What is Wrapped Bitcoin (WBTC)?
Wrapped Bitcoin was created to address a couple of long-standing problems in the crypto space. Firstly, although Bitcoin (BTC) forms the bulk of the liquidity available in the crypto space, the Bitcoin network is relatively slow and can’t support smart contracts. On the other hand, the Ethereum network, and its popular ERC-20 tokens, are faster and smart contract-capable.
So, to help traders, institutions, and DApps (decentralised applications) more easily harness the liquidity provided by Bitcoin, Wrapped Bitcoin (WBTC) was developed, launching in January 2019. In simple terms, it is an ERC-20 token, on the Ethereum blockchain, backed on a 1:1 basis with Bitcoin. This means exchanges, wallets, and payment apps that only handle an Ethereum node can also harness Bitcoin’s substantial liquidity.
Wrapped Bitcoin (WBTC) Basics
The Wrapped Bitcoin system works like this:
- A customer will send Bitcoin to a merchant (after completing relevant KYC and AML).
- The Bitcoin is then passed to a custodian, which mints new WBTC and creates a wrapped token contract. The WBTC is sent to the merchant.
- The merchant then sends the WBTC tokens to the customer.
- When a merchant redeems Bitcoin for WBTC tokens, the appropriate amount of tokens are then burned and deducted from the merchant’s on-chain WBTC balance.
Although only merchant addresses can redeem the original Bitcoin for WBTC tokens, WBTC tokens themselves can be traded on many crypto exchanges.
Wrapped Bitcoin Blockchain
As previously mentioned, WBTC is an ERC-20 token, so it runs on the Ethereum blockchain, and transaction fees must be paid in ETH.
WBTC Supply
Because WBTC is backed on a 1:1 basis with the original Bitcoin (BTC), theoretically it has the same limit of 21 million. However, in practice, this is impossible, because many Bitcoin have already been lost, and it is extremely unlikely that every Bitcoin will end up being wrapped. According to CoinGecko, at the time of writing, there were nearly 236,000 WBTC in circulation.
Wrapped Bitcoin (WBTC) Adoption & Usability
Since its launch in early 2019, WBTC has grown to become one of the world’s most popular cryptocurrencies. At the time of writing, according to CoinGecko, it was ranked #20, just behind Uniswap and Solana, with a market cap of over $3.7B – compared to Bitcoin’s $309.6B. Because it is an ERC-20 token, it is widely supported by decentralised exchanges and payment apps.
Wrapped Bitcoin Network Fees & Speed
Because WBTC uses the Ethereum network, it can suffer from significant network congestion and volatile gas fees. However, with the Merge now complete, further planned upgrades to Ethereum should increase network capacity and reduce fees.
Wrapped Bitcoin (WBTC) Security and Safety
WBTC benefits from the well-established security and safety of the Ethereum network. The main security threats when using wBTC come from interactions with third parties, for example, exchanges and wallets, which are often the target of hackers.
Security and safety tips:
- Don’t leave your WBTC on exchanges. Use exchanges for buying and selling only. Always transfer your crypto to a local wallet for short-term storage.
- For long-term storage, keep your crypto in a hard wallet.
- Always keep your wallet keys in multiple safe places – they cannot be recovered.
- Never tell anyone about your crypto holdings. No matter how secure your storage is, if you or your loved ones are physically threatened, you’ll probably hand over your personal keys.
Wrapped Bitcoin (WBTC) Volatility
Because it is backed on a 1:1 basis with Bitcoin, the price of WBTC should always closely shadow that of the original Bitcoin. However, as you’re probably aware, the price of Bitcoin itself can be highly volatile.
Final Word on Wrapped Bitcoin (WBTC)
Wrapped Bitcoin is a pragmatic attempt to harness the strengths of the Bitcoin and Ethereum networks, i.e. high liquidity and smart contract flexibility. Of course, this has made it very attractive for specific users, especially in the institutional and DeFi space. So far, WBTC seems to be delivering exactly what it promises, but as other cryptos gain market share and increase in liquidity, the attractiveness of WBTC may wane.
You can find out more about WBTC at the official site.