As of late, there has been a lot of talk regarding wrapped tokens. Specifically, Wrapped Bitcoin (wBTC) continues to surface as one of the prime examples of why wrapping tokens is beneficial to all. The concept of wBTC emerged in a bid to improve Bitcoin’s functionality and usability. Consequently, these tokens help provide more sophisticated financial services to traditional BTC holders.
What is Wrapped Bitcoin wBTC?
wBTC is a new innovation that effectively brings BTC to the Ethereum blockchain. This unique financial instrument provides traders, institutions, and Dapps a bridge to the Ethereum network while maintaining exposure to Bitcoin. The goal is to bring Bitcoin’s price value into play and combine it with Ethereum’s programmability.
Each wBTC is an ERC-20 token that represents Bitcoin (BTC) on a 1:1 basis. Notably, you can convert any Bitcoin over to wBTC using various networks available to the public today. You can also convert your wBTC back into traditional BTC whenever you desire. This flexibility allows users to effortlessly bounce between wBTC and BTC to suit their investment strategy.
Benefits of Wrapped Tokens
Upon learning about wBTC, you may wonder “why would I want to convert my BTC over to wBTC.” Luckily, there are a lot of reasons why an investor would want to wrap their BTCs. Primarily, it provides integration into the Ethereum ecosystem. Ethereum has the largest ecosystem of any cryptocurrency.
This vast network includes exclusive wallets, Dapps, DEXs, games, and smart contracts. Wrapped Bitcoin users can even gain access to DeFi lending and borrowing networks without actually giving up or trading their Bitcoin directly. It’s this latter reason that has caused such a stir in the market lately.
Liquidity
Another significant advantage wBTC brings to the market is greater liquidity. The Ethereum ecosystem is diverse and spread out. This distribution of funds can create a scenario where DEXs (decentralized exchanges) and other platforms lack the necessary liquidity to function optimally. Low liquidity renders an exchange less effective because users can’t trade their tokens quickly and for the amount they desire. wBTC integrates the liquidity of BTC into the flexibility of Ethereum’s ecosystem. In this way, wBTC closes the liquidity loop between many CeFi and DeFi products.
Scalability
Scalability is another major advantage gained from wrapping your Bitcoin. Since wrapped tokens exist on Ethereum’s blockchain, rather than Bitcoin’s directly, transactions conducted with wBTC are faster and cost less. Additionally, you have more transaction and storage options.
New Functionalities
Wrapped BTC provides users with more functionality compared to regular BTC. For example, wBTC can leverage Ethereum’s robust smart contracts. Smart contracts are self-executing pre-programmed protocols. They are considered a core technology of the blockchain sector. However, they didn’t become such until Ethereum entered the market years after BTC. Consequently, BTC lacks full smart contract capabilities in its true form.
DeFi BTC
It can be argued that the expansion of the DeFi (Decentralized Finance) spawned the birth of wBTC. At the very least, it’s the spark that lit the wBTC fire. DeFi applications seek to transform traditional centralized financial services into decentralized version. Popular apps like Compound allow users to replace banks and provide liquidity in return for rewards.
Staking WBTC
Staking is one of the most popular DeFi functionalities. There are currently multiple versions of staking protocols in effect. Most require a user to lock their cryptocurrency into a smart contract for an agreed time in exchange for rewards. Users who convert their BTC over to wBTC can take advantage of these next-gen protocols. For example, platforms such as CoinList allow you to automatically earn rewards by staking wBTC in your network wallet.
Yield Farming BTC
Yield Farming is another DeFi protocol that continues to gain momentum in the sector. Farming is different than staking in a few ways. Specifically, farming protocols have shorter lockup periods. Many farming systems allow network users to lend out their crypto with interest. For example, Compound allows anyone to secure a passive income lending out wBTC to other users in the network via farming pools.
wBTC on the Rise
There are some serious benefits gained when you wrap BTC. These advantages have helped spawn a new sector in the blockchain industry. Nowadays, more investors then ever want to utilize wBTC services. A September report highlighted this growth in spectacular form. According to researchers, there are now over $1.1 Billion in wBTC in use globally.
Different wBTC Models
Interestingly, there are a couple of different BTC wrapping models in use within the sector. Each of these strategies differs slightly but produces the same result – BTC on the ETH blockchain. Here are the three most popular wrapping protocols in use today.
Centralized
In a centralized BTC wrapping strategy, you rely on a firm to maintain the value of your assets. In this system, you provide your BTC to a centralized intermediary. From there, they lock your crypto up in a smart contract and issue a corresponding ERC-20 token. The downside of this approach is that you are completely dependent on the firm to maintain your BTC safely stored away. The platform BitGo is a prime example of this strategy in use.
Is Wrapped BTC (wBTC) Safe?
The concept of wBTC is fairly safe in that the technology is sound. However, there are still many risks you should be aware of before you convert your BTC over to wBTC. One of the main concerns arises from the trust-based models of early wBTC platforms. In this scenario, there is always a risk that the platform could somehow unlock the real BTC and leave token holders with fake wBTC.
Bottom Line
The concept of wBTC continues to see momentum in the market for many reasons. Primarily, nobody wants to trade their BTC, especially as this cryptocurrency is now at all-time highs. Wrapped Bitcoin allows these long term HODLers to earn passive rewards without relinquishing ownership of these valuable digital assets. For these reasons, you can expect to see more wBTC enter the market in the coming weeks.
