What is a wrapped bitcoin?

In the more than a decade since the first cryptocurrency was launched, many coins have appeared on the market, but bitcoin still remains the most recognizable digital asset. Because the bitcoin protocol does not initially support shared smart contracts, there is no easy way to use it in the decentralized finance (DeFi) sector. Wrapped Bitcoin (WBTC) has emerged as a solution to this problem. In this article, we will take a closer look at what WBTC is and what it is for.

Content:

1. What are wrapped cryptocurrencies?
2. Features of Wrapped Bitcoin
3. Ecosystem and how it works
4. How to buy Wrapped Bitcoin?
5. Pros and cons of Wrapped Bitcoin
6. What can be done with WBTC?
7. Alternatives to WBTC
8. Conclusion

What are wrapped cryptocurrencies?

Before moving on to WBTC, it is worth explaining what wrapped (or tokenized) cryptocurrencies are. These are digital assets that represent some coin on other blockchains. The purpose of these tokens is to be usable in the broader blockchain ecosystem and enable cross-chain interoperability.

The wrapping process involves locking the original digital asset on its native blockchain in smart contracts. Once a certain amount of coins is blocked, a similar amount is minted in the form of a wrapped cryptocurrency on another blockchain.

Features of Wrapped Bitcoin

WBTC is an ERC-20 standard token on the Ethereum blockchain, pegged to the value of bitcoin 1:1. It was launched in January 2019 as a way to give decentralized applications (DApps) on Ethereum access to WBTC. Multi-chain platform Kyber Network, cryptocurrency custodian BitGo, and private investment platform Republic Protocol were involved in the development of the project.

WBTC listed popular DeFi platforms such as Compound, Dharma, and dYdX immediately after its launch. Prior to WBTC, the only way to use BTC in financial transactions was through centralized organizations such as centralized exchanges (CEX).

The main goal of WBTC is to provide crypto traders with an easy way to use their BTC assets in Ethereum-based DeFi protocols. Ethereum supports smart contracts, unlike the bitcoin blockchain, allowing developers to create DApps.

Traders use WBTC to access decentralized trading, lending, and borrowing (lending protocols). For example, if BTC holders want to generate passive income from their long-term bitcoin investments, they can issue WBTC and lend it in protocols on Ethereum.

One particular advantage WBTC has over bitcoin is speed. Transactions with wrapped bitcoins are done through the Ethereum blockchain, where blocks are generated every 15 seconds. In comparison, blocks are created on average every 10 minutes on the bitcoin blockchain.

Ecosystem and how it works

The Wrapped Bitcoin lifecycle process involves several participants, each performing unique tasks:

• Custodian. They are responsible for preserving the original bitcoin, creating new WBTC tokens, and destroying unsecured assets. The custodian is BitGo, which also ensures that transparency conditions are met.
• Merchant. Organizations for which the issuance and burning of wrapped bitcoins is done. They also distribute the tokens. The first companies to take on this task are Kyber Network and Republic Protocol.
• Customers. These are investors who intend to use their ВТС in decentralized applications.

The wrapping process begins when a bitcoin holder requests WBTC from a seller in exchange for BTC. Upon receiving the request, the seller performs KYC identification of the BTC holder and establishes a transaction with the custodian, who is authorized to issue a new WBTC. The seller receives the tokens and sends the BTC to the custodian. At the last stage, the seller, and the bitcoin owner exchange BTC for WBTC, either through CEX or by performing an atomic swap.

How to buy Wrapped Bitcoin?

If you do not have the time or desire to deal with bitcoin wrapping, you can buy it on a crypto platform. Let’s understand how to do this with the example of the Bybit exchange.

• First, you need to register and confirm a new account or log in to an existing one. You can create an account using this link.
• Through the navigation menu, you should go to the cryptocurrency purchase page.
• Next, you need to enter the amount of USDT stablecoins to buy, select the currency for payment, and one of the proposed payment services.
• If you have not previously passed verification, the platform will request it at the next stage.
• After successfully completing the KYC procedure, the purchased stablecoins can be used to purchase WBTC on Bybit spot/derivatives.

The received tokens can be stored in any crypto wallet that supports Ethereum and allows interaction with DeFi projects:

MetaMask. A browser extension and mobile app for Android and iOS are available.

Trust Wallet. A popular wallet, developed by the Binance exchange, provides staking and connectivity to dApps in 50+ different blockchains.

Guarda Wallet. A cross-platform solution is available in browsers, PC, and phones, while it is possible to set up login via hardware storage to increase security.

You should remember to follow security rules and use only trusted and reliable resources to buy and store cryptocurrencies.

Pros and cons of Wrapped Bitcoin