Bitcoin is the world’s largest and most popular cryptocurrency, offering users an array of advantages, such as decentralization, security, and a high level of transparency. However, one long-standing complaint of bitcoin holders is their inability to access the world of DeFi and DeFi applications.
This is where “Wrapped Bitcoin” comes into the picture. You may have heard of the term “Wrapped Tokens.” Blockchains such as Bitcoin and Ethereum have different functionalities and protocols. As a result, they are unable to communicate with one another. While this may help preserve the independence of individual blockchain networks, it hinders the creation of an interoperable system. Wrapped tokens such as Wrapped Bitcoin (WBTC) help address this issue.
This article will take a closer look at bitcoin and Wrapped Bitcoin, understand how each works, and their use cases.
Bitcoin vs Wrapped Bitcoin: Key Points
- Bitcoin was launched in 2009 by the pseudonymous Satoshi Nakamoto.
- Wrapped Bitcoin (WBTC) is an ERC-20 token representing Bitcoin on the Ethereum network. Users can swap it 1:1 for BTC.
- Bitcoin has established itself as the world’s largest cryptocurrency by market capitalization.
- WBTC tokens allow holders to participate and provide liquidity to Ethereum’s thriving DeFi ecosystem.
What Is Bitcoin?
Bitcoin was created in 2009 as a virtual currency that could function outside the influence of a single entity without any intermediary involved during transactions. Launched in 2009 by Satoshi Nakamoto, it was created in response to the 2008 financial crisis. It has since established itself as the largest cryptocurrency by market cap and the most popular.
The cryptocurrency functions on a decentralized public ledger known as the Blockchain. Miners verify transactions and add them to the blockchain in exchange for mining rewards. The current mining reward stands at 6.25 BTC. However, mining rewards are halved every four years or 210,000 blocks. Additionally, bitcoin’s total supply is capped at 21 million, meaning newer bitcoins are created at a decreasing rate.,
What Are Wrapped Tokens?
Before we move on to Wrapped Bitcoin, it is crucial to understand wrapped tokens. Wrapped tokens are cryptocurrencies that have value pegged to another asset. That asset could be another crypto.
When an asset is “wrapped,” a newly minted token is created, allowing the asset to transact on other platforms. A token is “unwrapped” when the wrapped token is burned and the original asset is retrieved.
Wrapped tokens allow non-native assets to be used on the blockchain, create bridges between different networks, and achieve a significant level of interoperability. They are usually managed by a custodian or third party that wraps and unwraps the asset. WBTC was among the first wrapped tokens to be used on the Ethereum blockchain, allowing holders to earn a fixed income.
What Is Wrapped Bitcoin (WBTC)?
WBTC was launched in 2019 and resulted from a significant collaborative effort between BitGo, Ren, and Kyber. It is now maintained by the WBTC DAO, an organization of over 30 members.
Wrapped Bitcoin (WBTC) is an ERC-20 token designed to represent bitcoin on the Ethereum blockchain, allowing users to trade their BTC for WBTC. WBTC tracks bitcoin’s price movements while giving holders the advantages associated with the Ethereum blockchain.
WBTC acts as a bridge between Bitcoin and Ethereum blockchains, allowing holders to access DeFi applications on the Ethereum network and enabling Ethereum-based applications access to greater liquidity.
Bitcoin vs Wrapped Bitcoin: How Do They Work?
Bitcoin’s genesis block was mined on the 3rd of January, 2009, and was intended by its creator to function as a peer-to-peer payment system. When a transaction is initiated on the blockchain, it is verified by the network and added to a block.
Bitcoin adds a new block to the blockchain every ten minutes, irrespective of the volume of transactions, and due to the blockchain’s public nature, transaction data held within these blocks can be verified in real-time. One advantage of this is that it reduces double spending, meaning users cannot spend the same cryptocurrency twice.
Three entities play a crucial role in the functioning and management of WBTC.
- The WBTC DAO – The WBTC DAO consists of over 40 members responsible for holding MultiSig smart contracts and adding or removing WBTC merchants and custodians.
- Merchants – Merchants are administrators that trigger the minting process of WBTC by sending BTC to the custodian and requesting the equivalent amount in WBTC.
- Custodians – Custodians act as vaults, providing reliability and security to WBTC, ensuring that all wrapped tokens are verified through on-chain proof-of-reserves.
Any user wishing to mint WBTC must deposit BTC and submit a request to the merchant. Once the request has been submitted, the merchant transfers the specified amount of BTC to the custodian’s address. The custodian locks the BTC, and an equivalent amount is minted in WBTC on Ethereum. If the user wishes to convert the wrapped tokens back to BTC, the custodian burns the WBTC, and the locked BTC is released back to the user.
Bitcoin vs Wrapped Bitcoin: Use Cases
When creating bitcoin, Satoshi Nakamoto intended it to be a peer-to-peer payment method. However, its use cases have increased over time thanks to its increasing value. Bitcoin holders can use bitcoin to purchase goods or pay for services, with many businesses, retailers, and stores accepting it as payment. The cryptocurrency has also emerged as a viable store of value and a hedge against inflation, with multinational institutions keeping bitcoin on their books.
Bitcoin has also emerged as a viable investment asset, with investors becoming interested in the cryptocurrency as it surged in popularity. This also saw the rise of cryptocurrency exchanges, as more and more traders wanted to purchase BTC.
Wrapped Bitcoin offers users several uses, such as accessing DeFi applications, decentralized exchanges, and smart contract-driven platforms. WBTC can bring liquidity to the Ethereum ecosystem from BTC holders. WBTC holders can use smart contracts, deposit assets into DeFi protocols, and take out a loan to purchase even more WBTC.
Bitcoin vs Wrapped Bitcoin: Comparison
|BitGo, Ren, and Kyber
|Coins based on Bitcoin blockchain
|ERC-20. Compliant with Ethereum
|Store-of-value and payments.
|Mining block rewards.
|Issued 1:1 with BTC
Bitcoin has firmly established itself as the largest and most popular cryptocurrency. Over the years, it has emerged as a viable investment asset, store of value, and hedge against inflation. Meanwhile, WBTC offers its users various benefits, such as cross-chain interoperability, boosting DeFi growth. It also allows BTC holders to participate in Ethereum’s DeFi ecosystem. Also, WBTC’s value is linked to bitcoin, meaning users can track BTC’s price and take advantage of WBTC’s smart contract functionalities.
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