Have you earned bitcoin by crypto gambling on the best crypto casino, and you’re hoping to branch out into other blockchain networks? Well, look no further than wrapped bitcoin. This method allows you to use BTC on blockchains with different native currencies.
Here, we explore what wrapped bitcoin is, how token wrapping works, and the pros and cons of wrapped tokens.
We will then take a closer look at the impact of the emergence of wrapped tokens on the world of cryptocurrencies, with particular emphasis placed on interoperability and decentralised finance.
What Is Wrapped Bitcoin (wBTC)?
Bitcoin tokens (BTCs) exist and have value on the bitcoin blockchain. It isn’t possible to directly use non-native assets on other blockchain networks.
BTC cannot be used on large blockchain networks like Ethereum or Binance Smart Chain.
There is, however, a valuable loophole for those looking to diversify beyond the bitcoin blockchain. The loophole we are referring to is known as a wrapped token.
A bitcoin token can be “wrapped” to form a tokenised version of a different cryptocurrency. Once a token is wrapped, it can live natively on a separate blockchain.
The asset’s original value is “pegged”. The token can be unwrapped and redeemed to its original form as desired.
Because blockchains exist in relative isolation, it isn’t easy to transfer assets among them. Wrapped tokens increase the interoperability between the various blockchains, allowing for cross-chain movement of tokens.
All of this helps achieve the common goal of cryptocurrency: decentralised finance (DeFi), a space outside central authorities’ control where traditional banking and decentralised technology meet.
How Token Wrapping Works
Let’s say you want to use bitcoin currency on the Ethereum blockchain. In this instance, wrapped bitcoin tokens would be transformed from a bitcoin token into an ERC-20 token.
This is hugely useful because an ERC-20 token is the most used standard of token design. They are compatible with smart contracts on decentralised exchanges and lending protocols.
Wrapped tokens began on Ethereum. ETH tokens are wrapped to form wrapped ETH (WETH), which possess the higher functionality and transferability associated with ERC-20 tokens.
Similarly, you can transfer BTC tokens into ERC-20 tokens. To better detail the step involved, let’s consider wrapped bitcoin (WBTC) intended for use on Ethereum. WBTC, in this context, functions as an ERC-20 token, essentially allowing BTC to be traded through the Ethereum blockchain.
The wrapping process requires a custodian of sorts. The custodian is an entity with access to the equivalent value of the wrapped form of the original asset. Thus, the custodian must have 1 BTC for every 1 WBTC minted. Proof of the BTC reserve will be stored within the blockchain.
Custodians can take the form of a:
- merchant
- multisig wallet
- DAO
- smart contract
How Does The Process Look?
- You send your BTC to a custodian to be minted into WBTC. For instance, in the case of a smart contract, the user will “lock in” the original amount on the contract.
- The custodian mints the WBTC through Ethereum on a one-to-one peg (1BTC = 1WBTC).
- If you wish to redeem your WBTC for BTC at any point, you issue something known as a “burn request” to your custodian, who will release the equivalent BTC in exchange for WBTC from the existing reserve pool. In the case of a smart contract, you would trade your WBTC back to the contract in exchange for BTC.
The custodian wraps and unwraps tokens at your discretion. Custodians are added, verified, and, when necessary, removed by a DAO in the context of WBTC.
The average user doesn’t need to concern themselves with the wrapping and unwrapping process’s intricacies. All you need to focus on is trading the wrapped tokens the same way as you would ordinary tokens, but now with more options!
The Pros
The most significant benefit of wrapped tokens is that non-native tokens can be used on other blockchains. Thus, wrapped tokens help bridge otherwise isolated blockchain networks, thereby increasing interoperability and promoting DeFi.
This, in turn, increases the liquidity and efficiency of centralised and decentralised exchanges.
With the wrapped version of BTC, traders can enjoy speedier transaction times and lower fees than those typically associated with the bitcoin blockchain.
The Cons
As of yet, using wrapped tokens for true cross-chain trading isn’t possible. Tokens must be wrapped through a custodian. This means that there is a “middle man” whom you must trust.
However, because decentralisation is the name of the crypto game, new technology is being speedily forged that will hopefully allow for wrapped token mining without requiring people to be at the mercy of a faceless entity.
The other con is the cost of the wrapped token minting process. Custodians can charge high fees, which are prone to incurring slippage.
The Impact of Wrapped Tokens
Decentralised Exchanges (DEXes) saw massive growth in mid-2020. In Q4 of last year, the trade volume on DEXes equated to over $60 billion. These vast gains are primarily thanks to WETH, making swapping ETH for ERC-20 tokens easier.
The versatility of ERC-20 tokens makes them so revolutionary in the cryptocurrency world. The methods behind token-wrapping are becoming generalised among all types of tokens and protocols, fuelling further growth.
Let’s now explore some of the most successful avenues for utilising WBTC.
Wrapped Bitcoin on Ethereum
Turning Bitcoin into an ERC-20 token means that your crypto assets can now interact with the smart contracts and protocols offered by the Ethereum blockchain.
As of Q4 in 2020, more than 159.99 BTC were within the Ethereum network. That is about $5.5 billion worth of wrapped bitcoin, most of which exist on the blockchain as WBTC or renBTC.
Bitcoin traders can access useful Ethereum Bitcoin wallets such as MetaMask.
WBTC
In January 2019, the wrapped bitcoin project was founded, known as the WBTC Decentralised Autonomous Organization (DAO). This organisation is responsible for any additions or removals of custodians. The WBTC DAO uses a multi-signature (MultiSig) smart contract approach.
With WBTC, traders can exchange through DEXes, using the wrapped coins for collateral necessary for borrowing, lending, or derivatives trading. In this way, the altered cryptocurrency is boosting the liquidity of bitcoin and feeding the DeFi economy.
Synthetic Bitcoin
In this approach, a trader will lock their BTC into a smart contract in exchange for a synthetic asset of the same value. This approach took off in 2020, with the leading platform Synthetix pioneering the method.
BTC is wrapped and given the name sBTC, which can then be traded for SNX tokens. SNX tokens allow for greater liquidity within the Ethereum network.
New Trading Platforms
Because wrapped bitcoin had taken off on Ethereum in such a big way, new trading products have recently emerged. TokenSets, for example, identifies itself as a DeFi company and recently produced a product that automates the trade between WBTC and ETH to efficiently capture gains in each asset.
Wrapped Bitcoin on the Binance Smart Chain (BSC)
You can use wrapped bitcoins (along with other wrapped cryptocurrencies) on the Binance Smart Chain (BSC) network. You wrap your tokens using the Binance Bridge, which converts your crypto assets into BEP-20 tokens.
BEP-20 tokens can be further traded or used in multiple yield farming applications. You will need to pay a fee for the wrapping and unwrapping process, but BSC promises much lower costs than those asked for by other blockchains.
Wrapped Bitcoin with MetaMask
Are you interested in getting in on the action and feeding the DEXes? Consider downloading MetaMask, the leading platform from which to purchase wBTC.
MetaMask offers:
- A vault that can be accessed by you alone
- Highly secure login process
- A wallet for storing and viewing all tokens
- Open access to decentralised exchanges for greater liquidity of your cryptocurrency assets
Once downloaded and registered, step one entails putting some ETH into your MetaMask wallet. You can purchase ETH directly from MetaMask or through other authorised exchanges. Once you have ETH, you can use the platform to exchange ETH for wBTC.
Final Thoughts
Wrapped tokens build bridges between isolated blockchain networks, increasing interoperability and encouraging the Decentralised Finance ecosystem.
Wrapped Bitcoin can more efficiently share liquidity with other blockchains in a cost-effective manner that further grows and nurtures the cryptocurrency industry.
Because blockchain interoperability is essential for the future of cryptocurrencies, wrapped tokens will soon become both necessary and abundant.
There are pros and cons associated with wrapped tokens, but the hope is that soon the benefits will outweigh any negatives as the technology and methodology become more refined.
