In recent months, a new alt coin has gained massive amounts of traction and, as of the writing of this article, holds 14th place on CoinMarketCap. So, what is Wrapped Bitcoin? Is It Bitcoin? The answer may actually surprise you.
What Is Wrapped Bitcoin (WBTC)?
Wrapped Bitcoin, abbreviated WBTC, is an ERC 20 token which is backed on a 1:1 basis with Bitcoin, sort of like a Bitcoin based stablecoin. Basically, Wrapped Bitcoin is a token which can be used to represent Bitcoin on the Ethereum blockchain. This is a done using a completely transparent process which is 100% verifiable. Wrapped Bitcoin is much quicker to transfer than regular Bitcoin and can be considered to be a layer two solution to Bitcoin similar to the lightning network.
The WBTC project was built based on a collaboration between a bunch of cryptocurrency companies: BitGo, Compound, Dharma, Kyber, MakerDAO, Ren, and TokenSets. The idea was thought of by the CEO of Kyber, Loi Luu, and the CTO of BitGo, Benedict Chan. The project was launched on January 2019.
Why Wrapped Bitcoin?
You may be wondering why there is a need to have a Bitcoin-like asset which can be spent on the Ethereum blockchain, and the answer is basically for ease of use.
Since its inception in 2009, Bitcoin technology has barely changed, but blockchain technology as a whole has transformed. When he created Bitcoin, Satoshi Nakamoto had no idea where blockchain technology would go. And since he didn’t stick around to continue the development, it has been increasingly difficult to make Bitcoin fit into a world which is increasingly run on Ethereum.
With the DEFI movement, which allows people to use cryptocurrency for traditional financial products, such as loans and derivatives, using the Ethereum blockchain has become more and more popular. But here’s the problem, there is currently no easy way to take your Bitcoins and invest them in the DEFI movement as there is no bridge between Bitcoin and Ethereum blockchains. Wrapped Bitcoin solves this problem as it is essentially a form of Bitcoin which exists on the Ethereum blockchain, and can easily be used for DEFI purposes. This way, Bitcoin holders can interact with the Ethereum blockchain without having to sell their Bitcoin. And those in the DEFI world can enjoy the liquidity of Bitcoin while using Ethereum run DEFI products.
How Does This Work?
The process of obtaining Wrapped Bitcoin is called “wrapping.” When you wrap or purchase an amount of Wrapped Bitcoin, the BitGo Trust Foundation holds that exact amount of Bitcoin in a fund, then issues you the ERC-20 friendly token which can be used on the Ethereum blockchain.
It may seem like this is an extra step, but if you consider the fact that this is replacing a number of steps, Wrapped Bitcoin really is a huge leap forward in the world of cryptocurrency convenience.
When you wish to trade your Wrapped Bitcoin tokens back to Ethereum, your Wrapped Bitcoin’s are burned and your Bitcoin will be returned to you from the trust. It is as easy as that.
Why Not Just Use Ethereum?
Some of you are probably wondering why you wouldn’t just use Ethereum for your DEFI needs. And you can, there is no reason not to. The main purpose of Wrapped Bitcoin is to open opportunities to invest for more people. Especially because Bitcoin has a larger market cap, more liquidity, and a bigger following than Ethereum. The success of DEFI is dependent on making these products available to a wider audience as well as the ability for investors to have liquidity.
It is also important to note that Wrapped Bitcoin is not the only coin of its type operating on the Ethereum blockchain. However, it is the only one which is 100% verifiable and it is backed by a community of companies rather than one single centralized company.
Where Can I Buy Wrapped Bitcoin?
Wrapped Bitcoin is available on a number of decentralized as well as regular exchanges. You can buy it on a peer-to-peer basis, but this slightly defeats the purpose of the coin. You can easily find it listed on CoinList and Coinbase as well as the decentralized exchange DEX. CoinList and Coinbase do follow KYC and AML regulations so if you don’t already have an account with them, you will need to be verified before you can make any large purchases. If you don’t want to go through this process then consider checking out DEX instead.
After you buy your WBTC, you can store it in any wallet which has the capabilities to store ERC-20 tokens. If you are planning to use it in the DEFI world, then it is best to store it in a wallet that is Web3 based and non-custodial so you can have easy access to a number of DEFI solutions like Uniswap, Yearn.Finance, Coupound, and Aave. But if you would like a wallet which is a bit more user friendly, the web wallet MetaMask is extremely useful for getting your coins into the DEFI world.
Should I Buy Wrapped Bitcoin?
If you are looking for an investment where you buy a coin and hold it, Wrapped Bitcoin isn’t this type of coin. Think instead of Wrapped Bitcoin as a coat check for Bitcoin. You check your Bitcoin in, get a ticket so your Bitcoin can be found later (Wrapped Bitcoin) and then when you retrieve your Bitcoin later, the coat ticket is destroyed. Wrapped Bitcoin doesn’t have any value behind it other than that which is provided by its Bitcoin anchor.
Now, on the flipside, if you are looking to get involved in investments with your Bitcoin, Wrapped Bitcoin is absolutely for you. There is no reason not to use Wrapped Bitcoin over selling your Bitcoin for Ethereum (which you can do as well). But the process behind Wrapped Bitcoin is sound, simple, and it is a good option for investors.
Although Wrapped Bitcoin isn’t necessarily an investment grade cryptocurrency, it is a token which provides an essential service to Bitcoin users who are looking to invest in the DEFI world. Wrapped Bitcoin is filling a technological gap which needed to be bridged in order to propel blockchain technology forward. Overall, Wrapped Bitcoin is a new technology, and it will be interesting to see how it’s future unfolds in the DEFI world.