- On October 26, 2018, BitGo, Kyber Network, Ren, and other community institutes launched WBTC to bring Bitcoin’s liquidity to the Ethereum ecosystem
- WBTC can be used in DeFi because its interoperability allows users to lend, borrow, and token-swap the wrapped cryptocurrency
- Various DeFi platforms that have already incorporated the ERC-20 token include; Aave, Balancer, Compound, Kyber Network, MakerDAO and Uniswap
- It is important to note; the wrapped cryptocurrency should generally not be viewed as an investment but rather as a tool
Cryptocurrency volatility has been a constant plaguing factor within the crypto ecosystem. As a result, stablecoins emerged, and to many crypto traders, this was a sign of a means to stabilize the value of crypto coins, including coins such as Tether and DAI tokens.
Popular as they are, they still faced various obstacles, so developers brought in a new kind of coin, wrapped token or, more specifically, the Wrapped Bitcoin(WBTC). A digital currency that exists as an ERC-20 token within the Ethereum Network mainly caters to DeFi Applications and software.
Understanding wrapped crypto
Wrapped cryptocurrency generally borrows fundamental concepts from stablecoins, but it’s slightly different. Unlike stablecoin, its ERC-20 token has the same value as the asset its representing. Its value, like a stablecoin, has a 1:1 backing ratio with its underlying cryptocurrency.Smart contracts make this possible by negotiating a stable value. It works in such a way the wrapped crypto version is issued on a host blockchain network such as the Ethereum Network, while the original digital asset is locked in a secure vault or a digital sandbox.
WBTC s an ERC-20 token that represents one bitcoin but is useable within the Ethereum network where otherwise it would be possible. It is critical to remember that WBTC is not Bitcoin. It is a token used to track the value of Bitcoin.
Background check on WBTC
On October 26, 2018, BitGo, Kyber Network, Ren, and other community institutes launched WBTC to bring Bitcoin’s liquidity to the Ethereum ecosystem. The main aim behind WBTC was to allow its DeFi applications and features to use Bitcoin within their daily transactions.
Through its various blockchain developments, a user can exchange 1 Bitcoin for 1 WBTC; this process is verifiable through a proof-of-reverse system which verifies that the ratio is achievable.
WBTC addresses the issue of interoperability of tokens. Currently, the preliminary design of blockchain networks is isolation. This enables each one to have different functionalities within the crypto ecosystem. Blockchain developers introduced specific mechanisms to facilitate communication between other blockchains, but neither achieved a transition between multiple consensus systems. This developed various issues, such as slow network performance and lengthy validation processes.
Wrapped cryptocurrency mitigates this flaw by allowing and improving capital and liquidity efficiency within DeFi operations and decentralized applications (DApps).
It essentially ‘wraps’ digital assets to be usable within a different network allowing easier accessibility and expanding its usability.
Currently, the WBTC protocol responsible for wrapping BTC is controlled by a Decentralized Autonomous Organization(DAO) consisting of 17 stakeholders who are important figureheads within the DeFi space.
How can you use Wrapped Bitcoin
WBTC is generally applicable in the below areas due to its ERC-20 token nature
- Crypto Trade – since it is common knowledge that Bitcoin is the world’s largest cryptocurrency, it is highly used in daily trading. However, this does not mean it is reachable or usable in any environment. The ERC-20 token allows bitcoin to be more accessible within the crypto market and, more so, decentralized applications. The wrapped cryptocurrency is usable on all Ethereum Network platforms, and users can also wrap and unwrap BTC. This enables them to shift from the traditional Bitcoin ecosystem and the decentralized applications on the Ethereum Network.
- DeFi institutions – WBTC can be used in DeFi due to its interoperability allowing users to lend, borrow, and token-swap the wrapped cryptocurrency. Various DeFi platforms that have already incorporated the ERC-20 token include; Aave, Balancer, Compound, Kyber Network, MakerDAO and Uniswap.
- Yield farming – WBTC can earn interest when a user offers to lend them to borrowers through money markets and liquidity pools. This essentially makes a user more money. The borrowing platforms use an algorithm to calculate the amount earned by determining the supply and demand of WBTC to set an interest rate.
- Margin Trading – this is essentially borrowing money to trade with. The definition might not appeal to many, but trading on a margin has few benefits. It provides leverage returns, potentially leading to greater profits that wouldn’t be accessible without borrowing. Although the opposite is true, one can ensure more significant losses if not practised wisely.
By essentially combining the value of Bitcoin with the market reachability of the Ethereum network, WBTC has significantly grown.
The Pros and Cons of the wrapped cryptocurrency
Bitcoin is generally the world’s leading cryptocurrency, especially in value, but you can’t do much with it. Wrapping Bitcoin opens you up to greater possibilities.
Many exchange platforms use WBTC to conduct their operations and allow crypto traders a more comprehensive array of opportunities to capitalize and gain profits off of Bitcoin. The ERC-20 token gives traders more flexibility with their coins.
Although Wrapped Bitcoin vastly scaled bitcoin, it also defeats its general aim. Bitcoin is renowned as the world’s safest cryptocurrency; it even rejects larger block sizes to minimize the number of people who can mine the cryptocurrency. They value their security over anything else. The smart contract holding the BTC within the Ethereum Network can be compromised. It defeats the whole concept behind BTC.
Wrapped Bitcoin is convenient to crypto traders, but it’s also less safe.
Is WBTC a good investment
It is important to note; the wrapped cryptocurrency should generally not be viewed as an investment but rather as a tool. The only reason why some crypto traders prefer WBTC over BTC is to take advantage of Ethereum’s DeFi platforms. Its value is equal to Bitcoin; it’s just that range of applicability differs.
WBTC should only be an option if you want additional ways to benefit and earn more from the cryptocurrency ecosystem.