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What is Wrapped Bitcoin (WBTC)?


XanPool _ What is wrapped bitcoin (WBTC)

Disclaimer: The information provided here is not investment advice, and readers are encouraged to do their own research before making financial decisions.


Table of Contents:

What is WBTC?

How are WBTC Tokens Produced?

Why use Wrapped Bitcoin?

Is Wrapped BTC safe?


If you are a crypto enthusiast, you might have heard of wrapped crypto tokens or wrapped Bitcoin. In this article, we explore what a wrapped Bitcoin is and how it works. In decentralized finance (DeFi), where the fast movement of funds is crucial, wrapped tokens find a valid application. Some recent blockchains such as Polkadot, overcome the interoperability issue. However, it is necessary to find a solution for allowing communication between early networks such as Ethereum and Bitcoin, which is why wrapped tokens are created.


Wrapped tokens make it possible to use cryptocurrencies from one blockchain on a different blockchain. Blockchains are different from each other, so they can't easily communicate with each other. Wrapped tokens solve this incompatibility.


WBTC is an ERC-20 token that represents Bitcoin. It can be said to be a modified version of Bitcoin, equal to it in price, that can be used on the Ethereum blockchain. The token was created for allowing users to interact with Ethereum’s decentralized finance ecosystem. WBTC aims in combining the best of both worlds as it leverages the value of Bitcoin’s liquidity and improves transaction speed as well.


What is WBTC?

WBTC stands for Wrapped Bitcoin. It’s an ERC-20 token that represents Bitcoin. You can convert one WBTC into one BTC, or vice versa. As WBTC is an ERC-20 token, it makes the transfer of WBTC faster compared to normal Bitcoin. The key advantage of WBTC is its integration into the world of Ethereum wallets, smart contracts and dapps.


How are WBTC Tokens Produced?

The governing members of the WBTC DAO help decide what upgrades or changes should be made to the protocol for producing Bitcoin, as well as who should assume the role of the custodian in managing the system.


Users who have Bitcoin and want to convert it into Wrapped Bitcoin must interact with merchants. After the user asks a merchant to convert Bitcoin, the merchant initiates a process of minting and burning Wrapped Bitcoin by performing identity verification.


The custodian who holds the actual Wrapped Bitcoin mints and burns tokens on the Ethereum blockchain. When WBTC is burned, the custodian returns Bitcoin to the user. This process repeats each time a new WBTC is minted.


Why Use Wrapped Bitcoin?

There are several reasons why you should use Wrapped Bitcoin (WBTC) over regular Bitcoin. First, it is much more convenient to use in DeFi applications because it can be stored in any Ethereum-based wallet. Second, because WBTC is backed 1:1 by actual BTC, you can be sure that your funds are always safe and secure. Finally, using WBTC could potentially help you earn more interest on your BTC because it opens up new avenues for earning interest through yield farming and lending platforms.


Here are a few reasons why you should use Wrapped Bitcoin over Bitcoin:


  • Interoperability: One of the main differences between wrapped BTC (WBTC) and regular BTC is that WBTC is an ERC-20 token, which means it can be used on the Ethereum blockchain and can be stored in any Ethereum-based wallet. This allows WBTC to be more easily integrated into the world of decentralized finance (DeFi) applications, while regular BTC is limited to the Bitcoin blockchain.

  • Speed and convenience: Because WBTC is an ERC-20 token, it can be transferred faster than regular BTC, which can be subject to longer transaction times and higher fees on the Bitcoin network. Additionally, because WBTC can be stored in any Ethereum-based wallet, it can be more convenient to use in DeFi applications compared to regular BTC, which may require the use of a separate wallet.

  • Trust and security: Regular BTC is considered to be more secure and trustless because it relies on pure code to operate, rather than people or organizations. On the other hand, WBTC relies on a custodian to hold the underlying BTC and mint and burn tokens on the Ethereum blockchain, which means users must trust that the custodian will not run away with their funds or be hacked. However, WBTC is transparent and audited, so users can track the creation and burning of tokens on-chain to ensure the integrity of the system.

Is Wrapped BTC Safe?

A wrapped Bitcoin token is safe because it will likely be held in custody by Ethereum or Binance Smart Chain, and once converted into an ERC-20 or BEP-20 token, it will be secure on the related network. One of the main flaws in wrapped BTC tokens is that you have to trust the custodian keeps the underlying asset safe. If they are hacked, or if they release the real Bitcoin to someone else, then token holders of the ERC-20 compatible wrapped BTC would be left with a worthless asset.


The way Bitcoin is stored determines how secure it is. For example, if a centralized custodial bridge promises to mint ERC-20 tokens on Ethereum, you must trust that the organization will hold your BTC and not run away with it. To protect yourself, ensure these organizations are backed up by guarantees and insurance in case something goes wrong. In the decentralized world of crypto, a smart-contract-managed bridge would be the best choice. The code of immutable time-stamped smart contracts will protect you from trusting any third party.


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Disclaimer: The information provided here is not investment advice, and readers are encouraged to do their own research before making financial decisions.




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