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Welcoming new crypto innovations: What is Wrapped Bitcoin?

There’s nothing more frustrating than being a Bitcoin investor but wanting to explore the DeFi ecosystem at the same time. Although you want to access decentralised applications (dApps) and participate in play-to-earn games, you can’t just give up the benefits that come with owning Bitcoin such as its price, limited supply and popularity. With the lack of interoperability between digital assets, how can you further maximise the power of other blockchains?

Thanks to new crypto innovations, an interoperability hack is now being implemented. This includes the Wrapped Bitcoin, a breakthrough in the crypto market that aims to bridge gaps and bring better liquidity into DeFi. Imagine wrapping your bitcoins around another chain that would allow you to take advantage of other blockchain functions.

Curious to know more? Continue reading below for more information!

What is Wrapped Bitcoin cryptocurrency?

Considered to be included in the category of wrapped cryptocurrencies, wrapped Bitcoin (wBTC) are ERC-20 tokens that can be used in non-native blockchains but hold the same value as their original asset. In short, it represents Bitcoin on a 1:1 ratio. 

Launched in January 2019, the wBTC token was established to provide bitcoin liquidity into the Ethereum network, especially its DeFi sphere. With this invention, dApp developers have found a way to take advantage of Bitcoin’s high market capitalisation and trading volume, bridging the gap between two different digital assets.

The entire process of wrapping your Bitcoins and creating newly minted tokens mainly depends on three entities, including:

  • Custodians – They are the authorities assigned to mint wBTC and maintain the security of bitcoin reserves.
  • Merchants – A merchant distributes wBTC to network users and burns excess tokens. In the case of wrapped Bitcoin, Kyber Network and Republic Protocol play this role.
  • Decentralized autonomous organization (DAO) – They are responsible for implementing changes within the smart contract, such as adding or removing custodians and merchants.

When your Ethereum address has successfully received its wBTC tokens, you can use them within the network’s financial services, such as investing, lending and savings. What makes this more beneficial and convenient is you don’t have to divulge private information, compared to when applying for loans in traditional institutions.

How does it work?

If you wish to wrap your bitcoins, you must go through the process carried out by custodians and merchants. After submitting a request, a merchant would start a transaction to authorize a custodian in minting a specific amount of wBTC. 

You also have the option to unwrap your wBTC back to BTC whenever you prefer, making it easier for you to enhance your investment tactics and jump from the Bitcoin blockchain to the DeFi ecosystem. 

For instance, you can register an account in Maker or Airswap and fund your balance with bitcoins. Click the ‘Wrap’ button and input the amount of bitcoins you want to wrap in exchange for newly minted ERC-20 tokens. However, you can also purchase wBTC straight from exchange platforms like Coinbase and Binance, among many others.

wBTC models: What are the popular wrapping protocols?

There are different wrapping protocols used to wrap digital assets like Bitcoin. Although their processes differ slightly from each other, they aim to produce the same result: to integrate Bitcoin into the Ethereum blockchain. 

Check them out below:

Synthetic Assets

The use of synthetic assets has helped wrapped Bitcoins gain traction within the crypto market. With this protocol, you will lock your BTC funds into a smart contract and receive a synthetic asset holding the same value. However, this will not be directly backed by Bitcoin. The platform would instead back them up with native tokens, a strategy pioneered by the Synthetix DEX. 

Centralised

From the term itself, a centralised wrapping strategy means that you give your BTC fund to a centralised intermediary where they issue ERC-20 tokens corresponding to your preferred amount. You will completely depend on a firm to wrap your bitcoins and safely store them away, which is considered to be a suboptimal approach by some users.

Trustless

The most advanced wrapping protocol is the trustless method. This is where your Bitcoins are wrapped via a decentralised system. The responsibilities of a custodian will be transferred into a smart contract and your BTC funds are locked within a network contract. With this, the network holds no right to adjust or update your BTC without your consent.

Why should you invest in wrapped Bitcoin cryptocurrency?

You might wonder why you should wrap your BTC into wBTC. Why should you go over processes that seem too complex when you can just invest in digital currencies that are compatible with the Ethereum blockchain? 

However, there are reasons why most investors are now including wBTC in their portfolio and these include: 

  • Increased liquidity

The meteoric rise of wBTC has paved the way for greater liquidity within the market. Since decentralised exchanges (DEX) within the DeFi ecosystem do not hold enough liquidity for optimal function, wrapped bitcoins can help investors trade their assets more efficiently and bridge the liquidity loop between CeFi and DeFi products.

  • Better scalability

Wrapping your BTC might just be right up your alley if scalability becomes a huge concern. Once the wrapping has been executed and the system issues newly minted tokens, wBTC will operate on the Ethereum blockchain which makes transactions faster and cheaper.

Wrapped Bitcoin cryptocurrency: All about interoperability

The industry of cryptocurrencies has welcomed new frontiers and innovations, with the creation of wBTC opening the door for interoperability and improved liquidity. It has bridged the gap between the Ethereum ecosystem and Bitcoin, further helping investors take advantage of dApps, a high market capitalisation and trading volume. 

It is considered to be a fintech revolution, eventually becoming another building block for DeFi applications. That’s why wrapped tokens like wBTC are all about combining the best of both worlds, which is the perfect choice for investors looking for a great crypto journey. 

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