Wrapped BTC

What is Wrapped Bitcoin (WBTC)?

Wrapped Bitcoin is a relatively new innovation in cryptocurrency that effectively brings Bitcoin into the world of decentralized finance (DeFi).

Bitcoin itself can’t connect very effectively with blockchains like Ethereum that host the biggest DeFi ecosystems. This means that the cryptocurrency’s primary asset is difficult to involve in one of the technology’s primary use cases.

Wrapped Bitcoin solves this problem by creating what is effectively a stablecoin pegged to the value of Bitcoin. It is also backed 1:1 by BTC.

Owners of WBTC thus hold a token that corresponds to the BTC that is held in reserve. As a result, they can benefit from its value as well as the ability to use it in various Ethereum-based DeFi applications.

What is Wrapping?

Wrapping is a technique where a token is created on a smart contract blockchain like Ethereum to represent another asset, such as Bitcoin. This is done to allow the use of the target asset on the smart contract blockchain when no other way to shift the actual asset exists.

The asset that is the target of wrapping is sent to and held by a custodian throughout the existence of the wrapped token. This entire process is facilitated by smart contracts.

When Was Wrapped Bitcoin Launched?

Wrapped Bitcoin was launched in January 2019, following its announcement the previous year. In just 18 months after this launch, users converted north of $800 million worth of Bitcoin into WBTC.

WBTC was launched as an ERC-20 token on the Ethereum blockchain. It immediately allowed traders to use Bitcoin value on decentralized exchanges like Airswap, Ddex, Ethfinex, Idex, Kyber Swap, Loopring, and others.

DeFi protocols that use WBTC include heavy hitters in the space, such as MakerDAO, Dharma, Compound, and the Kyber Network. Many of these lenders allow WBTC to be locked up using a smart contract as collateral in order to issue a loan using the DAI stablecoin.

Who are the Founders of Wrapped Bitcoin?

Wrapped Bitcoin is part of the Wrapped Tokens project, a joint endeavor of BitGo, Kyber Network, and Ren.

BitGo is a vital part of the WBTC system, serving as its custodian, where Bitcoin is deposited and held securely to back the WBTC tokens issued to users. BitGo is a digital asset custody, trading, and financial services firm founded by the entrepreneur Mike Belshe.

Singapore-based Kyber Network, founded in 2017 by Loi Luu, Victor Tran, and Yaron Velner, is a merchant within the WBTC ecosystem. It mints and burns WBTC tokens to maintain the 1:1 backing of WBTC by BTC in reserve.

Ren, also founded in 2017, is an institution that plays a similar role to Kyber Network where WBTC is concerned. It specializes in cross-blockchain integration of cryptocurrency assets and DeFi applications.

How Does Wrapped Bitcoin Work?

There are two main counterparties that have to be in place in order to wrap Bitcoin. One is a merchant who initiates the wrapping procedure, and the second is the custodian who locks the Bitcoin into the reserve and issues WBTC.

It must be noted that there are many companies that can take the role of the merchant, the custodian, or both.

The general procedure is simple:

You must purchase or have some BTC.

You send a wrapping request for the desired amount of BTC to the custodian via the merchant.

The merchant sends BTC to the custodian and requests a wrapped coin from the DeFi platform.

The DeFi platform approves the request, and the custodian mints WBTC that equals the BTC received.

The custodian releases WBTC to the merchant, who then transfers WBTC to your ERC-20 wallet.

You can use your WBTC on the DeFi platform!

The process usually involves fees, as it involves the use of various counterparties and the need for various transactions. Users will often have to pay transaction fees as well as merchant and custodian fees.

Unwrapping WBTC to reclaim BTC works essentially in reverse, with WBTC being burned and BTC being returned to you.

What Makes Wrapped Bitcoin Unique?

Wrapped Bitcoin is a landmark innovation in cryptocurrency because it brings the sheer liquidity of Bitcoin into DeFi. Conversely, it allows DeFi users to leverage the industry’s most popular asset.

Prior to the existence of WBTC, there was no efficient way to use Bitcoin in DeFi. This opportunity could not be allowed to go begging for too long.

Another unique selling point of WBTC is that its reserve is visible on-chain. Unlike major stablecoin platforms faced with transparency concerns, such as Tether, WBTC custodians are regularly audited, and the reserve can be viewed on the blockchain.

How is the Wrapped Bitcoin Network Secured?

As an ERC-20 token, WBTC is secured by the Ethereum blockchain that it runs on. ETH is currently secured by the Ethash proof-of-work (PoW) consensus algorithm.

PoW blockchains rely on computers, called miners, dedicating their computing power to solving cryptographic puzzles. These puzzles are hard to solve but easy to verify, allowing miners to find new blocks for the blockchain and verify them at set intervals.

However, Ethereum will shift to proof-of-stake (PoS) as part of its ETH 2.0 merge. In a PoS system, token holders lock their balances on the network to become validators. Validators have a chance to propose new blocks based on their proportional token holdings.

WBTC also exists on the TRON blockchain, and the WBTC on TRON is secured by TRON’s delegated proof-of-stake (DPoS) consensus mechanism.

TRON has 27 Super Representatives that propose blocks for the network. These Super Representatives are voted for by TRON stakers. The top 27 finishers in the election are granted SR status for a 6-hour time period.

It is important to note that while WBTC has a notional value equivalent to that of Bitcoin, it is actually secured by the blockchains it is issued on.

In other words, WBTC is in no way secured by Bitcoin’s proof-of-work. As such, a catastrophic collapse of the Bitcoin network would not impact the integrity of WBTC tokens themselves, but would certainly affect their value.

What is the Use of WBTC?

One of the main advantages of Wrapped Bitcoin is that it enables you to trade quickly, with lower fees and fewer restrictions.

Additionally, you can use WBTC in various DeFi-specific activities, such as yield farming, which are highly lucrative.

Ultimately, the benefit of WBTC comes down to cross-chain transactions. This wrapping allows the use of assets on other chains to leverage protocols not found on Bitcoin’s blockchain or its ecosystem of on-chain applications.

Who Controls Wrapped Bitcoin?

Wrapped Bitcoin was launched as a joint initiative by Kyber, Ren, and BitGo. However, it is currently controlled by the Wrapped Tokens DAO.

The Wrapped Tokens and WBTC ecosystem involves many institutions as partners. The DAO members are responsible for the addition and removal of merchants and custodians for WBTC.

You can find a full list of DAO members and participants on the WBTC website. Some notable DAO members include original founders Kyber, Ren, and BitGo, as well as Blockfolio, Compound, Loopring, Maker, and AAVE.

How Much WBTC Is In Circulation?

The amount of WBTC in circulation can change quickly based on activity, as custodians mint WBTC as desired by users. It is likewise burned when users wish to unlock and redeem their BTC.

There are currently over 260,000 WBTC tokens in existence. While there is no official protocol-defined cap for how many WBTC can exist, it does stand to reason that there can’t be more WBTC than there are BTC in existence.

This may change in the future as more complex (and often questionable) practices and derivatives migrate to cryptocurrency along with the Wall Street interest in the industry. For now, however, this theoretical maximum holds true. 

How Do You Buy WBTC?

Given WBTC’s dominance in the area of wrapped tokens, it is one of the easiest to acquire.

You can buy WBTC from any merchant, centralized or decentralized, that is part of the WBTC network and serves as a partner.

Is It Possible to Buy WBTC Instantly?

The process of wrapping can sometimes take time because a lot of WBTC merchants need to conduct Know Your Customer (KYC) protocols. These KYC steps often involve identity verification, which needs to be handled manually and thus takes some time.

However, acquiring WBTC via decentralized exchanges tends to be a quick process. The transaction speed depends on the network being used. Layer 1 Ethereum normally takes a few minutes, whereas layer 2s like Loopring settle almost instantly.

How Do You Store WBTC?

WBTC can be stored in any ERC-20 token compatible wallet. Cryptocurrency wallets typically come in two forms: cold and hot, with cold wallets serving as something akin to cold storage for the long-term holding of an asset.

That said, the entire point of WBTC is to be used on Ethereum-based DeFi applications. As such, most WBTC users tend to use wallets that provide easy integration with popular WBTC-enabled platforms like Uniswap, Compound, and AAVE.

Top hardware wallets like Ledger are often compatible with these platforms, as are mobile wallets like Trust Wallet and web wallets like Metamask.

Wrapped Bitcoin Energy Consumption

As an ERC-20 token, WBTC doesn’t have its own blockchain and therefore doesn’t really consume its own power.

However, it could be argued that some of Ethereum’s (and to a lesser extent, TRON’s) consumption could be attributed to WBTC, given its popularity.

That said, Ethereum is transitioning to proof-of-stake and TRON is already using an energy-efficient DPoS consensus mechanism. Therefore, WBTC’s energy consumption is on course to be insignificant compared to that of Bitcoin in the near-to-medium term.

Is WBTC a Good Investment?

WBTC is backed 1:1 by Bitcoin, and therefore represents the value of Bitcoin while existing on different blockchains using different wallets.

In theory, then, the holders of WBTC should be able to reap the same benefits that BTC investors would.

However, WBTC comes with additional risks. Purchasing and holding Bitcoin simply relies on the Bitcoin network and the popular belief that BTC has value. The WBTC, however, exists on other blockchains, and the BTC backing is held by a custodian.

Therefore, WBTC possesses the risk profile of Bitcoin, in addition to the security risks of its native blockchains, as well as its custodians.

A hack on one of the main custodians on the WBTC network would be catastrophic, especially if the reserve is drained. Not to mention, the collapse of Ethereum or TRON would also affect WBTC.

As such, the increased risk profile that WBTC suffers from may make it a worse investment than BTC, and one without any greater upside when simply bought and held. It was designed to be used where BTC could not be, and it is from this utility that investors can reap the greatest rewards.