Fulcrum and DDEX. You could also trade it on margin crypto exchanges like Bybit or Binance Futures, but it’s recommended that you go for decentralized platforms as they have enhanced fund security.
  3. As collateral for crypto-backed loans: Bitcoin HODLers can use WBTC to take out loans personal or business loans. Some people even use the loan to back their cryptocurrency investment strategies.
  4. To earn liquidity mining revenues: if you’re comfortable taking on high risks, you can earn liquidity mining rewards and fees by depositing your WBTC in liquidity pools.

What Are the Top Benefits of Wrapped Bitcoin?

In addition to allowing bitcoin holders to trade on the Ethereum protocols, other benefits of WBTC include;

  1. High scalability: since WBTC is available on Ethereum’s blockchain as opposed to Bitcoin’s network, transactions are processed swiftly and at low fees. You also have more storage options.
  2. Enhanced liquidity: the Ethereum network is very diverse, and this distribution of funds reduces the liquidity needed for the network to function optimally. This then reduces the speed at which trades can trade their tokens, making decentralized exchanges less effective. WBTC combines the flexibility of Ethereum protocols and the liquidity of Bitcoin, ultimately closing the liquidity loop between DeFi and CeFi products.
  3. Staking WBTC: one of the most popular DeFi functionalities is staking, which is currently available in multiple versions. Most staking protocols require you to lock your digital assets with a smart contract and then earn rewards once the agreed period lapses. WBTC allows you to take advantage of this feature through platforms such as CoinList.
  4. Provides users with new functionalities: wrapped bitcoin has more functionalities than regular bitcoin, including leveraging the smart contracts on Ethereum Network.

What Are the Different Types of WBTC Models?

The 3 most popular WBTC models are;

  1. Centralized: for this strategy, you have to use a firm like BitGo to lock your WBTC in a smart contract and maintain its value. The centralized firm then issues an ERC-20 token for your wrapped bitcoin. The major disadvantage of this strategy is that you lose control of your digital assets.
  2. Trustless: this strategy is more advanced and is done on decentralized systems. Even though your WBTC is locked in a smart contract, the platform can’t make any adjustments to your WBTC without your consent.
  3. Synthetic assets: on this model, you receive synthetic assets whose value is equal to your locked assets. Instead of your tokens being backed up by bitcoin, the platform you use backs them up with their native cryptocurrency.

Even though all these models are different from each other, their results are similar; the ability to trade bitcoin on Ethereum protocols.

Who Created Wrapped Bitcoin?

Kyber Network, BitGo Inc and Ren were WBTC’s initial developers. They released a whitepaper in January 2019 and launched the token as the month came to an end. At first, there were only 8 merchants who could facilitate BTC to WBTC transactions, but many more followed.

WBTC is controlled by DAO (a decentralized autonomous organization) that has 17 members who represent the DeFi ecosystem’s stakeholders. They each hold a private key to the wallet that secures the WBTC system and can vote to make changes to smart contracts, add or remove members.

To keep the system secure, BitGo constantly conducts audits.

Where Can I Buy Wrapped Bitcoin in Australia?

There are several Australian crypto exchanges where you can buy WBTC, including Binance and Swyftx.

This token is reasonably safe, and given its overall usefulness and functionality, it’s likely to remain among the top traded digital assets in the world.

I hope we have answered the question “What is Wrapped Bition” in this article!

Disclaimer: This article is intended to be used and must be used for informational purposes only. It's important to understand that digital assets are risky, you should always do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice.