Introduction of wrapped tokens:
Every cryptocurrency has a separate protocol, features, and functions. Hence, it will not be possible if you try to trade Bitcoin on the Ethereum blockchain due to the immense differences creating a blockage in the development of interoperable exchanges. To put it in simple words, it becomes impossible to transfer data from one crypto to another.
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Wrapped tokens like Wrapped Bitcoin (WBTC) exhibit the original cryptocurrency on another blockchain. The value of a wrapped token is similar to the native cryptocurrency. However, the differentiating factor is that wrapped tokens can be used on a non-native blockchain and later can be redeemed if the owner wants via the process of burning the wrapped tokens.
Wrapped tokens are a way through which crypto lending, staking, yield farming, and interoperability on other blockchains are possible without the hassle of protocols.
What is Wrapped Bitcoin (WBTC)?
After the launch of Ethereum, the blockchain created a robust ecosystem of decentralised finance (Defi) technology. Wrapped Bitcoin (WBTC) is an ERC-20 token integrated into the Ethereum blockchain and backed by proof-of-reserve. One wrapped Bitcoin (WBTC) is equal to one Bitcoin, which simply means that the reserve works on a 1:1 ratio. Wrapped Bitcoin represents actual Bitcoin on the Ethereum network, while the equivalent amount of Bitcoins are stored in reserve.
In the year 2019, wrapped Bit coin was launched by a group of major players in the decentralised finance (Defi) field, including BitGo, Ren, Dharma, MakerDAO, Compound, and Set Protocol. The aim of bringing the concept of wrapped Bit coin was to bring more liquidity to the Ethereum network.
It completely depends on the willingness of the investor to convert the Bitcoin to wrapped Bit coin (WBTC) and take advantage of the Ethereum blockchain wallet, decentralised applications (Dapps), and smart contracts. Moreover, investors can anytime convert wrapped BTC (WBTC) back to the original Bit coin by interacting with the merchant and sending them a burn signal. The merchant will then take the actual Bit coin out of the reserve and burn the wrapped Bit coin.
Three entities are necessary to make the process of wrapped Bitcoin work in an efficient manner:
- Custodians: The group of individuals who stores the digital asset or Bitcoin in this scenario. WBTC is a project operated and controlled by Decentralised Autonomous organisations (DAO).
- Merchants: The group of people who initiates the process of minting or burning wrapped Bitcoin by verifying the identity of the investor. However, the actual burning of WBTC is done by the custodians. You can swap BTC for WBTC on the Coin list, Atomic wallet, and Poloneix.
- Decentralised Autonomous Organisation (DAO): It is a group of 30 members who decide the changes in smart contracts and protocols. Moreover, they decide who will be the merchant and custodian.
Working of Wrapped Bitcoin (WBTC):
Users or investors willing to convert BTC for WBTC must interact with the merchants to initiate the swap transaction. Once an investor submits a proposal to mint WBTC, the merchant will send an authorisation request to the custodian to issue a similar amount of WBTC. The aftermath of this process is swapping WBTC for BTC, wherein the custodian will store the Bitcoin in reserve.
Similarly, if the users want to swap WBTC for BTC, they can put forth a request to the merchant. The merchant will initiate the burn process by conducting full verification of the user’s identity. Then, the BTC is taken out of the reserve, and the custodian will burn the WBTC on the Ethereum Blockchain.
Advantages of Wrapped Bitcoin (WBTC):
Liquidity: We all know that Bitcoin is the largest cryptocurrency, and it is a very liquid asset compared to the Ethereum blockchain. Moreover, the decentralised finance (Defi) ecosystem on Ethereum and some of the major Dapps require the use of collateral. For example, MakerDAO and Compound require the users to collateralise crypto-assets to borrow.
However, the liquidity of the Ethereum blockchain is less than Bitcoin. So, with the help of wrapped Bitcoin, the liquidity of Bitcoin can be used on the Ethereum network to power decentralised applications and finance for borrowing and lending.
Enhance security: Unlike Bitcoin, which relies on algorithms and pure codes, wrapped Bitcoin (WBTC) enhances security and trustworthiness between users and the Decentralised Autonomous Organization (DAO). Moreover, it won’t create the scenario of trustlessness.
More functionalities: Wrapped Bitcoin opens doors for new and diverse functionalities and frameworks. For instance, WBTC can leverage the full potential of decentralised finance (Defi) and smart contracts. Smart contracts are self-executing pre-programmed contracts. Furthermore, with the increased use of WBTC, lending and staking have become an easy process for investors. Thus, bridging the gap between centralised finance and decentralised finance.
Final Verdict:
The future is about how the developers will leverage the benefits of wrapped tokens or wrapped Bitcoin. With the growth of decentralised finance, the use cases and applications of WBTC will grow more, bringing more scalability with cost-efficient transactions.
