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DeFi Decrypted: What is WBTC?

DeFi Decrypted: What is WBTC?

Explainers DeFi

13 Oct 2020

Wrapped Bitcoin (WBTC) is an ERC20 token that was created to integrate Bitcoin with the DeFi world. The token acts as a stablecoin for Bitcoin, meaning 1 WBTC will always represent 1 BTC in value. Despite the many newcomers topping the crypto charts, Bitcoin remains the biggest coin in terms of market share, so it only makes sense to infuse DeFi with the full force of the original cryptocurrency. As an ERC20 token, the transfer of WBTC is faster than regular BTC but the key advantage is the integration with dApps, Ethereum wallets and smart contracts. By the way, Uniswap, a protocol for the decentralized exchange of ERC20 tokens based on the Ethereum blockchain, works on the same terms.

Since its inception, WBTC has generated a lot of interest across DeFi applications including lending, derivatives, DEXs and payment protocols.

Tokenizing Bitcoin

Wrapped Bitcoin was launched on Ethereum in January 2019, as part of a collaboration between major DeFi players including Ren, BitGo, Compound, Kyber, MakerDAO and Set Protocol. Today, the project is managed by a Decentralized Autonomous Organization (DAO) called the WBTC DAO.

One of the greatest advantages of WBTC for DeFi was the injection of liquidity the token brought in. Many of the most popular DeFi dApps require users to put in collateral of their own to use the service. For example, to borrow crypto assets using Compound users need to lock up a certain amount of collateral. Using only ETH would’ve limited the growth rate of these protocols, but by integrating the service with Bitcoin that limit has been lifted. There is simply much more money held in Bitcoin by more people all over the world.

Now, people can HOLD Bitcoin while putting that money to work using DeFi protocols that support WBTC.

How WBTC works

There are 3 major components to framework of WBTC tokens: receiving, minting, and burning.

To get WBTC, you need to receive tokens from a WBTC merchant. The merchant conducts KYC/AML procedures and verifies your identity. Once this is completed, the swap is executed, transferring Bitcoin to the merchant and WBTC to you. Minting refers to the process of creating new wrapped tokens. Minting in the wrapped framework is initiated by a merchant and performed by a custodian. Burning is the action of redeeming Bitcoin for WBTC tokens, and only merchant addresses can do this. The amount to be ‘burnt’ is deducted from the merchant’s WBTC balance (on chain) and the supply of WBTC is then reduced.

As you can see, WBTC requires trust in people and systems rather than pure code. To increase trust and transparency, WBTC undergoes regular audits and publishes all on-chain transactions and verifications for the Bitcoin and Ethereum networks. Anyone can check how much BTC was sent to the WBTC address on the Bitcoin blockchain, match the transactions with the creation of WBTC, and verify the burning process of WBTC to redeem BTC on-chain.

If you simply want to trade WBTC, that’s a lot easier. The token is supported by most DEXs operating in the DeFi space including Uniswap, Kyber and SushiSwap, and increasingly on centralized exchanges like AAX. You can then put that WBTC to work on any of the other protocols in DeFi such as Compound, Aave, or Set. Swapping directly between WBTC and BTC is only possible through official WBTC merchants including Kyber, Dharma, Set, GOPAX, AirSwap, Prycto, ETHfinex and Ren.

The path for WBTC

The future for WBTC is not just about how individual traders use it, it’s about how DeFi developers deploy it strategically. As an ERC20 token, Bitcoin in the form of WBTC is another building block in the modular system design of DeFi protocols. Now it’s up to the most innovative developers to find interesting ways to capture the best of Bitcoin, Ethereum, DeFi and alternative finance all on a single platform.

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