Wrapped Bitcoin is a sought-after feature in the DeFi sector. These unique digital assets get created when a user transfers their Bitcoin onto another network, in most instances, Ethereum. WBTC is popular because it combines the best aspects of blockchains and enables traders to take advantage of the exciting DeFi features available today, while still retaining ownership of their precious Satoshis. Here’s why wrapped Bitcoin continues to see growing adoption in the market.
What Makes WBTC
The original Wrapped Bitcoin concept required you to lock your coins into a smart contract on Ethereum. This contract then issues a pegged token on the native blockchain. The original WBTC concept leveraged a specially created ERC-20 token. As such, anyone with WBTC gains full interoperability within the Ethereum ecosystem. For example, WBTC can be stored in any ERC-20 compliant wallet and it is traded on top-performing DEXs such as Uniswap and Sushiswap.
Keenly, HODLers gain the most from wrapped Bitcoin because it allows them to retain exposure to Bitcoin while also securing passive rewards. Wrapped Bitcoin HODLers can take their tokens and join staking, farming, and lending pools. All of these features provide secure returns with minimal risk compared to trading.
One of the main characteristics of WBTC is that it holds a 1:1 backing to Bitcoin in some way. The original version leverages the BitGo trust. Best of all, the entire process is on the blockchain which enables regular users to verify that the WBTC remains pegged. This process is called proof-of-reserve.
WBTC adds a lot of liquidity to the Ethereum ecosystem which benefits both DEXs and traders. According to recent reports, there is +240,000 Bitcoin locked on the Ethereum blockchain. This amount equates to 1.3% of Bitcoin’s current supply.
Another cool feature about WBTC is that you can easily convert your tokens back into Bitcoin whenever you desire. The process is designed to remove all technical barriers from the equation. You can accomplish the task with a press of a button on most platforms that support the feature. When you are ready to convert back into Bitcoin, the WBTC tokens are automatically burned. In this way, the entire WBTC token lifecycle remains transparent.
Another part of this equation is the Proof of Assets mechanism. This system provides blockchain verifiable network stats including total contract amount and on-chain validations data. Notably, the system also performs audits on a regular basis with the goal to demonstrate transparency through publicly viewable and verifiable transactions.
Closing the Loop
The main purpose of WBTC is to close the liquidity loop that exists between CEXs (centralized exchanges) and DEXs (decentralized exchanges). Currently, these sectors operate as separate liquidity pools. Sadly, this situation hurts both groups as DEXs suffer from a lack of liquidity, and CEX users are left at the mercy of a third party. By combining these pools, traders gain a lot of benefits.
One of the fastest-growing use cases for WBTC is DeFi lending. DeFi lending protocols remove the bank from the loan equation, Instead, these systems integrate advanced smart contracts that enable users to lend their crypto out to borrowers directly via large lending pools. Notably, these interest-earning pools enable lenders to receive repayment on time, even when the borrower is late.
Another reason why WBTC is so popular is that it improves Bitcoin’s scalability. WBTC can be sent at the same speed as any other ERC-20 token. Ethereum approves blocks of transactions roughly every 17-seconds. In comparison, Bitcoin approves a block every ten minutes. In the coming weeks, Ethereum is set to improve this block time as part of the network’s conversion to a proof-of-stake consensus mechanism. WBTC users will gain more speed and features as a result of this conversion.
Farm Some WBTC
WBT can be farmed on popular DeFi platforms such as Compound currently. Farming is similar to staking in that you agree to provide liquidity to a network smart contract in exchange for rewards in the form of tokens. The main difference between the two is that there are no lockup periods or early withdrawal penalties required in farming.
Top Performing WBTC
Due to the advantages, WBTC brings to the market, it’s now a popular option for traders. Consequently, there are multiple WBTC standards available today. BitGo, Keep Network (tBTC), and Synthetix DEX (sBTC) are prime examples of networks supporting this functionality.
In BitGo’s original WBTC version, BTC users send their crypto to a Trust and are sent WBTC tokens in return. In the Keep Network standard (tBTC), the centralization is removed. Nodes, wallets, and smart contracts retain the collateralization levels autonomously.
Another innovative example of the concept was created by Synthetix the network utilizes an SNX token to provide backing for sBTC. The network employs a self-monitoring and balancing smart contract that holds the equivalent value of a single BTC in SNX to back each token. This strategy provides the developers with more flexibility while still ensuring full transparency to users.
WBTC Making its Way to Other Networks
As you could imagine, Ethereum users are not the only ones interested in bringing Bitcoin’s liquidity to their network. In November 2020, the Binance Smart Chain (BSC) announced support for a wrapped token called BTCB. The project was an immediate hit and according to recent reports, there’s now over 73,000 Bitcoin locked on the Binance Smart Chain (BSC).
Things to Consider About WBTC
There are some risks that users must take into consideration when deciding if adding WBTC to your portfolio is the right move. For one, WBTC requires you to put trust in a third-party custodian. This custodian will hold many vital roles in the equations such as securing your Bitcoin, minting new tokens, and monitoring the value of the Bitcoin collateral. If something goes wrong on their end, it could end badly for users.
Wrapped Bitcoin Is Set to Go Mainstream
Wrapped Bitcoin provides a host of benefits that Bitcoiners have long desired. Additionally, the constant expansion of the DeFi sector promises to provide even more functionality and usability to the market. For these reasons, wrapped Bitcoin is set to remain a popular option for traders moving forward.