What is a Wrapped Bitcoin

wrapped-bitcoin

Wrapped Bitcoin : The first, biggest, and most well-known cryptocurrency in the world is Bitcoin. The breakthrough “peer-to-peer electronic cash system,” which gave rise to Bitcoin more than ten years ago, is mainly still based on the same technology today.

However, Bitcoin is not the only cryptocurrency. Developers have established a vibrant decentralised finance (DeFi) ecosystem on smart contract blockchains like Ethereum.

It is necessary to build an ERC-20 token that reflects Bitcoin in order to use it within Ethereum’s DeFi ecosystem. By integrating the value and liquidity (money) of Bitcoin to the vibrant and quickly developing world of DeFi, Wrapped Bitcoin (WBTC) aspires to combine the best aspects of both worlds.

What is a Wrapped Bitcoin?

Wrapped Bitcoin, or WBTC, is a straightforward ERC-20 token that stands in for Bitcoin; one Wrapped Bitcoin (WBTC) is equivalent to one Bitcoin (BTC). You can change one BTC for another, and vice versa.

WBTC transfers more quickly than regular Bitcoin because it is an ERC-20 token, but its main benefit is that it can be used with Ethereum wallets, decentralised applications (dapps), and smart contracts. Over 280,000 WBTC are in use as of the time of publication.

Who Created the WBTC?

In January 2019, Wrapped Bitcoin debuted on the Ethereum mainnet. In an effort to inject more liquidity into the Ethereum network by using Bitcoin, significant companies in the DeFi ecosystem, including BitGo, Ren, Dharma, Kyber, Compound, MakerDAO, and Set Protocol, collaborated to create Wrapped Bitcoin. The WBTC DAO, a Decentralized Autonomous Organization (DAO), is currently in charge of the project.

What Makes It Unique?

On Ethereum, many of the most well-known DeFi dapps demand the use of collateral. Users of services like MakerDAO and Compound must lock up their cryptocurrency assets in order to borrow other cryptocurrency assets.

The potential growth of these protocols constrained by the fact that Ethereum’s total value is considerably lower than Bitcoin’s. Protocols benefit from an increase in liquidity by integrating Bitcoin, which enables them to expand the sources of collateral for their dapps. Wrapped Bitcoin also enables owners of the cryptocurrency to use DeFi dapps like Compound to borrow and lend money while still holding it as an asset.

Benefits of Wrapped Bitcoin

Users may require WBTC for a wide range of DApps, games, decentralised exchanges (DEXs), and smart contract-driven platforms. Decentralized finance is one application case in particular that has drawn the attention of many (DeFi). Wrapped Bitcoin allows users to borrow and lend money inside the DeFi ecosystem without first having to exchange their existing BTC for ETH or a stablecoin.

For those who desire to use their Bitcoin inside the Ethereum network, WBTC can help in the following ways.

Liquidity

WBTC’s potential to promote higher market liquidity is a key factor in its usefulness. There are numerous diverse applications functioning within the Ethereum ecosystem. DEXs and comparable platforms can find themselves short on the liquidity they require to operate at peak efficiency due to funds being dispersed across numerous places. By bringing in more cash from Bitcoin owners who would prefer not to sell all of their Bitcoin, WBTC boosts liquidity.

Staking

Staking tokens is one of the most well-liked DeFi activities. In return for a percentage of the network’s block rewards, users of proof-of-stake protocols can lock up their money in a smart contract for a predetermined amount of time. Users can receive rewards on websites like CoinList by converting their BTC into WBTC.

Yield Farming

Yield farming another well-liked DeFi hobby. Staking and yield farming are similar, although yield farming has shorter lockup times. Users can borrow money using many of these protocols and receive interest. By lending out wBTC to other network users, platforms like Compound enable cryptocurrency owners to generate passive income.

Additional Functionality

WBTC provides more functionality than standard Bitcoin because it is available on Ethereum as an ERC-20 token. This essentially indicates that WBTC can employ smart contracts. Programmatic agreements known as smart contracts take effect when specific criteria met. Many new blockchain technologies are based on this technology. While it’s conceivable that Bitcoin will one day support smart contracts, WBTC currently serves as a stand-in.

Trading on Margin

Sometimes seasoned traders choose to trade on margin. To borrow money to trade with is meant by this. Trading on margin can offer leveraged returns, which may allow for bigger profits than would otherwise be achievable. The converse is also possible, and traders may lose even more money than they initially put up.

WBTC enables DeFi traders to trade Bitcoin utilising decentralised exchanges on margin. Alternatively, owners can make money by lending out their WBTC to the protocol so that other people can utilise it for margin trading.

Is Bitcoin in a Wrapper a Smart Investment

Depending on the objectives of your trading strategy, wrapped Bitcoin can be a profitable investment. WBTC can be seen as more of a tool to access the Ethereum network and DeFi because it is a strict replication of Bitcoin. WBTC is probably going to become even more popular in the near future given the rapid expansion and development of decentralised solutions.

Is Wrapped Bitcoin Safe

Even though bundled Bitcoin has a good track record, it still has some risks, just like any other technology or investment that pays off. For instance, it’s possible that the value of WBTC will diverge from the value of its underlying asset (BTC). Additionally, merchants or custodians may make mistakes as the transaction is being completed. Therefore, after you’ve made the decision to wrap BTC, it’s crucial to be aware of the dangers that could arise and have a plan in place in case you need to reduce them.

Conclusion

Wrapped BTC is a cutting-edge technology that created a connection between the well-known networks Bitcoin and Ethereum, enabling BTC owners to benefit from decentralised finance and the rapidly expanding number of applications it supports. Additionally, WBTC increases capital efficiency and promotes liquidity on both CEX and DEX.

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