Wrapped Bitcoin (wBTC): Bridging the Gap Between Bitcoin & Ethereum's Ecosystem
‘Cryptocurrency’ as a term has never been unknown to anyone as it is known for its trusted yet trending investment segments in the modern era. If you are aware of cryptos and their hype, you must be aware of the world’s biggest cryptocurrency which is known as Bitcoin. It came up as a revolutionary launch in 2009. Since then, developers have been more focused on restructuring the web3 world that centres on creating the burgeoning landscape. As every technology and development has its limitations, similarly bitcoin has its long-standing complaints which include its inability, or lack of interoperability to access the world of Decentralised finance and Decentralised applications across networks.
To ensure that Bitcoin works an efficient mechanism, the term ‘wrapped Bitcoin’ came into notice. But what is that? Let's break out. We all know that blockchain and Ethereum both have different functionalities and protocols. Due to that, these chains limit their communication with each other. Having separate protocols might preserve independence but cause hindrances to developing an interoperable system. The reason is that the wrapped tokens such as wrapped bitcoin (WBTC) get launched to address the issue.
| Bitcoin | Wrapped Bitcoin |
|---|---|
| In 2019, Bitcoin came into force and was launched by Satoshi Nakamoto. | The Wrapped Bitcoins work on ERC 20 token standards that represent the presence of Bitcoin on the Ethereum Network. |
| Due to its maximum market capitalization, Bitcoin is known as the world’s first and largest cryptocurrency. | wBTCtoken enables the token holders to participate effectively while offering liquidity on Ethereum’s DeFi networking. |
What is Wrapped Bitcoin (wBTC)?
The Wrapped Bitcoin (wBTC) is a robust yet advanced form of Bitcoin that has a well-defined purpose in the crypto landscape. The evolution was done to extend the interoperability of Bitcoin in the Ethereum blockchain. The wBTC is an Ethereum token backed by one-to-one bitcoin (BTC) which means 1wBTC would be equivalent to 1 Bitcoin. 1wBTC= 1 BTC
It enables the user to interact with diverse Ethereum-based decentralised applications and Ethereum’s based decentralised Finance (DeFi) ecosystem uninterruptedly.
The wBTC token was built using Ethereum’s ERC 20 token standard adding liquidity to the Bitcoin on the elevated DeFi scale. Earlier the crypto users who owned bitcoin were not able to access and utilise DeFi dApps that employ Ethereum protocols. However, the DeFi projects identified the opportunity by tapping into the largest market capitalization and jumped onto higher trading volume using wBTC Ethereum tokens. The standard usage of the wBTC lies in collateral, pleading the loan repayment while taking out a crypto loan on Defi platforms.
The Benefits of wBTC
Having a wrapped Bitcoin token has marked the highest liquidity to the decentralised exchange (DEXs) and on DeFi applications that operate on the Ethereum blockchain. With time merchants, exchanges and wallet users of wBTChave risen, and the amount of accessing bitcoin after being converted into wBTC has also increased.
The concept of wrapped Bitcoin has shattered the boundaries and interoperability between the Ethereum and the Bitcoin blockchain in both technical and conceptual terms. Before innovation, the value of the user base of Bitcoin was just limited to engaging decentralised finance. Years have been taken to analyse and find the way of speculation between BTC and ETH, which is known as ‘chain maximalist’ in terms of perspective that gives one blockchain at the expense.
Another major factor that is associated with the wBTCis its speed. Wrapped Bitcoins are more likely to settle Bitcoin transactions faster as they employ the Ethereum blockchain, which is quicker to add a new block in 15 seconds, compared to other blockchains.
How wBTCWorks?
Wrapped Bitcoin is an innovative yet thoughtful development built to support the request for an Ethereum-based ERC 20 token from a merchant in exchange for Bitcoin. While requesting the receipt one needs to fill in certain details like the Know Your Customer (KYC) and Anti Money Laundering (AML) process to verify the identity and to initiate the transactions with a custodian. After completing the custodian process, the transaction was minted on a certain number of wBTC and sent to the merchant's Ethereum address. If either the user and the merchant performed trade through the centralised exchange (CEX) or generated peer-to-peer transactions on a decentralised exchange end up concluding the transaction where the merchant gets the bitcoin and the user gets wBTC. Once the transaction gets settled completely, the user can easily utilise the wBTC token on various DeFi platforms.
- Receiving: To receive the wBTC a user needs to request a token from the merchant. In this stage, the merchant needs to perform KYC, for their identity approval. Once that process is done, the user and merchant can execute their swap, in this, the Bitcoin can be transferred from the user to the merchant and wBTC from the merchant to the user.
- Minting: Minting refers to the process of developing new wrapped tokens using a wrapped framework that is initiated by the merchant and later performed by a custodian.
- Burning: Burning is the action of redeeming the Bitcoin for wBTC tokens and can be addressed by the merchant. The amount that has been burnt would be deducted from the merchant’s wBTC balance and in the same place the supply of wBTC is then reduced.
Risks Associated with Wrapped Bitcoin (wBTC)
Wrapped Bitcoin has certain factors that make it vulnerable towards risk unlike other cryptocurrencies, its limitations could affect the digital assets.
1: Price Volatility
As the wrapped bitcoins are pegged with the Bitcoin, that means the fluctuations of the Bitcoin’s price will directly affect the wBTC’s value. Similar to that, any market movements of BTC would reflect on wBTC making the market more vulnerable to the inherent volatility of the cryptocurrency markets.
2: Custodian Risks
wBTC has a solid back of Bitcoin that is held in reserve by a custodian, If the usage of the token gets compromised due to lack of control, reserving and the peg between wBTC and the BTC would also be jeopardised affecting the confidence of the user along with the value of the token.
3: Security & Insolvency
The custodians who are holding the BTC reserves are more likely to be exposed to risks like hacks, security breaches and even insolvency. To preserve the failure of any such event could lead to the complete loss of any underlying asset (BTC), putting wBTC holders at a significant financial threat.
4: Regulatory Hurdles
The legal status of wBTC is also subject to evolving regulations like other cryptos. The changes in government policies or any such enforcement protocols could impact the ability of trading or might also create legal uncertainties affecting liquidity and market value.
Conclusion
The launch of wrapped Bitcoin was done to provide the ground-breaking solution eliminating the limitations of Bitcoin’s interoperability within the Ethereum chain. The pegging of Bitcoin to an ERC 20 token standard enables Bitcoin holders to participate in Ethereum’s Defi protocols, enabling liquidity, lending, and trading. The development of wrapped bitcoins bridged the gap between the top two leading powerful blockchains fostering growth, flexibility, and utility for the users. As the wrapped Bitcoin comes up as a revolutionary solution, it has certain risks associated with its functionalities. The volatility of Bitcoins, custodian risks, and potential regulatory challenges impacted the long-term market confidence and viability. Despite the risks, the wBTC marked a significant impact on the evolution of blockchain, coming up as a secure, reliable, and widely adopted bridging token among the most influential cryptocurrencies in the world.
FAQs
1: Which blockchains are in support of wrapped Bitcoins (wBTC)?
Several blockchains seamlessly favour the existence of wrapped bitcoins. Such as Wrapped Ether, Wrapped BNB, Wrapped DOGE, Wrapped Tron, and Wrapped XRP.
2: How to identify whether the price of wBTC will always be equal to the price of BTC?
At present scale, it's quite unpredictable to talk about the future pricing, but if the wBTC custodians maintain 1:1 backing or BTC to wBTC then the price of wBTC issued by the custodian should be equal to the pricing of BTC. Hence, if the custodian fails to maintain the 1:1 backing, then the price of wBTC may likely fluctuate in the future.
3: What was the aim behind wrapping the Bitcoins?
The main aim behind wrapping Bitcoin is to leverage the advantage of Bitcoin on the Ethereum ecosystem. The developers of wrapped BTC evaluated that Bitcoin is the world’s largest cryptocurrency and widely used, but to exceed its functionality across the Ethereum chain, Bitcoin needs to be wrapped to elevate its interoperability.
