What is wBTC (Wrapped Bitcoin)?
Wrapped Bitcoin (wBTC) allows Ethereum applications to embed a cryptocurrency backed by actual Bitcoin reserves.
In this way, Wrapped Bitcoin operates as a bridge between Bitcoin and Ethereum, allowing Bitcoin users to access decentralized financial applications (DeFi) and for Ethereum applications to gain additional liquidity.
To make this work, the passing process from BTC for wBTC depends on three entities:
- custodians — Mine the wBTC and maintain their reserves of Bitcoin safe.
- Merchants — Distribute wBTC to users and destroy excess wBTC.
- DAO — an autonomous organization decentralized responsible for changes to smart contracts and for adding or removing merchants and custodians.
Once the Wrapped Bitcoin has been deposited at a user's Ethereum address, the asset can be used in the network's financial applications for savings, loan and investment services in a way that can offer advantages over existing options.
Compared to processes where credit is assessed by a financial institution, wBTC users can put their Bitcoin to work without disclosing private information.
Who Created Wrapped Bitcoin (wBTC)?
wBTC was first announced in October 2018, but was later launched and created by a consortium of Bitgo, Kyber Network and Republic Protocol in January 2019.
Upon release, wBTC was immediately available for use in popular Ethereum DeFi dapps such as Compound, Dharma, bZx and dYdX.
Why Does Wrapped Bitcoin (wBTC) Have Value?
wBTC gets its value from Bitcoin price mirroring as it is supported 1:1 thanks to a reservation.
wBTC offers similar value to other projects that use Ethereum mint tokens reflecting the Bitcoin price, such as Keep tBTC, allowing Bitcoin holders to interact with the vast array of DeFi dapps present on Ethereum without the need to sell their own active.
When they decide to stop using these services, they only pay a small additional fee to recover their Bitcoin from merchants.
How Does Wrapped Bitcoin (wBTC) Work?
Users who wish to deposit BTC and mint wBTC must go through a process that is carried out by merchants and custodians.
A user can transfer Bitcoin to the custodian, who will then issue the equivalent amount in wBTC on the Ethereum network. When the wBTC needs to be converted back, the user opens a coin burn request.
The custodian then destroys the Wrapped Bitcoin and transfers the reserve's BTC back to the customer. The custodian is responsible for the wrapping and unwrapping (issuing and burning) of tokens. In the case of Wrapped Bitcoin, this action is managed by an autonomous decentralized organization (DAO).
The smart contracts that create the wBTC are controlled by a DAO composed of custodians, merchants and agreed institutions.
DAO makes common decisions, such as changing the smart contract that creates the wBTC or adding/removing its members.
DAO was launched with 16 initial members, including all custodians and merchants, along with several others such as MakerDAO, Blockfolio, Gnosis and Loopring.
Why Use Wrapped Bitcoin (wBTC)?
Users may find wBTC attractive as a way to use their Bitcoin in Ethereum applications and put their criptomoeda idle to work on various income generating instruments.
Investors may also want to consider adding wBTC to their portfolio to gain exposure to Bitcoin price action without interacting with the Bitcoin network or purchasing it through a centralized exchange.
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