Is Wrapped BTC Worth Investing?

Wrapped Bitcoin is a digital token with the same value as one Bitcoin but is based on ERC-20, making it usable on the Decentralised Finance ecosystem.

Bitcoin and Ethereum are cryptocurrencies that run on blockchains. Now, different blockchains have different functions, features, and protocols. Because of this difference, they cannot interact with each other. While this increases the security of a blockchain-based digital asset, it creates immense difficulties for developing an interoperable exchange or system of cryptocurrencies where the data of one crypto gets transferred into another crypto.

What is Wrapped Bitcoin

Wrapped Bitcoin (wBTC) is a modified version of bitcoin, equal to its price, that can be used on Ethereum. The token was created to allow users to interact with Ethereum’s decentralized finance (DeFi) ecosystem. An additional benefit is improved transaction speed: wrapped bitcoin transactions clear faster than bitcoin transactions.

  • As mentioned in a research paper published by Binance in August 2020, Wrapped Bitcoin or WBTC is an ERC-20 digital asset backed by Bitcoin (BTC) in a 1:1 fashion.
  • The digital asset functions with projects such as Kyber Network and REN being the Merchants who mint and burn WBTC tokens, and BitGo being the Custodian who holds BTC and the keys to mint WBTC tokens.
  • When a user wishes to exchange BTC for WBTC, he/she will be required the send his/her BTC to a Merchant. The Merchant will initiate a WBTC mint request and send the BTC from the user to the Custodian. The Custodian will then mint the corresponding WBTC, which will be subsequently transferred to the user via the Merchant.
  • When a user wishes to redeem his/her BTC with WBTC, the Merchant would communicate with the Custodian and transfer the user’s BTC back to him/her, while the WBTC token will be burnt.

What is the project trying to achieve?

Wrapped bitcoin uses smart contract functionality for bitcoin transfers to provide a way for bitcoin holders to access DeFi. In doing so, it brings the greater liquidity of the world’s largest cryptocurrency to the DeFi arena.

For new WBTC to be produced or minted, a so-called merchant places a request with another party, the custodian. WBTC’s white paper specifies that the merchant sends bitcoin to the custodian, which mints the WBTC and sends it to the merchant’s wallet on the Ethereum blockchain. The merchant can then swap the wrapped bitcoin with an end-user in exchange for the equivalent amount of bitcoin. Merchants are responsible for carrying out know-your-customer and anti-money laundering processes with the end-users.

Custodians are the institutions that hold the backing of bitcoin and mint the token. For WBTC, BitGo is the sole custodian as of October 2021. The founding merchants were Kyber Network and Ren, though others have now joined. In June 2021, it was reported that more than 1% of bitcoin was held in wrapped bitcoin tokens.

Removing WBTC from circulation – for example when a user wants to convert WBTC back to bitcoin – is accomplished through burning, a process that can be carried out only by a merchant. The merchant calls the “burn” function in the governing contract, and its WBTC balance is reduced. The custodian is then free to release the held bitcoins to the merchant, who can reimburse the end user.

Is wrapped BTC safe?

From a technical perspective, a wrapped Bitcoin token is safe. It will likely be in custody in safe platforms like Ethereum or Binance Smart Chain, and once converted into an ERC-20 or BEP-20 token, it will hold the security of the related network.

One of the significant flaws in wrapped BTC tokens is the need to trust the custodian that holds the underlying asset.  If the custodian unlocks and releases the real Bitcoin to someone else, token holders of the ERC-20 compatible wrapped BTC would be left with a worthless asset.

The way Bitcoin is held determines the level of security provided. A centralized custodial bridge that holds Bitcoin is an organization that promises to mint ERC-20 tokens on Ethereum, for example. The centralized entity must be trusted that they will hold the BTC and not run away with it. Users must ensure these organizations are at least backed up by guarantees and insurances in case something goes wrong.

A decentralized smart-contract-managed bridge would be the best choice in the decentralized world of crypto. No need to trust any third party, only trust the code of immutable time-stamped smart contracts.

The security of wrapped BTC bridges (cross-chain connections) has represented a heated argument across the DeFi community for a long time in that custodians must be relied upon for keeping the real BTC locked.

What Are the Benefits of Wrapped Tokens?

In short, they give the owners of digital assets freedom to explore other blockchains.

A large chunk of the DeFi ecosystem (and DApps) are based on the Ethereum network rather than the Bitcoin blockchain. This can be extremely frustrating for BTC owners, as this means it’s near impossible for them to get involved unless they sell their crypto assets or buy others.

Since the WBTC.network launched in January 2019, many DeFi protocols — including MakerDAO, Dharma, Compound, and the Kyber Network — have begun allowing borrowers to use WBTC as collateral. This can then be locked up into a smart contract, with crypto loans usually paid out using the DAI stablecoin on the Ethereum ecosystem.

The Wrapped Bitcoin project is overseen by the WBTC DAO. To jog your memory, DAO stands for Decentralized Autonomous Organization.

Why should one use and invest in wBTC or wETH?

  • As mentioned on a website called wbtc.network, WBTC brings greater liquidity to the Ethereum ecosystem including decentralized exchanges.
  • Wrapped Bitcoin converts Bitcoin into an ERC-20 based format, which can also be used to create smart contracts.
  • With Wrapped Bitcoin based on ERC-20 blockchain technology, exchanges, wallets and crypto-based payment apps only need to handle an Ethereum node, which makes it easier to manage transactions occurring on the decentralized finance ecosystem.
  • The current market cap of Wrapped Bitcoin is Rs. 812.4B and there are more than 262.0K WBTC is circulation as of now, according to Coinbase.

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