Wrapped Bitcoin WBTC explained (Bitcoin on Ethereum)

Den W. Den W. 03 June
Wrapped Bitcoin WBTC explained (Bitcoin on Ethereum)

A common question for crypto newbies is - why  are there so many different types of Bitcoin? Scrolling down the crypto rankings will show you  a host of assets that have ‘BTC’ in their name,   like RenBTC, Bitcoin BEP2, and Wrapped Bitcoin.

All of these variations of Bitcoin can be quite  confusing, but the explanation is quite simple! None of these tokens are the real bitcoin, but  they do have bitcoin as an underlying asset. Bitcoin tokenization is a  way to lock up or transfer   the value of Bitcoin to other blockchains.

The idea was first conceived by  the Wrapped Tokens Project, which   is a joint effort between Ren, Kyber Network  and the institutional asset custodian, BitGo. The process of locking up the Bitcoin and turning  it into an ERC20 token is known as “wrapping.”

Once the BTC is turned into an ERC20 token,   it can be used in Ethereum’s  rapidly expanding DeFi ecosystem. This means that instead of  just buying BTC and holding it,   investors can now buy WBTC and use it to  earn passive income in a number of ways. WBTC holders can take out loans on decentralized  lending platforms like MakerDAO or Aave, and   effectively borrow against the assets they wish to  hold, which can be very useful in a bull market! WBTC can also be used to provide  liquidity on platforms such as Uniswap,   giving you a small percentage of the fees from  the trades that happen in that specific pool.  

Similarly, it means that you can stake  your Bitcoin on platforms like Compound,   which pay you interest on your assets  in order to facilitate lending. Using WBTC also opens Bitcoin traders  to more trading pairs on decentralized,   Ethereum-based exchanges,  like Uniswap and Kyber Swap. These use cases seem to be  popular, because as of today,   over 8 billion dollars’ worth of WBTC has been  minted and sent into the Ethereum network.

But before WBTC can be minted onto the  Ethereum blockchain, every WBTC token   has to be backed by exactly 1 Bitcoin.  This guarantees the value of the asset,   whereas the security of the  WBTC is backed by Ethereum. But BTC is a much more secure asset than  WBTC, and the increased utility is a   trade-off for weakened security. Another  trade-off when using WBTC is that BitGo,   the entity that holds WBTC and the keys  needed to mint them, is a centralized company.

Despite BitGo’s positive  security record up until now,   they, or any third party that  gains access to their accounts,   have the power to freeze operations, divert WBTC  or prevent people from redeeming their Bitcoin. 
 With the rising popularity  of RenBTC and SynthetixBTC,   plus the emergence of Polkadot cross-chain DeFi,   the Ethereum version of Wrapped Bitcoin could  face some strong decentralized competition   in the future. For now though, it still  commands 72% of the tokenized Bitcoin market. And for the crypto space in general, any  way to import Bitcoin’s huge liquidity   into the DeFi space could be  a win-win for all involved.

What are your Bitcoin price predictions for 2021?   Let us know in the comments below. 

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