Wrapped Bitcoin (WBTC) – what is it?
101: An Overview of Wrapped Bitcoin and Its Benefits
The way we view conventional finance has been completely transformed by cryptocurrencies. This revolution has been led by Bitcoin in particular, which served as the model for subsequent cryptocurrencies.
However, it becomes clear that there are still some restrictions as more people become involved in the cryptocurrency ecosystem. For instance, the Ethereum network does not support Bitcoin.
We now have Wrapped Bitcoin (WBTC), a technology that aims to unify Bitcoin and Ethereum. We shall examine what WBTC is, its benefits, and its operation in this article.
WBTC stands for wrapped bitcoin.
A sort of token with Bitcoin as its backing is called wrapped bitcoin. It is an ERC-20 token with a 1:1 correlation to the price of Bitcoin.
In other words, a certain amount of Bitcoin is kept in reserve for each WBTC token that is generated.
WBTC coins are usable on the Ethereum network and function with all Ethereum-based programs, such as loan services, decentralized exchanges (DEXs), and other DeFi programs.
What is meant by "wrapped Bitcoin"?
It's critical to comprehend the meaning of "wrapped bitcoin" in order to comprehend what the phrase signifies. One cryptocurrency is "wrapped" in another blockchain or token during the wrapping process.
With WBTC, Bitcoin is concealed inside an ERC-20 token, which enables compatibility with the Ethereum network.
WBTC is a method of introducing Bitcoin's liquidity to the Ethereum network, enabling owners of Bitcoin to use DeFi applications.
The distinction between bitcoin and wbtc
The primary distinction between BTC and WBTC is that the former is an ERC-20 token on the Ethereum network, whereas the latter is native to the Bitcoin blockchain.
WBTC can be utilized on any Ethereum-based application, whereas BTC has restricted compatibility with other blockchains.
Because WBTC is backed by Bitcoin, there is an equivalent amount of Bitcoin in reserve for each WBTC token that is issued.
Wrapped Bitcoin (WBTC) is required.
The limitations of Bitcoin led to the need for WBTC. The interoperability of Bitcoin with other blockchains is constrained, and it is incompatible with the Ethereum network.
As a result, users of Bitcoin are unable to use any of the numerous DeFi applications that are accessible via the Ethereum network. By acting as a link between Bitcoin and Ethereum, WBTC enables access to these services for Bitcoin owners.
How did WBTC come to be?
There are various steps involved in minting WBTC. A user must first send Bitcoin to a WBTC merchant. After the transaction is confirmed, the merchant transfers the corresponding WBTC tokens to the user's Ethereum address.
A custodian who is in charge of upholding the 1:1 ratio between BTC and WBTC holds the BTC in reserve. To make sure the reserve is accurate, the custodian is routinely audited.
The Relationship of WBTC to Bitcoin and Ethereum
WBTC and Bitcoin and Ethereum are closely tied to one another. Because it is backed by Bitcoin, there is an equivalent amount of Bitcoin in reserve for each WBTC token that is issued.
WBTC can be utilized on any Ethereum-based application because it is an ERC-20 token on the Ethereum network. As a result, it is a flexible asset that blends Ethereum's compatibility with Bitcoin's liquidity.
WBTC and smart contracts
The development and administration of WBTC are greatly aided by smart contracts.
A smart contract is generated when a user gives Bitcoin to a WBTC merchant, confirming the transaction and minting the corresponding number of WBTC tokens.
The custodian holding the BTC in reserve and upholding the 1:1 ratio between BTC and WBTC are further guarantees provided by the smart contract. The frictionless movement of WBTC tokens between users is another benefit of smart contracts.
Intangibles and WBTC
Not all tokens are backed by digital assets, including WBTC. A wide range of assets, including gold, silver, and other cryptocurrencies, are used to support a lot of other tokens.
WBTC is special in that it works with the Ethereum network, though. For customers who want to access DeFi applications on the Ethereum network but still own Bitcoin, this makes it a valuable asset.
The Wrapped Bitcoin (WBTC): What is it?
Wrapped Bitcoin is a useful addition to the ecology of cryptocurrencies.
By connecting Bitcoin and Ethereum, it enables users of Bitcoin to use DeFi applications running on the Ethereum network. WBTC has the liquidity of Bitcoin and is compatible with the Ethereum network because it is backed by Bitcoin.
In order to maintain the 1:1 ratio between BTC and WBTC, smart contracts are vital to the creation and management of WBTC.
With the further development of the bitcoin ecosystem, WBTC will probably assume a more significant role.