Encapsulated cryptocurrencies like wBTC allow crypto assets like Bitcoin to be used on other blockchains. This interoperability feature allows holders of crypto assets to participate in decentralized financial applications. Greater participation in decentralized applications would subsequently mean an increase in the liquidity of smart contract platforms.
What is Bitcoin Wrapped Up
Wrapped Bitcoin (wBTC) is an ERC-20 token backed by Bitcoin (BTC) on a 1: 1 basis. Jointly launched by Kyber, Ren and BitGo in January 2019, wBTC is the first token that makes Bitcoin compatible on the Ethereum network. This allows Bitcoin holders to participate in activities such as lending, borrowing, margin trading, and yield farming on Decentralized Finance (DeFi) applications.
There are other encapsulated cryptocurrencies besides wBTC. In essence, all allow interoperability between different blockchains to facilitate the exchange of value. With the rise of Ethereum’s DeFi movement, the need for interoperability has become more urgent.
Why not just use native cryptocurrency
The lack of decentralized apps and smart contracts on the Bitcoin network means there is a limit to what you can do with your precious bitcoins. Instead of just hanging on to them, you can make them work on DeFi protocols on Ethereum using encapsulated bitcoins.
You can use native tokens on Ethereum, but now you also have the option to invest your bitcoins instead of trading or selling them for other tokens of lesser value.
Additionally, using a different cryptocurrency token like wBTC increase liquidity within DeFi protocols and contribute to their growth.
How the wBTC works
The Wrapped Bitcoin protocol is maintained by a decentralized autonomous organization, i.e. DAO WBTC which consists of 16 stakeholders within the DeFi space. The wBTC ecosystem has over 40 participants including DAO members, merchants, wallets, and exchanges.
wBTC is hit by a Guardian which in this case is one of the stakeholders, BitGo. It ensures that your token is secure. The merchants are the ones who initiate the wBTC minting process and send bitcoins to the custodian. In return, traders receive wBTC tokens.
Like a customer, you can buy wBTC through merchants like CoinList. They will perform KYC checks to verify your identity before packing your bitcoin.
To unbox your bitcoin or essentially burn wBTC, you will also need to do this through a merchant. Similar to the strike, traders would request to burn the wBTC and once confirmed, the custodian sends the equivalent amount of BTC to the trader.
Benefits of packaged bitcoin
There are three parties to the packaging of bitcoin:
Transferring bitcoin between exchanges in wBTC form is much faster than exchanging bitcoin for other DeFi-supported tokens. As a result, traders can participate in DeFi protocols with ease. It also increases the liquidity of DeFi protocols as the type of collateral grows and the volume of transactions increases.
Managing multiple cryptocurrencies on different nodes and transaction formats can be problematic. And so with wBTC which is an ERC-20 token, therefore only one Ethereum node is used simplified operation process.
DeFi applications can now take advantage of bitcoin payments in smart contracts for various activities such as lending, fund management, prediction markets and token sales.
Other encapsulated cryptocurrencies
Knowing this revolutionary interoperability solution, other entities sought to create their own versions of encapsulated cryptocurrencies.
Crypto exchanges and DeFi protocols like Huobi Global and Ren have launched their own versions of wrapped bitcoin, namely Huobi BTC (hBTC) and Ren BTC (renBTC) respectively. The purpose remains the same as wBTC but the method of obtaining packaged bitcoin may differ.
While many encapsulated cryptocurrencies exist on the Ethereum blockchain, there are some that live on other blockchains. On Binance Smart Chain, which supports smart contracts and DeFi apps, you can encapsulate various crypto assets such as:
Ripple (XRP): bXRP
Tie (USDT): bUSDT
Bitcoin Cash (BCH): bBCH
Polkadot (DOT): bDOT
Now that you can participate in the decentralized financial realm with your packaged bitcoins, why not learn more about the different types of DeFi apps available. You can start by reading the How To DeFi Beginners eBook. And when you’re ready, you can explore the advanced version. Get the How to do DeFi for a complete overview of new financial innovations.
Diyana helps you figure out complicated things. Follow the author on Twitter @diyana_eco