Bitcoin is the first crypto asset and one of the largest and most successful cryptocurrencies. Since its beginning, the core of Bitcoin technology hasn’t changed that much. But this doesn’t mean that there aren’t new projects happening in the blockchain world.
One such development is Wrapped Bitcoin. But what is Wrapped Bitcoin, and why does it matter? How does one get it? In this entry, you’ll find out precisely about all that.
What Is WBTC?
Most people have at least heard of Bitcoin and perhaps you’ve even landed your own. But now Wrapped Bitcoin enters the game, confusing asset holders worldwide. So what exactly is it? Wrapped Bitcoin or WBTC is an ERC-20 token backed by Bitcoin in 1:1 ratio. In a nutshell, one Bitcoin equals one WBTC.
It’s also worth mentioning that the Ethereum network designed these ERC-20 tokens to pay for goods and services. Owners of these tokens can sell or trade them, or use them as an investment, which why it’s important to understand that Wrapped Bitcoin is a token.
Now, WBTC is a kind of Bitcoin that allows for seamless integration to the Ethereum network, including wallets, DApps (Decentralised applications), and much more.
This tokenised Bitcoin creates an opportunity for cheaper and more efficient transactions. Furthermore, since Wrapped Bitcoin is 1:1 peg to Bitcoin, it makes it much easier for Bitcoiners to sell their assets, without the worry of them fluctuating.
Wrapped Bitcoin History
Although it’s the largest and the most popular crypto asset in the world, Bitcoin still operates in the same way it did when it was created, while the Ethereum network is responsible for innovations.
Despite this, the fact remains that Bitcoin still holds much more value than Ethereum. Moreover, only a tiny percentage of the population uses Ethereum compared to the cryptocurrency giant Bitcoin.
The issue is that the regular tokens Ethereum uses aren’t congruent with Bitcoin blockchains. So the creation of WBTC bridged this gap between Bitcoin and the Ethereum network, thus bringing much more liquidity to Ethereum.
Without Wrapped Bitcoin, Bitcointers couldn’t engage in any Decentralised Finance or DeFi, that transforms old ways of finance into transparent protocols, accessible to everyone.
With the creation of Wrapped Bitcoin, not only is this activity possible, but it’s also relatively fast and efficient.
How Does Wrapped Bitcoin Work
So how exactly does Wrapped Bitcoin work? The key parts of the process are the user, the merchant, and the custodian. If a Bitcoiner wants to exchange Bitcoin for Wrapped Bitcoin, they send the request to a merchant who is a middleman between the user and the custodian.
A merchant sends the amount of BTC the user wants to exchange to the custodian and presents the request for the transfer. Before the exchange happens, the custodian sends the request to the Ethereum blockchain for approval. They have to wait for six confirmations before proceeding.
Once the request is granted, the mint process starts, which is another term for swapping Bitcoin for Wrapped Bitcoin.
All this happens through an atomic swap between the merchant and the custodian, without the user being involved at first
To get the tokens, the user must get involved in an atomic swap with the merchant who has ERC-20 tokens. The merchant has to get I.D. information from the user to ensure the safe swap and transfer Wrapped Bitcoin to user’s WBTC address.
How to Get Wrapped Bitcoin
So how to get Wrapped Bitcoin? There are various Wrapped Bitcoin merchants, but the most famous ones are Dharma, Ren, or CoinList, Coinbase, or Kyber. The majority work by asking new users to sign up to the platform before exchanging their Bitcoin for Wrapped Bitcoin. The process is pretty straightforward after signing up.
What Are the Advantages of Wrapped Bitcoin
Although a relatively new project, there are many advantages of Wrapped Bitcoin. One of the main reasons Bitcoiners decide to swap Bitcoin for Wrapped Bitcoin is that it’s more cost-effective. Dealing with ERC-20 tokens is easier and cheaper.
Furthermore, the majority of the DeFi system and DApps are actually founded to support the Ethereum network and its tokens and not Bitcoin. Before the creation of Wrapped Bitcoin, this was a problem for many Bitcoiners as they were unable to engage in any DeFi-related activities.
With Wrapped Bitcoin, holders can finally invest in projects because these assets are compatible with DApps.
Put simply, Wrapped Bitcoin standardises Bitcoin into one format that can be used across the Ethereum network.
What Are the Disadvantages of Wrapped Bitcoin
Although Wrapped Bitcoin brings many advantages, there are also disadvantages of this project. In the main, by exchanging Bitcoin for Wrapped Coin, asset holders give their Bitcoin to custodians. This means they’re no longer owners of Bitcoin.
Another drawback is that users who decide to go through this swap, do this at their own risk. The Ethereum network is fairly secure, but the system it uses can’t match the already-established premium security levels of Bitcoin. There’s a possibility of your Bitcoin being released to another WBTC address, leaving you with tokens that hold no value.
Furthermore, since the swapping process involves merchants and custodians, it’s partly centralised, which doesn’t appeal to asset holders. After all, most of them became interested in Bitcoin for its decentralised nature that offers the user more control over assets.
Finally, since Wrapped Bitcoin depends on the system the asset holder chooses for swapping their Bitcoin, this poses another problem – the potential abuse of power.
Final Thoughts
Wrapped Bitcoin is at the surface level a fantastic innovation – it allows Bitcoiners to access DApps and invest, which was previously impossible as Bitcoin wasn’t compatible with the Ethereum blockchain.
But there are some disadvantages of Wrapped Bitcoin. In the main, it doesn’t appeal to all asset holders as it’s a more centralised system, and there are potential safety concerns.
However, it’s worth noting that the Ethereum network offered a new way of dealing with cryptocurrencies by creating Wrapped Bitcoin. As these bring much more liquidity to Ethereum, it’s likely the system will become even more efficient and secure in the future.