The position of Bitcoin as the number cryptocurrency in the world is unquestionable. Even those unfamiliar with the crypto world, in general, know Bitcoin, if only by name. However, despite its value and popularity, Bitcoin has some underlying problems in terms of usability.
It is in an attempt to solve this problem that Wrapped Bitcoin or BTC was created. Wrapped Bitcoin(WBTC) is an ERC-20 token with the same value as BTC, which represents Bitcoin on the Ethereum blockchain. By doing this, Bitcoin can be used for transactions on the Ethereum blockchain without having to convert it to Ethereum.
Bitcoin tokens can be converted into wBTC and vice versa using various platforms. This gives Bitcoin owners incredible flexibility in the way they use the currency.
Why Convert Bitcoin into Wrapped Bitcoin
You may wonder what the essence of wrapped Bitcoin is and why anyone would want to convert their Bitcoin into a wrapped token. The answer lies in the limitations of Bitcoin.
While Bitcoin might be the most valuable cryptocurrency by a mile, it does not compare with Ethereum in terms of functionality. The Ethereum ecosystem is the largest and most functional blockchain ecosystem for cryptocurrencies. It hosts several Dapps, wallets, DEXs, smart contracts, and games.
Since Bitcoin cannot be used directly on this ecosystem, there would be a need to convert it to ETH first. But with a wrapped Bitcoin, you can use Bitcoin directly on Ethereum without having to exchange it.
Benefits of Wrapped Bitcoin
Wrapped Bitcoin makes the market have more liquidity. With several Decentralized exchanges and other platforms that exist on the Ethereum ecosystem, liquidity can pose a problem when trading token. But Bitcoin offers more liquidity, and its seamless integration into Ethereum as wrapped Bitcoin ensures optimal functionality.
- Better usability
A wrapped Bitcoin holder will have access to capabilities that Bitcoin itself does not have. For example, wrapped Bitcoin can be used in creating smart contracts, which Ethereum performs better at than Bitcoin.
If you hold Bitcoin and want to perform a transaction on the Ethereum blockchain ecosystem, you will have to consider trading it for ETH first. For wrapped Bitcoin, this does not have to happen. Since it is already on the Ethereum blockchain, the transaction will be less expensive and faster. You will also have more options for storage and transactions.
DeFi applications are one of the major developments on Ethereum. These decentralized finance platforms hold a lot of potentials as well as multiple functionalities. One of such functionalities lets you safelock your cryptocurrency with a smart contract for some time while you earn rewards on it. You can stake your wBTC using any of these protocols that allows for that and earn on it.
- Yield Farming
This is another DeFi capability. It is similar to Staking, except that it lasts for a shorter period. Some yield farming protocols will also allow users to lend out your cryptocurrencies in exchange for an interest instance; you can lend out your wBTC on Compound to other users and earn interest on it.
The benefits of wBTC are numerous, which explains its growth in recent months. As of press time, the asset has a market cap that is well over $7 billion, an indication of its growth and its usage by market players.
Types of Wrappings Bitcoin Models
When it comes to wrapping Bitcoin, there are several models available, all of which will create Bitcoin that can be used on the Ethereum blockchain. The common ones are;
In this strategy, you give your BTC to a centralized intermediary in exchange for an ERC-20 token of equal value while they lock up your BTC in a smart contract. BitGo operates with this strategy.
This process is through a decentralized system. A smart contract on the network will hold your BTC, and the platform cannot modify such a contract without getting your approval. This system is autonomous.
- Synthetic Asset
In this format, your BTC is locked in a cryptocurrency and in exchange, you will get a synthetic asset of proportionate value. Your BTC is not backed up by BTC but rather the native tokens on the platform.
Wrapped Bitcoin offers a lot of benefits and holds significant potential. This explains its significant growth. However, it is not without challenges. The most notable one is the risks involved.
Earlier trust platforms could gain access to the smart contract and replace the real BTC with a fake one. Centralization and concentration is also a problem, with only a few platforms holding a large amount of BTC in their custody.
Beyond those risks, wBTC has a lot of potentials, and wrapping is quite easy with several platforms available to help with that.