If you are not familiar with cryptocurrencies, it can be pretty tough to understand what Wrapped Bitcoin is and how it works.
Does this mean you should go over the basics and learn more about the general concepts of cryptocurrencies and blockchains before you dive into this option in particular? Well, it isn’t mandatory, but it would be a good idea.
You see, keeping up with all the information in this market can be overwhelming, and it is natural for people who even know about it to get lost with the new additions and how each one of them works.
Thus, yes, we would recommend going over the simple concepts of what cryptocurrency is and how they work. But if you have done this already and just want to learn more about specific options in the market just like WBTC, then we can lend you a hand here.
Wrapped Bitcoin sounds very new to some people, while others find themselves already wrapped around it and using it for new operations and options.
However, is it really something you want to use? And is it simply another cryptocurrency in the market? Let’s get deeper into the topic and clarify the essentials, plus some details you will need later on.
What Is Wrapped Bitcoin (WBTC)? – More Than a Digital Currency?
If you know about Bitcoin, you will be able to understand this new option a bit better. But we would also add some Ethereum knowledge to the requirements.
You see, we don’t find the explanation of Wrapped Bitcoin to be that complicated, but it is indeed something that can get confusing, as we have mentioned a few times already.
So, we will do our best to keep it simple.
Wrapped Bitcoin (wBTC) is just like bitcoin, but it has been converted in order to be used in the Ethereum blockchain without any limitations.
The wrapped token was launched in January 2019, and due to the conversion, it is now considered an Ethereum token that is backed 1-to-1 by bitcoin (BTC).
But what do this backing and token mean for the ecosystem and market?
This means that one wBTC equals one bitcoin, so the value follows the same price as in the market for the original token.
But unlike the original bitcoin, the wBTC token allows users to interact with many of Ethereum’s decentralized applications (dApps), particularly Ethereum’s Decentralized Finance (DeFi).
The wBTC token was created using Ethereum’s token standard to provide bitcoin liquidity and make this work properly. Previously, cryptocurrency users that only owned bitcoin could not access the DeFi dApps built on the Ethereum protocol.
But DeFi projects discovered an opportunity to tap into the greater market capitalization and the higher trading volume of bitcoin through wBTC Ethereum tokens.
When you take out a DeFi platform cryptocurrency loan, wBTC can be used as collateral or a promise for loan repayment.
The collateral in the form of wBTC is returned after the crypto loan has been repaid, and the platform will reimburse the wBTC if the collateral is liquidated.
But How Does It Work? – Inside Its System
This system doesn’t have to be more complicated than the actual cryptocurrency transfers and processes.
Essentially, Wrapped bitcoin is when you request Ethereum-based ERC-20 tokens from a merchant for exchange for your bitcoin.
The merchant will then conduct a Know Your Customer process (KYC) to verify your identity. After that, they will initiate a transaction with a Custodian.
Currently, BitGo is the only custodian of wBTC, which means the custodian mints a set amount of wBTC, and then sends them to the merchant’s Ethereum address.
You and the merchant will then either make a transaction through a central exchange (CEX) or through a peer-to-peer transaction (known under the atomic swap), leaving you with bitcoin and the merchant with your wBTC.
After the transaction is completed, you’ll be able to use your wBTC tokens across various DeFi platforms.
You can request the merchant to convert your wBTC to bitcoin again. In what is called a “burn transaction,” the merchant destroys the wBTC when this transaction takes place.
To better understand this process, you need to be familiar with the fact that “minting” is the process of creating new wBTC tokens and can only be initiated by the merchant and performed by the custodian previously mentioned.
This process of “burning” is when you redeem Bitcoin for wBTC instead, and the merchant will be the only one allowed to do this.
So basically, this works as a usual transaction. Still, the merchant and custodian are closely related to the process of requesting the transaction, going to the merchant who will burn and request the minting process when needed.
Wrapped Bitcoin (WBTC) History – Who Created It?
Defining or, more like knowing from where a token originated, is always crucial to determine its reliability and potential.
Though WBTC is directly connected with Bitcoin, people don’t have a hard time relying on the cryptocurrency transactions or choosing to work around it depending on their needs.
However, why does it even exist if you have Bitcoin? The answer is the same reason for how it works, considering you can operate in the Ethereum ecosystem, and when it comes to who created it in specific when thinking about this, you can have a look at this history.
BitGo Inc, Kyber Network, and Ren were the original developers of the wrapped Bitcoin protocol that was known as Republic Protocol initially.
The wBTC whitepaper was released by this consortium on January 24, 2019, and not long after, on January 31, 2019, eight merchants launched the token to facilitate bitcoin-to-wBTC transactions.
A decentralized autonomous organization (DAO) controls the wBTC protocol, which currently has 17 members representing stakeholders across the DeFi ecosystem.
Each member of the wrapped bitcoin DAO holds the key to the multi-signature wallet that protects the system.
Members can vote to add, remove or modify members as well as to change the smart contracts around which the token and entire system was built around.
You can see both the creation and burning of wBTC via the Ethereum and Bitcoin blockchains, which means it is a dual system and token for use.
BitGo regularly audits the system and initiates a proof-of-reserve transaction on the Bitcoin blockchain. This allows individuals to confirm that their bitcoin reserves are valid.
The rapid development and widespread use of wBTC are signs that DeFi is growing and can be used to increase the value of the rapidly evolving crypto ecosystems.
With this in mind, the creators continue boosting the token and the entire process of requesting, minting, and burning with the merchants and custodians.
Availability & Main Use: For What Is It Really Used?
Since WBTC works around Bitcoin and it is exactly the same, you have the same supply as the latter.
The limit supply for bitcoin is set at 21 million, and creators continuously burn a specific number of tokens in the market.
This means you have the exact same supply for wBTC, depending on how you exchange them to operate on the Ethereum ecosystem.
But it is very general when it comes to its use, and we have mentioned it so far: Just to use it on the Ethereum network.
If it isn’t that clear year, the ability to take part in the Ethereum ecosystem allows holders and people to participate in decentralized finance applications or dApps.
Usually, you had to liquidate your Bitcoin holdings in order to do so, and it wasn’t always allowed.
However, with the wBTC option, you can do it without liquidating anything or dealing with other issues, or losing the value of your tokens.
With bitcoin hitting the $60k mark once more at the moment of writing this and its update, it is very appreciated to have an option that doesn’t require liquidation, and you can maintain your finances with the token.
Investing & Changing: Is It Worth It?
We understand what you’re thinking, “isn’t it the same as bitcoin?” Does this mean I have to invest in BTC in order to get wBTC?”
For the first, we pretty much think you’ve got the answer (but just to make sure, it is not). However, for the second, it is true you have to purchase or be a bitcoin holder in order to opt for wBTC.
Thus, when it comes to considering this token as an investment, it falls in the same category of spending money in Bitcoin and how much you can purchase from the designated markets.
This also leads us to the usual question, is it worth investing in this decentralized cryptocurrency?
If you ask us, it is, but the problem with this market is that it is quite volatile, and you have to deal with the possibilities of losing lots of money just like you could earn it in the blink of an eye due to this price volatility.
Among all the currencies you can invest in, bitcoin is the original. Despite its current cost, it is worth investing slowly but surely as it is only prone to continue increasing regardless of how it falls in certain periods.
But suppose you are trying to bet on cryptocurrencies in order to become a millionaire or have a continuous income and profit. In that case, we suggest you bet for options that involve having your own business and being more independent instead of having to deal with cryptocurrency market cap, WBTC DAO, and general digital assets in this niche.
They provide you with more reliability and safety in terms of what you can expect from any of them, and you won’t have to deal with a market that changes literally every minute.
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