Wrapped Bitcoin is an ERC-20 token directly backed by Bitcoin. ERC-20 tokens are created and used on the Ethereum blockchain. Since Wrapped Bitcoin is directly backed by Bitcoin, its price mirrors that of Bitcoin. Hence, 1 Wrapped Bitcoin is equal to 1 Bitcoin.

Wrapped Bitcoins serve to bridge the ERC-20 trading gap between centralized and decentralized exchanges. Before the creation of wrapped bitcoins, most trading in centralized exchanges was done with Bitcoin and not Ether, while many decentralized exchanges only offered trades in Ether and not Bitcoin.

However, this changed with the launch of Wrapped Bitcoin (WBTC). Through WBTC, DeFi traders can buy and trade a Bitcoin equivalent on decentralized exchanges that solely support ERC-20 tokens.

History of Wrapped Bitcoin

BitGO Inc., Kyber Network, and Ren (formerly known as Republic Protocol) created and launched Wrapped Bitcoin. BitGO is a digital asset trust and security company. Kyber Network is a decentralized liquidity protocol that allows users to exchange tokens directly and securely. Ren is a blockchain protocol that enables users to interact between different blockchains.

The first step in launching the Wrapped Bitcoin token was the release of its whitepaper on January 24, 2019. The whitepaper outlined its purpose and functionality in detail.

The Wrapped Bitcoin token was launched on January 31, 2019. At the time of the token launch, only eight merchants could facilitate the conversion of Bitcoin to Wrapped tokens and vice versa. However, as the token grew in popularity, the number of merchants facilitating the conversion of Bitcoin to Wrapped Bitcoin increased.

Key Players

Custodian

The custodian is the institution or party that holds Bitcoin, the underlying asset backing the Wrapped Bitcoin tokens. BitGo is the custodian of the Wrapped Bitcoin token. It holds Bitcoin in its reserves, ensuring that the Wrapped Bitcoin token maintains a 1:1 ratio price peg with Bitcoin. The custodian is also responsible for minting the Wrapped Bitcoin token.

Merchant

The merchant is the institution or party to which the Wrapped Bitcoin token will be minted and burnt. The merchant directly interacts with the custodian, distributing the Wrapped Bitcoin token minted from the custodian to the users.

In the early days of the Wrapped Bitcoin token launch, Kyber Network and Ren were the main merchants. However, the number of merchants interacting with the custodian (BitGO) and distributing the Wrapped Bitcoin tokens has increased.

Users

These are the holders of the Wrapped Bitcoin token. They can trade or transact with the token on the Ethereum network.

DAO Members

A DAO, or decentralized autonomous organization, is a decentralized entity comprising members who can vote or participate in the decision-making process of a blockchain protocol or network. The Wrapped Bitcoin protocol is controlled by a DAO comprising 17 members.

Each member of the Wrapped Bitcoin DAO holds a key to the multi-signature wallet that secures the protocol. The DAO can also vote to remove erring members or add new members.

How Does Wrapped Bitcoin Work? Minting and Burning

Minting

Source: WBTC Whitepaper

Minting is the process of producing new Wrapped Bitcoin tokens. BitGo, the custodian, is responsible for creating or minting new Wrapped Bitcoin tokens.

Below is a detailed process of how Wrapped Bitcoin tokens are minted:

• A user requests Wrapped Bitcoin tokens from a merchant.
• The merchant performs the required Anti-Money Laundering (AML) and Know-Your-Customer (KYC) checks on the user to verify their identity.
• Once the user’s identity has been verified, the merchant initiates a transaction to authorize the custodian, BitGO, to mint X amounts of Wrapped Bitcoin tokens. The newly minted Wrapped Bitcoin token is sent to the merchant’s address on the Ethereum chain.
• The merchant then sends the equivalent amount of Bitcoin to the custodian. So, let’s say the custodian, BitGo, mints and sends 1 Wrapped Bitcoin token to a merchant; the merchant will, in turn, send 1 Bitcoin to the custodian.

However, before a custodian sends the requested amount of Wrapped Bitcoins to the merchant, the custodian must wait for six block confirmations of the Bitcoin transaction. A Bitcoin transaction is considered secure and irreversible after these confirmations.

Source: WBTC Whitepaper

Customer-Merchant (KYC, AML, and Bitcoin)

Customers must use a merchant to acquire Wrapped Bitcoin (WBTC) tokens. But before that happens, the merchant must do their due diligence and verify the customer’s identity through Know-Your-Customer (KYC) and Anti-Money Laundering (AML) checks. This is just a precaution to ensure everything is up and up. Once the verification process has been passed, the merchant will kick off the WBTC minting process. The customer sends the equivalent amount of Bitcoin (BTC) to the merchant, eventually reaching the custodian, BitGO.

Merchant-Customer (WBTC Tokens)

After the merchant has verified the customer’s identity and received the Bitcoin, it gets newly minted WBTC tokens from BitGO and sends them to the customer’s Ethereum address.

Notably, many centralized and decentralized exchanges directly provide Wrapped Bitcoin tokens. Customers can simply purchase WBTC like any other cryptocurrency on Gate.io.

Burning

Source: WBTC Whitepaper

Burning is the process of redeeming Bitcoins for Wrapped Bitcoins. In simple terms, burning is the process of exchanging Wrapped Bitcoins for Bitcoins. Only merchants can burn Wrapped Bitcoins.

To burn a Wrapped Bitcoin token, the amount of tokens to be burned or exchanged is first specified. The specified amount of tokens to be burned is then deducted from the merchant’s wallet.

Outlined below is a detailed breakdown of how Wrapped Bitcoins are burned:

• A user requests to redeem or exchange a particular amount of Wrapped Bitcoins with Bitcoins.
• The merchant then does the required AML and KYC processes to verify the user’s identity.
• Once the user’s identity is verified, the merchant creates a burn transaction with the custodian, requesting X amounts of Bitcoin tokens.
• The custodian then sends the requested amount of Bitcoin to the merchant, while the equivalent of the Wrapped Bitcoins is deduced from the merchant’s address.

However, before these burn transactions are finalized, the custodian waits for 25 block confirmations to ensure irreversible transaction finality.

• Once the merchant gets the Bitcoin, it sends it to the user’s wallet address.

Source: WBTC Whitepaper

What is the WBTC Token?

WBTC is the tokenized or converted version of Bitcoin that can be used on the Ethereum blockchain network. It has a 1:1 price ratio value with Bitcoin, with 1 WBTC equaling 1 BTC.

WBTC has grown to have a market cap of over $9 billion, becoming the 15th largest crypto asset by market cap. Although there are 21,000,000 WBTC in total supply, only 0.73% are in circulation.

Uses of WBTC

WBTC allows Bitcoin holders to benefit from endless opportunities in the DeFi ecosystem and Ethereum network. Using the WBTC token, users can;

• Participate in yield farming
• Earn interest from decentralized lending pools
• Margin trade on centralized and decentralized exchanges
• Become a liquidity provider in any DeFi lending protocol of their choice

Is the WBTC Token a Good Investment?

WBTC is a tokenized version of the Bitcoin token. Since it is an ERC-20 token, it allows Bitcoin holders and users to benefit from the Ethereum blockchain. Using the WBTC tokens, its holders can benefit from Ethereum’s Decentralized finance.

Thus, investing in WBTC tokens can be a good strategy for users who want to explore Ethereum decentralized finance while benefiting from Bitcoin’s huge growth.

However, before investing in the WBTC project, ensure you understand it in detail. You can learn more about it by reading its whitepaper and closely monitoring what is said about it in the crypto community.

Risk Analysis

Advantages

A significant advantage of the WBTC token is its use in the Ethereum blockchain network. As an ERC-20 token, it can be used in any Ethereum smart contract.

The WBTC token also opens many earning potentials for its holders or users who might want to benefit from Ethereum’s decentralized finance.

Since WBTC mirrors Bitcoin’s price movements, it is not directly affected by external factors that might otherwise directly affect other non-wrapped cryptocurrency tokens.

Disadvantages

Although WBTC mirrors Bitcoin, it is not Bitcoin. No matter how high its price movement may go, WBTC is just a tokenized version of Bitcoin with more utility functions. This means it cannot be used within the Bitcoin blockchain, and its holders cannot be referred to as Bitcoin owners or holders.

Compared to Bitcoin, WBTC is more centralized, which goes against the ethos of blockchain technology, which aims to maintain decentralization.

BitGO controls the supply of WBTC. While BitGO may have a Bitcoin reserve that ensures that WBTC maintains the 1:1 ratio price peg with Bitcoin, the way these tokens are distributed may still be controlled by individuals or centralized entities.

For example, there has been much controversy regarding Justin Sun, founder of the Tron Blockchain, and his recent partnership with BitGO, the primary custodian of the WBTC tokens.

Some crypto enthusiasts have raised concerns around this recent partnership, fearing that Justin Sun’s participation in the managerial affairs of the WBTC ventures may negatively affect the WBTC tokens. Many have referenced Justin’s adverse aftermath effects on the TUSD coin, highlighting that Justin has a track record of misappropriation.

Although Wrapped Bitcoins aims to have a 1:1 price ratio with Bitcoin and have more use cases than Bitcoin, there are concerns that centralized entities may still control its supply.

How Can You Own a WBTC Token?

To own a WBTC token and become a part of users benefiting from its compatibility with the Ethereum blockchain network, follow the simple step-by-step process:

Set up a wallet

To own a WBTC token, you need to purchase it from a cryptocurrency exchange. To do this, you must create a Gate.io account, complete the KYC process, and add funds to the account to purchase the token.

Take action on WBTC

Users can sign up and purchase or trade WBTC tokens here.