WBTC Explained

What Is Wrapped Bitcoin [WBTC]?

Wrapped Bitcoin is a tokenized version of Bitcoin (BTC) that runs on the Ethereum (ETH) blockchain.

WBTC is compliant with ERC-20 — the basic compatibility standard of the Ethereum blockchain — allowing it to be fully integrated into the latter’s ecosystem of decentralized exchanges, crypto lending services, prediction markets and other ERC-20-enabled decentralized finance (DeFi) applications.

WBTC is also backed by Bitcoin at a 1:1 ratio via a network of automatically monitored merchants and custodians, ensuring that its price is pegged to Bitcoin at all times and allows users to transfer liquidity between the BTC and the ETH networks in a decentralized and autonomous manner.

Wrapped Bitcoin was first announced on October 26, 2018, and officially launched on January 31, 2019.

How Are Wrapped Bitcoin Created?

The creation of Wrapped Bitcoin brings the world's leading cryptocurrency Bitcoin into the world of Ethereum's DeFi ecosystem. The WBTC token adheres to the ERC-20 token standard, with tokens created for those who want to convert BTC into WBTC.

All to-be-converted BTC is held by a custodian, who takes part in the actual minting and burning of Ethereum-based tokens. When WBTCs are burned, the user can reclaim their BTC balance from the custodian. During mining, users send BTC to the custodian for storage and receive an equivalent in WBTC tokens. BitGo is the biggest custodian for Wrapped Bitcoin, and they will mine a certain number of WBTC and send them to the merchant's Ethereum address.

The user who wants to swap between wBTC and BTC performs a trade — through a centralized exchange or atomic swap on a decentralized exchange — to move funds to the merchant. Once finalized, the user can use their BTC/wBTC as they see fit. If WBTC is converted to BTC, the associated Wrapped Bitcoin balance will be destroyed through a burn transaction.

The WBTC DAO consists of governing members who decide on significant upgrades and changes to the protocol. Additionally, these members can serve as merchants or custodians managing BTC assets.

What Can You Do With WBTC?

As Wrapped Bitcoin tokens adhere to the ERC-20 token standard, one can use them across the broader Ethereum ecosystem. That includes trading them on decentralized exchanges — like Uniswap, 1Inch, Sushiswap — and exploring decentralized finance opportunities through protocols and platforms supporting WBTC.

DeFi opportunities for WBTC range from lending and borrowing to yield farming, token swapping and liquidity pools. Various protocols and platforms support Wrapped Bitcoin, including Aave, Balancer, Compound, MakerDAO. Some of these providers may issue platform-native governance tokens as an extra incentive.

Using WBTC as colateral for a crypto-backed loan can be a significant option for businesses. Additionally WBTC holders can earn interest from supplying liquidity, although the APY will be relatively low.

Another option for WBTC is to engage in margin trading, where Wrapped Bitcoin is used to margin trade Ethereum, stablecoins and other ERC-20 tokens. Users deploy WBTC to enhance fund security while trading. That process is fully non-custodial and powered by smart contract technology.

Who Are the Founders of Wrapped Bitcoin?

The Wrapped Tokens project, of which WBTC is a part, wasn’t founded by individuals but is rather a joint project of three organizations: BitGo, Kyber Network and Ren.

BitGo, co-founded in 2013 by American computer scientist and entrepreneur Mike Belshe, is an institutional digital asset custody, trading and financial services firm. In addition to being one of the developers of WBTC, BitGo also serves as its original custodian — the entity that holds WBTC tokens and the keys needed to mint more of them.

Kyber Network is an on-blockchain liquidity protocol that enables the integration of different cryptocurrency tokens and DeFi applications. It was founded in 2017 by Loi Luu, Victor Tran and Yaron Velner and is based in Singapore. Along with Ren, Kyber Network has helped create WBTC and still serves as a merchant on its network — the institution that mints and burns WBTC tokens to maintain the 1:1 ratio of tokens to BTC reserves.

Similarly to Kyber, Ren is a company focused on cross-blockchain integration of cryptocurrency assets and DeFi applications via solutions such as RenBridge, RenVM and others. It was founded in 2017 by Taiyang Zhang and Loong Wang.

What Makes Wrapped Bitcoin Unique?

By virtue of being the oldest and largest cryptocurrency on the market, Bitcoin can boast a massive user base and a liquidity pool of several dozen billion dollars. However, its blockchain functionality is relatively basic by modern standards.

Unlike Bitcoin, Ethereum was built from the ground up to support more advanced use cases by utilizing the technology of smart contracts, giving rise to an entire industry dubbed “decentralized finance.”

Ethereum and products derived from it offer their users such advanced financial instruments as lending and insurance, which do not rely on trusted intermediaries.

By “wrapping” BTC in the ERC-20 standard, WBTC enables full integration of a Bitcoin-like asset into this advanced environment of financial decentralized applications, bringing along the immense liquidity associated with the BTC market.

In addition, Wrapped Bitcoin makes the job significantly easier for exchanges, wallets and payment services that work with Ethereum: instead of having to run two separate nodes for ETH and BTC networks, they can support WBTC operations with just an Ethereum node.

Finally, Ethereum blockchain’s faster average blocktime — about 15 seconds vs 10 minutes respectively — increases the speed with which WBTC can be transacted, compared to actual bitcoins.

Wrapped Bitcoin's Flow into Ethereum Network

Part of Bitcoin’s circulating supply has flowed into the Ethereum Network, corporate treasuries and exchange-traded investment products in the form of wrapped BTC (WBTC) in 2021. According to Arcane Research, while Bitcoin balance on crypto exchanges has fallen by roughly 1.2%, Bitcoin held in corporate treasuries, exchange-traded investment vehicles and on Ethereum has risen by 0.51%, 0.69% and 0.98% respectively. There is currently $10.9B worth of WBTC on the Ethereum network, as of February 2022. Besides Ethereum, WBTC is also available on the Tron blockchain, with a total value of $4.1M worth of Bitcoin.