The world’s most popular cryptocurrency is still Bitcoin, but it doesn’t have the same functionality as some other tokens, such as those on the Ethereum blockchain.
But what if you could access Bitcoin on the Ethereum blockchain? That’s the idea behind Wrapped Bitcoin, which is a wrapped token based on Bitcoin but used on the Ethereum blockchain.
Here’s what you need to know about Wrapped Bitcoin vs. Bitcoin.
What is Wrapped Bitcoin?
Wrapped Bitcoin (WBTC) was launched in 2019 as a way to use Bitcoin (BTC) on the Ethereum blockchain. Rather than having an individual founder, it was instead created by a group of three developers, including BitGo, Kyber Network and Ren. These organizations are key players in decentralized finance (DeFi) and wanted to provide a way for Bitcoin tokens to be used on the Ethereum network.
The Ethereum blockchain is known for its use in DeFi transactions and its popularity for building DeFi applications (dapps). However, if you have a lot of Bitcoin tokens, they can’t be used on Ethereum. On top of that, transactions on the Bitcoin blockchain take much longer than those on the Ethereum blockchain.
In order to make it possible for those with Bitcoin reserves to participate on the Ethereum blockchain, the consortium created an ERC-20 token, or an Ethereum standard token, called Wrapped Bitcoin. Similar to stablecoins like Tether (USDT) and USD Coin (USDC) which are tied to the value of a particular currency, one WBTC is always worth one BTC, and Bitcoins are held in provable reserves so WBTC is always backed by BTC.
Wrapped Bitcoin vs. Bitcoin: What’s the difference?
It’s important to note that Wrapped Bitcoin is a tokenized version of Bitcoin that can be used in Ethereum's DeFi ecosystem. The process of minting WBTC requires the use of trusted merchants that basically hold your BTC and then issue you WBTC tokens that are compatible with Ethereum.
For example, let’s say you have a large number of bitcoin tokens. You want to send money over Ethereum, or perhaps you want to develop some dapps on the Ethereum blockchain. You’d like to use your Bitcoin tokens, but you can’t. So, instead, you go to a trusted merchant who takes the time to verify your identity and make sure that everything’s as it should be.
Next, the merchant goes to a custodian (currently BitGo), which is a trusted third party. The custodian issues ERC-20 tokens identified as Wrapped BTC. The number of WBTC tokens is equal to the number of Bitcoin tokens you promise to provide. Up to this point, you’ve kept your BTC.
Now, the WBTC can be sent from the custodian’s account to the merchant’s Ethereum-compatible crypto wallet. Now, it’s time for the swap. Using a peer-to-peer transaction or an exchange, you send your BTC to the merchant and they send you the WBTC.
Once you have the WBTC, you can use it on the Ethereum blockchain for DeFi transactions or for dapps. The BTC remains in reserve and is backing for the WBTC. All of this is verified on the public ledgers used for Bitcoin and Ethereum blockchains. You can see the transactions and the proof of reserves on the blockchains.
Later, when you’re ready to have your BTC back, you can return to the merchant and redeem your WBTC. The merchant then destroys the WBTC in a process known as burning, as there’s no reserve left.
Swapping Bitcoin for Wrapped Bitcoin may seem like a long process, but it can be completed relatively quickly. The real benefit is that you don’t have to deal with using exchanges (and the larger resulting fees) to exchange BTC for Ethereum (ETH) or some other token. Instead, you get your Wrapped Bitcoin and can use it on a number of compatible Ethereum-based platforms.
How can Wrapped Bitcoin be used?
The idea here is to make it possible for Bitcoin holders to use tokens from one platform on another platform. Although the best cryptocurrency exchanges make it easy to buy and sell tokens, or even trade some token pairs, wrapped cryptocurrencies can save money and effort.
Some of the ways that WBTC (and other wrapped currencies) can be used include:
- Increased transaction speed: For those who want to speed up transactions, the Ethereum blockchain is preferable to the Bitcoin network. With WBTC, it’s possible to use your BTC reserves on the Ethereum platform, conducting business faster.
- Increased liquidity: Centralized cryptocurrency exchanges (such as Coinbase) often use Bitcoin as the main token of trade. (Read our full Coinbase review.) However, decentralized exchanges, also called DEXs, often use Ethereum. Instead of having to exchange BTC for ETH and then go to a decentralized exchange for other digital assets, it’s possible to use WBTC.
- Smart contracts with Bitcoin: Right now, BTC isn’t used with smart contracts. However, WBTC allows the possibility of using BTC to back smart contract transactions.
- Pave the way for fiat currency tokens: If WBTC is successful, it could pave the way for tokenizing fiat currencies using the ERC-20 standard. It would allow for a system of holding U.S. dollars (USD) or euros (EUR) in reserve, and minting price-stable tokens that could be used on the blockchain without the need for currency conversion.
How to invest in Wrapped Bitcoin and Bitcoin
Both WBTC and BTC can be bought on major centralized exchanges. For example, you can buy WBTC tokens on eToro and using Coinbase Pro. Gemini allows you to store WBTC, but Kraken doesn’t offer purchase or storage. You also need a crypto wallet that’s compatible with different tokens.
Additionally, it’s possible to purchase WBTC on decentralized exchanges such as Uniswap, though you usually need to have a stash of ETH in order to purchase WBTC directly.
If you decide you want to have your own WBTC minted, you will need to make sure you have enough BTC to complete the transaction. In this case, you’d go to WBTC DAO to find a merchant and submit your request. There are other ways to wrap BTC, including using smart contracts that tokenize the BTC you have.
However, WBTC is the most popular version of a wrapped bitcoin token, so you’re more likely to have liquidity when you focus on WBTC. If you already know how to buy bitcoin, you can probably get WBTC too.
Which is better, Wrapped Bitcoin or Bitcoin?
The better option for you depends on your situation and goals. Wrapped Bitcoin is a tokenized version of Bitcoin that can be used on the Ethereum blockchain. If you’re just looking to keep a store of value, Bitcoin could be a good choice. However, if you want to be able to use your tokens for DeFi transactions, or if you’re interested in dapps, Wrapped Bitcoin might be better for your needs.
Is Wrapped Bitcoin a good investment?
Whether WBTC is a good investment depends on your needs and portfolio strategy. It’s important to note that WBTC is tied to Bitcoin’s price, so it costs the same as BTC. If you think it has a chance to remain the main version of tokenized Bitcoin, and you expect the price of BTC to rise in the future, WBTC might be a decent investment. Whenever you’re investing money, it’s important to consider your own needs and goals.
What’s the purpose of Wrapped Bitcoin?
The purpose of Wrapped Bitcoin is to be able to use Bitcoin reserves on the Ethereum blockchain. Basically, it’s so those with a large amount of Bitcoin can use their tokens on the Ethereum blockchain without going through the process of exchanging BTC for ETH.
A wrapped cryptocurrency is a tokenized version of a crypto asset, backed by the original coin. Wrapped Bitcoin is a tokenized representation of Bitcoin held in reserve. WBTC is designed to be used on Ethereum-based platforms, making Bitcoin work with the Ethereum ecosystem.
As you think about how to buy cryptocurrency, it’s important to note that although you can buy WBTC on the secondary market, the tokens are destroyed once they’re redeemed with trusted merchants. It’s also important to realize the WBTC is tied to BTC, so it will never be more valuable than Bitcoin.
Carefully consider your needs and goals as well as market volatility before you decide to invest in wrapped bitcoin.
Disclosure: The author of this piece owns BTC and ETH.