Discover WBTC, Bitcoin for the Ethereum ecosystem

ProductDec 15, 2022
Discover WBTC, Bitcoin for the Ethereum ecosystem

Like other wrapped tokens, WBTC solves the interoperability challenge that plagues veteran blockchains. While Bitcoin is isolated from non-native networks, wrapping offers a smart workaround. This technology for cross-chain conversion makes transactions simpler and faster. Find out more about WBTC crypto in our guide.

What are wrapped tokens?

The term wrapped tokens refers to tokenized versions of cryptocurrencies typically hosted on non-native blockchains. Pegged in value to the underlying asset, they serve as a quick fix for the lack of interoperability. Like stablecoins deriving value from fiat or commodities, wrapped tokens derive value from the cryptos they represent.

Cross-chain transactions are crucial for the flourishing of the decentralized ecosystem. If a coin or token fails to interact with other blockchains, its relevance may diminish. On a wider scale, isolation impedes the growth of the global crypto economy. As a result, the wrapping technology, initially designed for Ethereum, has spread to more blockchains.

What is wrapped Bitcoin?

BTC, the world's first cryptocurrency, has revolutionized finance. Yet while Bitcoin epitomizes blockchain, the pioneering system has one fundamental flaw — working in silos.

WBTC is a solution-driven token: it makes the coin interoperable, enabling other blockchains to facilitate BTC transactions. According to the official site, the creation of WBTC was a joint initiative by Kyber, Ren, and BitGo.

Holders can make payments on the Ethereum network without delays and extra costs and interact with DeFi tools. At press time, WBTC's competitors include RENBTC (wrapped BTC on the Ren platform) and BTCB (wrapped Bitcoin on BNB Chain).

How does WBTC work?

BTC backs WBTC at a 1:1 ratio, so the tokens follow the price of the underlying coin. As an ERC-20 token, WBTC is hosted on Ethereum, the most popular blockchain for DeFi and NFTs. Wrapping and unwrapping — turning BTC into WBTC and vice versa — requires a custodian and a merchant.

Minting WBTC. Source: wbtc.network
Minting WBTC. Source: wbtc.network
  • A custodian is the wrapper and unwrapper that locks and unlocks BTC amounts equal to those of wrapped tokens. Custodians must ensure institutional-grade security, with all WBTC "fully backed and verified through on-chain proof of reserves." As the sole custodian for WBTC, BitGo performs regular audits to show transparency through publicly verifiable transactions.
  • A merchant is an intermediary between the user and the custodian. Merchants act as administrators — they initiate the processes of minting and burning tokens, which the custodian performs.
  • A multi-signature contract controls the addition and removal of custodians and merchants. The keys to this smart contract are held by members of WBTC DAO (decentralized autonomous organization), which include institutions that are neither merchants nor custodians. According to WBTC news, Kyber Network is planning a shift to a new multi-sig contract with thirteen signers. Reaching a consensus and processing a transaction will require eight of them.

What is WBTC supply?

At press time, the proof of assets page shows 202,255.4691 BTC in custody for 199,238.7123 WBTC in the ERC-20 contract.

Wrapping and unwrapping

Custodians interact with merchants to exchange BTC for WBTC and back. These operations involve two different transactions — minting and burning. Both are recorded publicly — anyone can see them via a block explorer. Here is how the process works, according to the WBTC whitepaper.

  1. A user who wants to convert BTC to WBTC (for example, 5 BTC) notifies their merchant.
  2. The merchant authorizes the custodian to mint WBTC for the user and sends the user's bitcoins to them.
  3. The custodian locks the bitcoins to mint 5 WBTC and sends the wrapped tokens to the merchant's wallet. The merchant transfers them to the user.

Burning works in a similar way. Suppose the user has 2 WBTC left and wants to unwrap them (swap WBTC for BTC). Here is what happens after they notify their merchant.

  1. The merchant sends a burn request or calls the corresponding function in the governing contract to reduce the user's WBTC balance accordingly. Only merchants can initiate burning.
  2. The custodian releases 2 BTC from the reserve to the merchant, who then reimburses the user. Meanwhile, the 2 WBTC are burned — removed from circulation.

How to wrap Bitcoin

One of the ways to convert BTC to WBTC is via centralized wrapping. Once you send Bitcoins to a centralized custodial platform, it will lock it in a smart contract, mint an equivalent amount of WBTC, and transfer it to you through your merchant. Similarly, custodians and merchants convert WBTC to BTC.

How to convert WBTC to BTC trustlessly

Those who want to avoid third parties use trustless techniques based on smart contracts. After a user sends BTC to such a contract, it mints an equivalent amount of WBTC. Finally, some wrapping solutions mint synthetic BTC-pegged assets without necessarily requiring BTC collateral.

Wrapped Bitcoin vs. Bitcoin: Advantages

One of the most significant advantages of WBTC vs. BTC is speed, particularly when the Bitcoin network traffic surges. WBTC is also versatile, while the underlying coin is primarily a payment option and an investment asset. Overall, the wrapped version trumps BTC in three respects:

  • Speed of transactions
  • Liquidity
  • Utility

On centralized exchanges, liquidity may be limited. Their DeFi counterparts circumvent it through AMMs — automatic market makers. At the same time, most DEXs are chain-specific, so wrapping is the only solution for BTC holders that want to use them.

As WBTC is an ERC-20 token, it works with Ethereum smart contracts, which serve multiple purposes. For example, one can engage in yield farming via WBTC pools on DEXs. Traders, institutions, and DeFi protocols get various benefits from adopting WBTC crypto:

  • Traders can move Bitcoin between different exchanges to access higher liquidity and enjoy shorter processing times.
  • Providers of wallets, exchanges, and payment systems can handle WBTC with just the Ethereum node instead of juggling multiple nodes and transaction formats.
  • Dapps can include Bitcoin in lending protocols, token sales, prediction markets, and more.

Is WBTC safe?

As wrapping and unwrapping involves a custodian, trust is a prerequisite for both. Despite the existence of credible dedicated platforms, some users may be hesitant to convert their holdings. As a result, they opt for buying WBTC on regulated exchanges.

Secondly, despite the time and cost savings compared to BTC, the Ethereum network has its flaws. In particular, it is notorious for slowing down when congestion spikes.

WBTC use cases

After wrapping their coins or buying WBTC, holders can unlock a wide range of utilities in decentralized finance. They may use WBTC on both decentralized exchanges (DEXs) and decentralized applications (Dapps). As of December 2022, popular use cases include the following:

  • Using WBTC as collateral for crypto loans on DeFi and CeFi platforms, including CoinLoan.
  • Earning interest by locking WBTC in liquidity pools on lending protocols like MakerDAO, Compound, and AAVE.
  • Wrapped Bitcoin staking on centralized exchanges — for example, WBTC staking in dual liquidity pools on Binance.
  • WBTC yield farming by moving WBTC between dedicated pools on different DeFi platforms.
  • Margin trading other ERC-20 tokens, ETH, and stablecoins to generate profit. As this activity involves trading with borrowed money, it is not recommended for beginners.

What is a wrapped Bitcoin worth?

Due to the 1:1 peg, the WBTC price mirrors that of BTC. As of December 14, 2022, one wrapped token is worth $17,792.02. It has risen by 4.4% over the past week and 9.2% over the past 30 days. However, BTC's wrapped equivalent is still over 60% below the all-time high of November 10, 2021 ($70,643, according to CoinGecko). The all-time low of $3,139.17 was observed on April 2, 2019.

Wrapped Bitcoin price history as of December 15, 2022. Source: CoinGecko
Wrapped Bitcoin price history as of December 15, 2022. Source: CoinGecko

WBTC is the 22nd cryptocurrency by market capitalization (over $3.5 billion). The total available supply is just under 200 million tokens.

Using WBTC on CoinLoan

CoinLoan offers multiple use cases for your wrapped tokens. Earn an attractive yield with our Interest Account, borrow WBTC against other cryptos, fiat, or stablecoins, or use it as collateral for hassle-free loans! You can transfer the tokens from your WBTC wallet or get them through our Exchange.

Our mobile app and web-based platform are always at hand. CoinLoaners can manage their crypto portfolios on the go with confidence and peace of mind. As a regulated financial institution, CoinLoan adheres to the highest asset and user protection standards. Explore your opportunities today:

WBTC loans

Turn your wrapped Bitcoin into collateral to access stablecoins, fiat, or other cryptocurrencies. We offer WBTC-backed loans for a period between one month and three years. The Loans feature is easy to navigate and understand:

  1. Choose the assets.
  2. Set the loan term (standard or customized).
  3. Select a convenient LTV rate from 20% to 70%.

WBTC loans work both ways. If you do not have WBTC yet, get it on CoinLoan in a few clicks or taps, using other assets as collateral. You can even get WBTC loans backed by WBTC! Collateralizing does not trigger a capital gains tax (unlike selling) while ensuring asset protection without lock-ins.

WBTC deposits

CoinLoan offers attractive WBTC yield conditions for Bitcoin and its wrapped equivalent in Interest Account. You can increase your rate by staking CLT, our native token. Pick an option that suits you best:

  • 5.2% standard APY
  • 7.2% APY with CLT Staking

WBTC on CoinLoan Exchange

Convert your WBTC to other supported assets via our intuitive crypto Exchange. The range includes stablecoins like USDT and PAXG, fiat currencies, and other cryptoassets. Swapping is as easy as 1-2-3: choose the ticker symbols for both assets, enter an amount, and launch Exchange!

How to convert BTC to WBTC and back

To get WBTC for BTC, switch from BTC to BCH (Bitcoin Cash) and then convert BCH to WBTC. The same steps in reverse will convert WBTC to BTC.

Alternatively, users can wrap or unwrap Bitcoin via bridges, dedicated exchange sites (for example, Binance Convert, Changelly, or ChangeNow), or crypto exchanges with a corresponding feature (for example, Binance, Kraken, or HitBTC).

Final word

WBTC is the most popular type of tokenized Bitcoin. Native to Ethereum, it gives access to a rapidly growing ecosystem of DeFi products and services. As WBTC is pegged to the pioneering cryptocurrency, its holders can create more value without abandoning the Bitcoin value chain. Borrow, collateralize, or deposit WBTC on CoinLoan to make the most of this multifaceted crypto!

Disclaimer:

The information provided by CoinLoan (“we,” “us,” or “our”) in this text is for general informational purposes only. All investment and financial opinions expressed by CoinLoan in this text are from the personal research and open information sources and are intended as educational material. All outlined information is provided in good faith. However, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information in this text.

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