While decentralized finance (DeFi) may promise endless possibilities, a few problems could prevent it from achieving its goal of competing with the current centralized financial system. One is the incompatibility of the major cryptocurrency Bitcoin with the major decentralized applications that make up the decentralized ecosystem.
This is where Wrapped Bitcoin (WBTC) comes into play. The basic idea is to develop a digital currency that represents Bitcoin on the Ethereum blockchain. Read how it works.
What is Bitcoin Bundle (WBTC)?
Wrapped Bitcoin (WBTC) is an ERC-20 token whose value is tied to Bitcoin. This means that it is a representation of Bitcoin that can run on the Ethereum blockchain. It is one of the most valuable wrapped tokens available in the DeFi ecosystem thanks to the reliability of Bitcoin.
The assets are “packaged” so that they can be used on other blockchain networks where they cannot operate. Just as astronauts need to be wrapped up in thick suits to survive outside their natural habitat, the Earth needs wrapped BTC in order for Bitcoin to run on other blockchains.
Packaged tokens are needed due to the functions and uses offered by various blockchains. For example, unlike Bitcoin, the Ethereum blockchain contains smart contracts that allow decentralized applications (DApps) to run. However, native tokens can only be used on native blockchains. Token wrapping makes it easier to use crypto assets on non-native chains.
Packaged Bitcoin (WBTC) vs Bitcoin (BTC)
The relationship between Wrapped Bitcoin and Bitcoin is similar to the relationship between Tether (USDT) and the US dollar: the value of USDT is tied to the value of the US dollar. So why do we need USDT if it has the same value as the US dollar?
While they have equal value, the US dollar is a fiat currency issued by a sovereign body, the US government, through the Treasury Department, which means you cannot use it for cryptocurrency transactions. That is why a cryptographic version of the American Fiat, the USDT stablecoin, is being introduced that can run on blockchain networks.
The same goes for Wrapped Bitcoin and the “regular” Bitcoin that everyone knows, except both are used for cryptographic transactions.
For example, if a BTC holder wants to deposit their bitcoins on a DeFi platform (e.g. Aave) to earn interest, they must use Wrapped BTC, because AAVE tokens are only used on the Ethereum network and Wrapped BTC are ERC20 tokens. . Similarly, encapsulated tokens can be used in Ethereum.
How does the Bitcoin package work?
There are two ways to get WBTC tokens. You can mint them or buy them from a decentralized or centralized exchange (which usually means a higher fee). The minting process of Wrapped Bitcoin involves two main events: strike and burn.
To mint WBTC, you need to request and make a payment to a WBTC seller like Loopring or DeversiFi. The merchant then negotiates with the custodian, who mints the token and sends Bitcoin in exchange for WBTC. The custodian places the Bitcoin in a reserve and keeps it safe.
To redeem bitcoins, you have to pay another small fee to the merchant, who then initiates a burn transaction with the custodian. The custodian releases Bitcoin and burns WBTC.
The transaction is tracked and verified on the Ethereum blockchain and can be viewed publicly via a blockchain explorer such as Etherscan.
The problem caused by oversupply of Wrapped Bitcoin is solved by the process described above. With the maximum supply of Bitcoin limited to 21 million coins, the total potential supply of packaged cryptocurrencies is also limited to this amount, as WBTC tokens cannot be minted until ownership of the corresponding Bitcoin has been verified. So each token is linked to a corresponding Bitcoin.
This procedure follows the lending process of institutionalized banks, in which borrowers needing a loan must temporarily provide the bank with money equal to or greater than their property. Once the loan is repaid, ownership of the property is restored. But in this case, the value of the two assets is linked, so any depreciation or increase in value reflects both assets.
Is Wrapped Bitcoin (WBTC) a good investment?
The advantages of Wrapped Bitcoin, higher transaction speed, lower fees and most importantly, cross-chain interoperability, will surely contribute to the growth of DeFi as users will be able to make payments easier, faster and cheaper and have access to services finance and public services. Using WBTC is an impressive way to make DeFi as simple as centralized financial services without sacrificing the permissionless nature of Bitcoin.
Even if another innovation turns out to be a better solution for cross-chain transactions, packaged cryptocurrencies effectively solve the interoperability problem and will remain relevant for a long time to come.
- Step 1: Create a verified Bybit trading account (for new users)
- Step 2: Log in and buy USDT via Bybit Express, P2P trading or credit/debit card
- Step 3: Visit the spot market section and look for the WBTC/USDT pair
- Step 4: Enter the number of WBTC tokens to purchase
- Step 5: Click Buy Limit Order
- Step 6: Confirm the transaction and wait for your WBTC token to be credited to your account
The cryptocurrency world is on a steady march towards greater efficiency, impeccably secure transactions, readily available services, and simplicity that will allow it to step out of the financial edge and dominate the global economy.
Therefore, constant innovations are needed to overcome obstacles or challenges that hinder mass adoption. Packaged cryptocurrencies are one such innovation.
The idea that assets can be copied for transactions on other blockchains without being overproduced is a sign that DeFi can undoubtedly solve the problems that many fear will hold it back.
Truly decentralized finance is here to stay – and what better sign of that than the asset represented by Bitcoin itself?