Wrapped Bitcoin is a technique for securing Bitcoin (BTC) in an Ethereum (ETH) blockchain smart contract. The standard token type used on Ethereum, known as an ERC20 token, may be created from Bitcoin using a smart contract.
“Wrapping” is the process of encrypting Bitcoin and converting it into an ERC20 token. The BTC can then be utilised in Ethereum’s fast developing DeFi ecosystem once it has been converted into an ERC20 token. Tradesmen may,
Wrapped Bitcoin deposits can be made to yield aggregators to receive interest.
Contribute liquidity to Uniswap and receive a cut of the trading commissions
Make a wrapped Bitcoin deposit in MakerDAO and obtain a secured loan.
Someone might employ wrapped Bitcoin for a variety of different purposes. We even outlined how Ethereum may grow Bitcoin in an article. Due to Ethereum’s current inability to grow, this is not currently achievable; however, if Ethereum does so in the future, wrapped Bitcoin may be able to benefit.
Like the lightning network, Ethereum might serve as a second layer scaling option for bitcoin.
The Advantages of Wrapped Bitcoin
Normal Bitcoin is pretty limited, which is fantastic! Bitcoin is meant to be the safest cryptocurrency in the world, not the flashiest and most interesting. What it is. However, you’ll need to use wrapped Bitcoin if you want to earn interest or do anything else “interesting” with it.
You can borrow money and deposit Bitcoin in a DeFi protocol like MakerDAO. Or, to put it another way: decentralised leverage. Take out a WBTC loan and utilise the proceeds to purchase more WBTC.
Normal Bitcoin is pretty limited, which is fantastic! Bitcoin is meant to be the safest cryptocurrency in the world, not the flashiest and most interesting. What it is. However, you’ll need to use wrapped Bitcoin if you want to earn interest or do anything else “interesting” with it.
You can borrow money and deposit Bitcoin in a DeFi protocol like MakerDAO. Or, to put it another way: decentralised leverage. Take out a WBTC loan and utilise the proceeds to purchase more WBTC.
On decentralised exchanges like Uniswap, you can trade wrapped Bitcoin alternatives like WBTC. You can sell WBTC on Uniswap in addition to selling it to profit from trade fees. Or, to receive interest on your deposit, you may store it on a website like Compound.
In general, the trader has much more freedom to spend their Bitcoins when they are wrapped. With wrapped Bitcoin, you can do more than just retain BTC; you can also get loans, offer liquidity, generate a passive income, trade on a decentralised exchange, etc.
The Disadvantages of Wrapped Bitcoin
Security, security, security is the value of bitcoin. This was clearly demonstrated when the Bitcoin community decided against using higher block sizes. To increase the amount of users who may host a node, they aimed to keep the blockchain as compact as possible.
Security is the most crucial factor on the Bitcoin network. In the event that the global banking system collapses, Bitcoin is what you want to have.
Holding BTC on the Ethereum blockchain partly violates the purpose of Bitcoin given its function as a safe asset. A significant loss could result from exploitation of the smart contract storing the Bitcoin. Or, like in the instance of WBTC (more on this in the part that follows), the business could start freezing wallets to prevent the redemption of Bitcoin.
We can effectively compare wrapped Bitcoin to gold. Many people purchase gold as insurance against the financial system’s collapse. Even if the financial markets go unavailable, the serious investor will keep actual bullion in a safe where they can still access it. Gold in a safe is comparable to Bitcoin in a non-custodial wallet like Exodus, where the user has access to all of their funds.
The less committed investor will purchase so-called “paper gold,” or gold through an ETF. The issue is that no one can predict what will happen to these paper gold products in the event of a significant disruption to the financial system. They don’t provide as much security as having actual gold on hand. Similar to storing Bitcoin on Ethereum, this is Even while it might be practical, the investor is giving up security.
The Different Flavors of Wrapped Bitcoin
There are several different varieties of wrapped Bitcoin. All of the coins adhere to the ERC20 token standard, although different businesses and protocols are used for the wrapping.
WBTC is by far the most prevalent kind of wrapped Bitcoin. This is the original Bitcoin that was wrapped, and BitGo is in charge of it. BitGo has a lengthy history of security, which is a benefit. It is doubtful that a hidden exploit exists in the cod.
WBTC has the drawback that BitGo, a centralised business, manages the packaging and redemption process. They have the power to lock accounts and impede Bitcoin redemption.
Numerous decentralised Bitcoin-wrapped protocols are expanding swiftly. Although TBTC recently debuted and RenBTC already has $250 million in Bitcoin locked up, the protocol only currently has roughly $13 million worth of Bitcoin locked up.
The users’ faith in these decentralised protocols won’t come quickly. However, they will likely replace the centralised wrapping services in the future if they prove to be dependable.
The First Step
Utilizing Bitcoin on Ethereum effectively requires an honest evaluation of its advantages and disadvantages. Ultimate security is suitable for the individual holding Bitcoin as insurance against the collapse of the financial system. They ought to most likely think about storing their BTC in a non-custodial wallet.
There are numerous ways to use BTC on Ethereum to generate a passive income, provided you’re aware of the hazards. WBTC has now been in existence for a number of years and has established itself as a rather safe commodity, at least by crypto standards. Check out DeFi Pulse and DeFi Rate for additional details on WBTC and other wrapped Bitcoin products.
Informational only, this content does not constitute investment advice. Before making any transaction, you should speak with a knowledgeable, licenced advisor.
