Wrapped Bitcoin (wBTC) Explained in 3 Minutes

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The DeFi (decentralized finance) movement has created a variety of new blockchain-based financial tools to help investors take their strategy to the next level. Wrapped Bitcoin is one of these concepts that have the potential to change the way HODLers think. These unique digital assets continue to bring new opportunities and advantages to the market.

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BitGo Inc, Kyber Network, and Ren (formerly Republic Protocol) were the parties who developed the wBTC concept. The group officially released the wBTC whitepaper on January 24, 2019. Only a few days later, the first wBTC hit the market. Notably, the use of these advanced digital assets is on the rise. According to recent data, in September 2021, the WBTC market had already reached +$1.1 billion.

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Wrapped Bitcoin Technical Aspects

The term Wrapped Bitcoin is used to describe the process of taking Bitcoin and bringing it into the Ethereum blockchain. There are a multitude of reasons why someone would want to bring their BTC over to Ethereum. For one, Ethereum is the largest DeFi and Dapp (Distributed Application) ecosystem in the world. As such, it provides traders access to an excellent selection of wealth generation services and features.

Wrapped Bitcoin is effectively wrapped at a 1:1 value on the new blockchain. Specifically, your Bitcoin gets locked into a smart contract and the new network issues a token that represents your Bitcoin's value. This strategy pegs the token to your Bitcoin. Consequently, your wrapped Bitcoin fluctuates in value alongside normal BTC.

Why Would I Want To Wrap My Bitcoin?

Bringing Bitcoin onto other networks provides a ton of advantages to the market. For one, it brings more liquidity to DeFi platforms. As the price of each Bitcoin is regularly around +$50,000, every wBTC that enters a platform provides the entire network with a liquidity boost. For those participating in liquidity pools and other services that reward users based on the pool's value, wBTC gives all users a boost.

Additionally, bringing Bitcoin's liquidity to DEXs (decentralized exchanges) improves the user experience and helps these protocols provide better services and higher rewards. Wrapped Bitcoin effectively bridges the liquidity gap between CEXs (centralized exchanges) and DEXs. These assets boost these networks which helps support DeFi adoption.

Ethereum Ecosystem

The main reason to wrap BTC is to take advantage of all the cool Dapps and protocols made for DeFi users. For example, wBTC enables BTC HODLers to earn passive rewards without giving up ownership of their digital assets. BTC users have long been out of the loop on the latest and greatest features due to the network’s lack of support for smart contracts. Now, BTC holders can take advantage of the vast selection of wallets, DEXs, Dapps, and other systems available. 

Scalability Concerns

Another major reason why wBTCs are gaining in popularity is that they help to solve many of the scalability concerns on the BTC blockchain. Bitcoin was the first cryptocurrency to successfully enter service. It was a pioneering effort that demonstrated how decentralized blockchain networks could improve financial systems. However, it’s been 13 years since its launch and the market is a very different place today.

Bitcoin utilizes the Proof-of-Work consensus mechanism. This system requires network nodes to compete against each other to solve a complicated math equation. The node (miner) that accomplishes this task first gets the ability to add the next block to the blockchain and is rewarded. This structure is very secure but is not scalable or efficient.

Scalability Issues 

Bitcoin has suffered from scalability concerns since 2015. In 2017, the sudden influx of new users nearly crippled the network. At that time, it could take over 24 hours for a Bitcoin transaction to process. These delays halted Bitcoin’s day-to-day currency usage. It got so bad that some transactions were less than the fees to send them.

Wrapped Bitcoin doesn’t have these delays thanks to the extra scalability provided by Ethereum. Ethereum processes a block of transactions every 13.5 seconds. In comparison, Bitcoin handles a block every ten minutes. Traders can save on fees and time when they wrap their BTC. This strategy also improves the transaction finality times. 

Wrapped Bitcoin (wBTC) Brings New Functionalities to Users

Developers and users benefit greatly from the introduction of wBTC. For one, they can now leverage advanced smart contracts using wBTC. Smart contracts are special protocols designed to run on distributed networks. They can be set up to self-execute upon the completion of certain criteria. Today, smart contracts are a basic feature found on nearly every blockchain.

DeFi wBTC

Those who want to build wealth without giving up their precious Bitcoin can do so utilizing wBTC services. Already, there are billions in wBTC in use on popular apps like Compound. Providing Bitcoiners access to the DeFi community has long been a major desire for DeFi developers. Here are just some of the reasons why wrapping your BTC is a smart move. 

Staking wBTC

Staking is the process of locking your cryptocurrency into a smart contract. There are staking protocols that secure networks and others that create liquidity. No matter the type of staking protocol, you will need to lock up a certain amount of coins for a predetermined time to participate. For your participation, you receive rewards usually in the form of the platform’s utility token. wBTC users can automatically earn rewards by staking assets in your CoinList wallet.

Farming wBTC

Yield Farming is another awesome DeFi feature that wBTC users can enjoy now. Unlike staking pools, farming pools don't have lockups, early withdrawal fees, or pre-set APYs. Instead, farming pools fluctuate their APY throughout the day. As such, farming requires a bit more attention but provides users with the opportunity to secure higher ROIs than staking if done correctly. wBTC users also can farm and earn interest on Compound.

Lending wBTC

Lending protocols are another game-changer that provides HODLers with a great way to secure low-risk rewards. Most DeFi peer-to-peer lending systems utilize large lending pools. This approach is great because it enables lenders to provide short-term loans with guaranteed payback regardless of the borrowers’ actions. These systems utilize collateralization protocols and wealth-generating liquidity pools to ensure that lenders are not at risk.

How to Wrap BTC

It’s easier than ever to wrap your BTC and start earning profits. Coinlist and others provide easy-to-use interfaces for wrapping your BTC. The process only takes a couple of minutes to complete. Coinlist provides one-button wrapping features. Simply click “Wrap” and enter the amount you want to bring to Ethereum. The system will ask you to confirm your decision. Click yes and in seconds, your wBTC is issued. Notably, there is a fee of 0.25% for this service.

wBTC Competitors

The first Wrapped Bitcoin was exclusive to the Ethereum ecosystem. Since that time, the Wrapped Bitcoin concept has been expanded and duplicated by multiple DeFi networks. These systems now play a crucial role in the market enabling traders, institutions, and Dapps to bridge BTC to the more advanced networks while maintaining exposure. Here are some of the top wBTC competitors in the market today.

Keep Network

The Keep Network provides wrapped BTC services via the tBTC protocol. The system operates as a fully decentralized system that leverages your BTC as collateral. The network provides developers and users with advanced functionality and scalability that surpasses Ethereum.

Synthetix DEX

Synthetic DEX is another contender that traders have found to be helpful. The network locks up your BTC and issues you sBTC. Interestingly, sBTC is backed by a combo of tokens. Specifically, each sBTC gets value from 80% of BTC and 20% SNX, the network’s utility token. 

Things to Consider Before You Wrap Your Bitcoin

Wrapped Bitcoin is a great option for those seeking to gain access to the wide world of DeFi while retaining ownership of their Bitcoin. There are some concerns you should think about before making the decision. For one, WBTC and other protocols require you to leave your Bitcoin in a third-party’s custody. 

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This scenario leaves users at risk of rug pulls and other scams where their BTC gets removed and their issued token losses value. It also creates more centralization in the DeFi space. Both of these issues can create issues for traders if not monitored correctly. 

As such, it’s recommended that you only stick with the top wrapped Bitcoin providers. Remember there are no refunds on the blockchain. If you send your crypto to a scammer, there is no way to get your BTC back. Consequently, it’s paramount to always DYOR (Dp Your Own Research) on any platform that promotes Bitcoin wrapping services. 

Wrapped BTC - DeFi Ingenuity at its Finest

You have to hand it to the creative minds behind the wBTC project. These assets help to bridge the liquidity gap that currently plagues the DeFi sector. Bringing HODlers into these systems is one of the best ways to provide all users with additional ROI opportunities. For these reasons, you can expect to hear a lot more about wBTC in the coming months as more users get hip to its advantages.