In the universe of cryptocurrencies, there has been a call for better bridges between major blockchains such as bitcoin and ethereum. Wrapped bitcoin tokens are being credited as a solution to help to bridge the gap, according to Coinmarketcap.
Main use case: decentralized finance
One of the main use cases for wrapped bitcoin is decentralized finance (DeFi) which does not rely on financial intermediaries such as brokerages, exchanges, and banks to offer traditional financial instruments, and instead uses smart contracts on blockchains, the most common one being Ethereum.
DeFi allows anyone with an internet connection and a smartphone to access financial services without a middleman. Using cryptocurrency and public blockchains, people across the world can perform any financial transaction.
wBTC as collateral
A standard use for wBTC is as collateral, or a promise for loan repayment, when taking out a cryptocurrency loan on DeFi platforms, Cryptomedia reported. When the borrowed crypto is returned, the collateral, in the form of wBTC, is returned. If the collateral is liquidated, the wBTC is recouped by the platform.
Promise of wBTC: liquidity
A relatively new innovation, wrapped bitcoin or wBTC has delivers some liquidity to decentralized finance protocols and has given bitcoin holders access to financial services not previously available to them.
A growing amount of bitcoin’s circulating supply — 1.3 percent — is being tokenized on Ethereum, The Block Crypto reported. The most popular version is wrapped bitcoin, which accounts for 80 percent of tokenized bitcoin. About 240,000 bitcoin have now been wrapped onto Ethereum, according to The Block’s data dashboard. That’s about 100,000 more BTC since the beginning of 2021 and growing fast.
“The tokenization process works by locking up an amount of bitcoin and issuing an equivalent number of tokens on Ethereum,” Tim Copeland reported for The Block. “The bitcoin-backed tokens are pegged to bitcoin’s price but can also be used on DeFi platforms and in other protocols. To reverse the process, the tokens are destroyed and the bitcoin released.”
Launched in January 2019, wBTC is backed one-to-one by bitcoin, which means that one wBTC is always equal to one bitcoin. The wBTC token allows users to interact with ethereum’s growing number of decentralized apps (dApps).
Benefits of wBTC include incentivization and speed. The technology has helped create a shared incentive between Ethereum and Bitcoin and reduced the hassle and perceived risk of trading tokens outside the Bitcoin network. Wrapped bitcoin transactions also clear faster than bitcoin transactions because wBTC is settled on the Ethereum blockchain, which adds a new block every 15 seconds, while BTC is settled on the Bitcoin blockchain, which adds a new block every 10 minutes, Cryptomedia reported.
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Not everyone is a believer in wBTC
Not everyone is convinced that wBTC will take off.
“For WBTC to take off, it would need a critical mass, which seems unlikely to me”, tweeted Joe Weisenthal,
co-host of the Odd Lots podcast and “What’d You Miss?” on Bloomberg TV.
“It already has critical mass,” Balaji S. Srinivasan responded via a tweet @balajis. “Wrapped BTC on Ethereum is ~1% of all outstanding BTC and growing exponentially. ” Srinivasan is an angel investor, entrepreneur and former chief technical officer of Coinbase and general partner at Andreessen Horowitz.
Read more here about how wBTC works and who created it.