Wrapped Bitcoin (WBTC) is an Ethereum token that is intended to represent Bitcoin (BTC) on the Ethereum blockchain. It is not Bitcoin, but rather a separate ERC-20 token that’s designed to track Bitcoin’s value. WBTC was created to allow Bitcoin holders to participate in decentralized finance (“DeFi”) apps that are popular on Ethereum. Through a WBTC partner, 1 Bitcoin can be exchanged for 1 Wrapped Bitcoin, and vice-versa. The BTC that backs WBTC is verifiable through a “proof of reserve” system that verifies the 1:1 backing between minted WBTC tokens and Bitcoin stored by custodians. WBTC is maintained by a group called the WBTC DAO that consists of over 30 members. It was originally started by BitGo, Ren, and Kyber.
What Is Wrapped Bitcoin (WBTC)?
Wrapped Bitcoin is a 1:1 representation of the underlying asset Bitcoin, used on the Ethereumblockchain. Wrapped cryptocurrencies track the asset's value they represent and can often be redeemed for that asset. In other words, wrapped cryptocurrencies make it possible to utilize crypto assets on non-native blockchains. This means that consumers can use Bitcoin in its wrapped form to interact with Ethereum's ecosystem of decentralized applications (DApps) and smart contracts. The Ethereum ecosystem may benefit from Bitcoin's liquidity by tokenizing it as an ERC-20 token.
Blockchains are designed to function in isolation. Different blockchains offer specific functionality in the crypto realm, and there is no adequate method for data transmission between them. Tokens created on one blockchain are difficult to transfer to another. Currently, certain technologies exist that allow communication across multiple blockchains. Some of these systems prefer a centralized exit between chains. Others rely on a root chain-based independent consensus model. However, neither approach allows for seamless transitions between multiple consensus systems, resulting in a time-consuming validation procedure and a lack of data transmission between chains. Wrapped Bitcoin tokens aim to address the bottleneck, improve communication between blockchains, and unlock new DeFi opportunities for users. Wrapped tokens, in general, also improve liquidity and capital efficiency for both controlled and decentralized exchanges. The ability to wrap idle assets and employ them on another chain can help to add liquidity to the system.
Wrapped Bitcoin attempts to expand on Bitcoin's advantages by focusing on the following:
- Beneficial for traders: Since Bitcoin acquires a major share of the crypto market, decentralized exchanges, often limited to ERC-20 tokens, suffer from low trading volumes and liquidity. Wrapped BTC provides customers with better liquidity and involvement. Also, Wrapped Bitcoin users can benefit from high-speed transactions on Ethereum.
- Institutions: Users of decentralized applications like exchanges, wallets, and payment services no longer must worry about handling numerous cryptocurrencies across different nodes and transaction types. WBTC combines the advantages of Ethereum and Bitcoin, allowing users to manage the wrapped assets using only an Ethereum node.
- DApps: Bitcoin payments may now be used in smart contracts for lending protocols, funds, prediction markets, and token sales in decentralized apps.
According to its whitepaper, WBTC's implementation and technology model consists four critical participants:
- Custodian: The entity or party that holds the asset is the custodian. The keys to minting tokens are in the hands of custodians.
- Merchant: The institution or party to whom wrapped tokens are issued is known as the merchant. The wrapped token is distributed mostly through merchants. Each merchant has a key that may be used to start the minting of new wrapped tokens and the burning of old wrapped tokens. Cryptocurrency burning is when a fraction of tokens are sent to a wallet with no private key. This means the tokens are lost forever. Tokens are usually burned to reduce availability and increase market value.
- Users: The holders of the wrapped token are referred to as "users." Wrapped tokens may be transferred and transacted in the Ethereum network just like any other ERC20 token.
- Member of the WBTC DAO: A multi-signature contract governs contract amendments and the addition and removal of custodians and merchants. The WBTC DAO holds the keys to the multi-sig contract owned by institutions.
Assets are exchanged for wrapped tokens by custodians and merchants. This is accomplished through two types of transactions: minting (the generation of wrapped tokens) and burning (the reduction of wrapped token supply).
History of Wrapped Bitcoin (WBTC)
WBTC was initially launched on October 26, 2018, as a collaborative effort by BitGo, Kyber Network, Ren (previously Republic Protocol), and other community partners to bring Bitcoin's liquidity to the Ethereum decentralized ecosystem and improve all decentralized apps.
BitGo is a crypto trading and financial services company cofounded in 2013 by Mike Belshe (a computer scientist and entrepreneur). It is also a digital asset custody provider for institutions and the first and only custodian of WBTC currencies.
Loi Luu, Yaron Velner, and Victor Tran launched Kyber Network in 2017 and are located in Singapore. The company offers a blockchain liquidity protocol that integrates multiple cryptocurrency tokens and DeFi apps.
Ren, like Kyber, is a business that uses technologies like RenVM, RenBridge, and others to combine cross-blockchains centered on cryptocurrency assets and DeFi applications. Taiyang Zhang and Loong Wang started Ren in 2017. Kyber Network, together with Ren, helped create WBTC and continues to be a merchant in the WBTC ecosystem.
The initial WBTC whitepaper was released in January 2019. In the same month, the token was launched with eight merchants (institutions) facilitating Bitcoin-to-WBTC conversions.
Kyber Network and REN are the merchants who mint and burn WBTC tokens, and BitGo is the custodian who holds BTC and the keys to mint WBTC tokens.
How Are New Wrapped Bitcoin (WBTC) Tokens Created?
The process of generating freshly wrapped tokens is known as minting. A custodian must do minting in the wrapped framework, but it must be "started" by a merchant. It's vital to remember that the user isn't involved in the minting process. It's a series of exchanges between the merchant and the custodian. WBTC minting events in chronological order:
The merchant initiates a transaction authorizing the custodian to mint X WBTC and send it to the merchant's Ethereum address. The merchant sends X BTC to the custodian. Custodian waits for six confirmations of the BTC transaction before creating a transaction on the Ethereum chain to mint X fresh WBTC tokens.
The BTC that backs WBTC is verifiable through a "proof of reserve" system that verifies the 1:1 backing between minted WBTC tokens and Bitcoin stored by custodians.
How Many Wrapped Bitcoin (WBTC) Tokens Are There?
WBTC does not have a set supply limit. The number of tokens in circulation is precisely proportional to the quantity of Bitcoin reserves in the WBTC network since Wrapped Bitcoin backs Bitcoin at a 1:1 ratio.