What Is Wrapped Bitcoin (wBTC) & How Does It Work?

Ever since its inception in 2009, Bitcoin and thousands of other cryptocurrencies have witnessed remarkable innovation and diversification. And while more and more people know at least the basic concepts when it comes to Bitcoin, many still don’t have a clear answer to the question “What is Wrapped Bitcoin?”.

In this article, we’re going to explore the intricacies of wBTC. With the increasing demand for cross-chain interoperability and liquidity in the complex world of cryptocurrency, Wrapped Bitcoin emerged as a valid solution for both.

Keep reading to find out how wBTC bridges the gap between blockchains and how it brings Bitcoin’s immense value to the thriving DeFi ecosystem. And once you finally unravel the mystery of Wrapped Bitcoin, you’ll learn how to obtain it, among other wrapped cryptocurrencies. Let’s jump right in!

What Are Wrapped Cryptocurrencies?

Let’s start with the basics. What is wrapped crypto, and how is it different from “regular” cryptocurrencies?

In essence, wrapped (or tokenized) cryptocurrencies are digital assets that represent those cryptocurrencies on other blockchains. The purpose of these tokens is to be usable in a wider blockchain ecosystem and enable cross-chain interoperability.

The process of wrapping involves locking up the original digital asset on its native blockchain in smart contracts. After locking a certain quantity, the same amount is minted in the form of a wrapped cryptocurrency on another blockchain.

Wrapped cryptocurrencies mirror the value and properties of the original while giving them new features specific to the destination blockchain. One of the reasons for using wrapped crypto is to enhance liquidity. Furthermore, people can use wrapped versions of cryptocurrencies to access products and services across a variety of blockchains.

However, it’s worth noting that there’s a certain dose of risk when it comes to wrapped crypto. Essentially, you’re locking your digital assets away using custodians or smart contracts to get their wrapped counterparts. That includes some degree of trust that you’ll be able to get your assets back whenever you want them.

What Is Wrapped Bitcoin (wBTC)?

In short, Wrapped Bitcoin is tokenized Bitcoin created on the Ethereum blockchain (ERC-20). As a wrapped cryptocurrency, its purpose is to bring the value that Bitcoin offers to the world of decentralized finance, dApps, and more.

The wrapped version of Bitcoin comes with a one-to-one peg to the original BTC. As a result, you can store, trade, and use it with confidence, knowing that each wBTC token you use has an equivalent value in BTC.

Wrapped Bitcoin makes up for some of the shortcomings that Bitcoin has when it comes to DeFi. While Bitcoin is the first cryptocurrency that paved the way for thousands that came after it, its native blockchain and programming come with limitations. For instance, it wasn’t until 2021 and the Taproot upgrade that BTC started supporting smart contracts.

On the flip side, Bitcoin has a massive market capitalization. Introducing it to the Ethereum ecosystem enhances the overall liquidity and makes BTC available for trading with a wide array of ERC-20 tokens.

How Does Wrapped Bitcoin Work?

Wrapped Bitcoin effectively works as an ERC-20 copy of Bitcoin. That’s achieved by using custodial and smart contract-based mechanisms. Simply put, you convert the amount of BTC you hold into equivalent wBTC you can then use on the Ethereum blockchain.

The price of Wrapped Bitcoin stays the same as Bitcoin’s, which allows you to use wBTC on a different blockchain without fear of it losing value compared to the original. The process of converting BTC to wBTC goes as follows:

1. Initiate the wrapping procedure by contacting a merchant who is going to perform a KYC check.
2. Deposit the amount of BTC that you want to “wrap” by sending it to a custodian.
3. Gain an equivalent amount of wBTC on the Ethereum blockchain. This process is usually executed using a smart contract that follows ERC-20 standards.

Considering a one-to-one ratio between the two assets, for each Bitcoin locked, you’ll get one Wrapped Bitcoin minted. A custodian who works to maintain the reserves of locked Bitcoin also preserves this peg.

Naturally, should you decide to redeem your wBTC and retrieve the original BTC, you’ll send your Wrapped Bitcoin back to the custodian’s address and get the corresponding amount of Bitcoin upon verification.

Once wBTC is minted, you can use it in various DeFi protocols, such as lending and borrowing against wBTC and trading on DEXs.

What Can You Do With Wrapped Bitcoin?

As we already mentioned, having wBTC gives you access to a wide range of services within the Ethereum ecosystem and the decentralized finance space. For instance, you can use your wBTC holdings as collateral to secure loans. Borrow stablecoins or other tokens by locking up wBTC without having to trade your Bitcoin for another cryptocurrency.

Another reason to get wBTC is to provide liquidity on decentralized exchanges. That way, you can participate in yield farming using your Bitcoin instead of other, more volatile assets. You can also use wBTC to trade on decentralized exchanges, gaining access to a wide range of trading pairs.

Then there’s the question of scalability. It’s generally much faster, cheaper, and more energy-efficient to send and receive wBTC on the Ethereum network than to do it with BTC on its native network.

Lastly, you can stake your wBTC. As opposed to regular, proof-of-work Bitcoin, Wrapped Bitcoin exists on a proof-of-stake network, which means you can stake it to earn passive income. Instead of keeping your Bitcoin reserves idle, why not put them to work and earn some more?

Is Wrapped Bitcoin Safe?

The benefits of Wrapped Bitcoin do come with a caveat. There’s the question of safety and various factors to pay attention to, some of which are common when comparing centralized and decentralized currencies.

First off, there’s the custodial risk. The concept of wBTC is based on the premise that custodians hold BTC properly and mint wrapped tokens accordingly. Nevertheless, even though custodians have a stellar reputation (at least for now), there is a chance that they could become targets of malicious activity.

Another concern would be smart contracts that carry out the minting and burning of wBTC. While they are regularly audited and secure, they can be subject to bugs and potential exploits that could lead to loss of funds or manipulation of wBTC value.

Then, there are regulatory concerns, as it’s not yet clear whether minting wBTC or swapping it back for Bitcoin are taxable events. If they are, then the process involves more costs than a one-time fee.

It’s also worth noting that there’s always a risk of user error. As it is with most cryptocurrencies, sending either BTC or wBTC to the wrong address may result in an irreversible loss of funds.

To mitigate these risks, you should always properly check custodians and use those with a proven track record. Furthermore, you should make sure that you know what you’re doing when using decentralized wallets and applications. To be on the safe side, only use the amount of BTC that you’re comfortable locking up.

How to Obtain Wrapped Bitcoin

There are several ways to obtain Wrapped Bitcoin. So, if you’re wondering, “How and should I buy Bitcoin or Wrapped Bitcoin?” you should examine each option, as both come with pros and cons.

Buy It on an Exchange

One of the easiest ways to obtain Wrapped Bitcoin is not to wrap it on your own but to straight-up buy it on an exchange. Today, many centralized exchanges offer wBTC for fiat currency.

To make things easier, you can use multiple forms of payment, such as debit cards, bank account payments, and wire transfers. You’ll get your wBTC soon after the payment goes through, and you can then trade it on an exchange or move it somewhere else.

However, if you don’t have an account at a centralized exchange, you should be prepared to pass the KYC check. KYC verifications often include digital identity or government ID verifications, biometric identifications, and more.

Exchange Other Cryptocurrencies With wBTC

Another simple way to obtain wBTC is to trade other cryptocurrencies for it. You can do that on both centralized and decentralized exchanges. There are plenty of places where you can exchange wBTC for USDT, ETH, BTC, and even CAKE and ADA. Naturally, this method requires you to have those cryptocurrencies on exchanges.

Convert Bitcoin Into wBTC

Lastly, you can convert or wrap your Bitcoin to obtain Wrapped Bitcoin. There are three ways to go about it:

1. Centralized wrapping involves a third party that will govern the process. They will lock your Bitcoin and mint Wrapped Bitcoin in exchange.
2. Trustless wrapping removes the need for third parties by relying on smart contracts. The process is similar to centralized wrapping, except for the use of a smart contract to lock and mint tokenized BTC.
3. Synthetic wrapping is the process by which you can use digital assets other than Bitcoin to create synthetic BTC.

Other Wrapped Cryptocurrencies

In addition to Wrapped Bitcoin, there are a number of other wrapped cryptocurrencies created for similar reasons. Some of these cryptos are:

• Wrapped Ethereum (WETH)
• Wrapped NXM (WNXM)
• Wrapped Solana (SOL)
• Wrapped CRO (WCRO)
• Wrapped Matic (WMATIC)
• Wrapped AVAX (WAVAX)
• Wrapped One (WONE)
• Wrapped Near (WNEAR)
• renBTC (RENBTC)

The Future of Wrapped Bitcoin

The future of Wrapped Bitcoin seems promising. With its ability to bridge the Bitcoin and Ethereum ecosystems, this cryptocurrency can play a significant role in the development of both environments.

By merging the value of BTC with the utility and possibilities of decentralized finance, we’ve seen the growth of DeFi and increased adoption of wBTC. An increasing number of crypto investors seek to diversify their portfolios and gain exposure to different currencies, and they take advantage of Wrapped Bitcoin to achieve those goals.

On the flip side, as the DeFi space keeps evolving, other protocols and technologies might change the use case and demand for wBTC. Lastly, there are still security risks and challenges to overcome in that regard.

Key Takeaways

In conclusion, Wrapped Bitcoin represents a valuable symbiosis between different blockchains and technologies. It removes the downsides of both blockchains and allows users to leverage their Bitcoin holdings while using Ethereum-based applications.

However, it’s essential to keep in mind the increased risk associated with using wBTC. The reliance on custodians and smart contracts makes it all the more important to do your research and make sure you’re using reputable services.

Wrapped Bitcoin is just one of the many ways that cryptocurrencies redefined the rules of finance. As we look forward, we await further innovation in the universe of digital assets.