What Is Wrapped Bitcoin and How Does It Work?

Learn all about Wrapped Bitcoin (WBTC), how it bridges Bitcoin and Ethereum, and the benefits it brings to DeFi and blockchain interoperability.

Introduction

Wrapped Bitcoin (WBTC) is a tokenized version of Bitcoin (BTC) that uses the Ethereum blockchain to represent the value of a Bitcoin. By “wrapping” Bitcoin and converting it as an ERC-20 token, WBTC allows BTC holders to interact with Ethereum-based protocols, including decentralized finance (DeFi) pools. In short, BTC is helping DeFi expand its use cases across more EVM networks using the ERC-20 token standard. This article explores WBTC, how it stands out from regular Bitcoin, and why it's important to understand wrapped tokens.

What Is WBTC?

Wrapped Bitcoin (WBTC)?is an ERC-20 token representing a single Bitcoin's value. That said, WBTC is 1:1 backed by an actual Bitcoin, which indicates there's always a BTC locked in a smart contract when users are minting a WBTC.

WBTC allows trades to occur on?DeFi?platforms without using costly bridges or wormhole access. It opens the door for users to trade WBTC pairs on DeFi protocols through smart contracts and enables faster transactions than traditional Bitcoin. As an ERC-20 token, WBTC is compatible with all EVM networks, where users can potentially tap into lending platforms and decentralized exchanges (DEXs) and possibly access yield farming protocols using WBTC pairs. Tokenizing Bitcoin as WBTC on the Ethereum network helps bridge the gap between two of the largest blockchain ecosystems. ?

Who Created Wrapped Bitcoin?

Launched in January 2019, WBTC was the effect of a collaborative effort between three major blockchain organizations, specifically:

• BitGo, a trusted cryptocurrency custody provider, ensures the secure storage of Bitcoin reserves backing WBTC.
• Kyber Network, a decentralized liquidity protocol, drives DeFi adoption by enabling seamless token swaps.
• Ren?focuses on blockchain interoperability, allowing assets to move freely across networks.

Together, these organizations aimed to bring Bitcoin’s value and liquidity to the Ethereum ecosystem and were governed by the Wrapped Tokens DAO, a decentralized autonomous organization made up of blockchain entities and community members. The DAO is responsible for ensuring that WBTC stays secure, transparent, and reliable. By turning?Bitcoin?into a token that works on Ethereum, WBTC connects Bitcoin with the world of DeFi, allowing users to use their tokens on previously untapped platforms for lending, trading, and earning yields in Ethereum-based apps. ?

How Do WBTC Tokens Work?

Wrapping BTC into WBTC is a simple process that is done on-chain. Here is a simple explanation of how wrapping and unwrapping WBTC works:

1. Wrapping BTC?– To create WBTC, Bitcoin holders send BTC to an authorized custodian wallet. The custodian verifies the deposit and mints an equivalent amount of WBTC on the?Ethereum blockchain.
2. Unwrapping WBTC?– When a user wants to redeem their WBTC for Bitcoin, they submit a request to the custodian. The WBTC is burned (removed from circulation), and the corresponding BTC is released from reserves and returned to the user. The process is transparent and entirely done on-chain, allowing anyone to verify if the BTC reserve is backing the WBTC in circulation. ?

What Are the Benefits of Wrapped Bitcoin?

• Access to Decentralized Finance (DeFi) ? Wrapped Bitcoin enables BTC holders to access Ethereum-based DeFi applications, enabling a range of new possibilities. Using WBTC tokens, users could borrow and lend Bitcoin assets, trade these assets on decentralized exchanges (DEXs), and participate in farming or staking to earn trading fees or rewards. Without WBTC, Bitcoin’s use in the DeFi space would remain extremely limited.
• Improved Liquidity on Ethereum ? Wrapped Bitcoin (WBTC) brings Bitcoin's value to Ethereum as a tokenized proxy, allowing BTC holders to participate in Ethereum-based DeFi without directly using Bitcoin. While WBTC doesn’t provide Bitcoin’s liquidity directly, it can deepen liquidity pools and increases capital flow on decentralized exchanges. This enables seamless trading and lending of BTC-backed assets within the Ethereum ecosystem.
• Blockchain Interoperability ? By tokenizing Bitcoin, WBTC enables interoperability between Bitcoin and Ethereum, bridging the gap between two of the largest blockchain networks. This increases the overall utility of Bitcoin without compromising on its core principles.
• Increased Network Speed ? Ethereum's transactions are significantly faster than Bitcoin's due to Ethereum’s shorter block times. WBTC benefits from these faster transfer speeds, making it an attractive option for users looking for quicker transactions. ?

What’s the Difference Between Bitcoin (BTC) and Wrapped Bitcoin (WBTC)?

WBTC is an ERC20 token backed 1:1 with Bitcoin. ?Their prices can differ slightly and there are critical distinctions between the two:

• BTC as an ERC-20 Token ? WBTC is an ERC-20 compatible with the Ethereum network and any other EVM networks. BTC, on the other hand, operates natively on its blockchain and is not compatible with non-Bitcoin networks.
• Access to DeFi Protocols on Ethereum ? BTC holders cannot directly access DeFi platforms on the Ethereum blockchain without going through a complex bridging process. WBTC simplifies this by acting as a gateway for Bitcoin holders to indirectly enter the Ethereum ecosystem and unlock opportunities in the DeFi space.
• Level of Decentralization ? Bitcoin is famously decentralized, with thousands of nodes maintaining its network. WBTC, while decentralized to an extent, relies on custodians and centralized entities to manage the collateralization and burning process. ?

Frequently Asked Questions

What Is the Point of Wrapped Bitcoin? ? Wrapped Bitcoin (WBTC) was created to bring Bitcoin’s value into Ethereum’s DeFi ecosystem. While it doesn’t directly transfer Bitcoin’s liquidity, WBTC acts as a proxy, allowing Bitcoin holders to use their assets on Ethereum. This enables faster, more flexible transactions and access to a wide range of DeFi opportunities, giving Bitcoin more utility within the Ethereum network.

Additionally, users can buy WBTC directly on various platforms, making it easy to participate in DeFi activities without needing to first convert Bitcoin to Ethereum. Whether you're looking to lend, borrow, or engage in decentralized exchanges, WBTC offers a way to bridge the two networks.

Final Thoughts

Wrapped Bitcoin?provides a powerful solution for integrating Bitcoin and Ethereum, two of the most influential blockchain networks. By tokenizing Bitcoin,?WBTC?empowers crypto traders and investors to leverage Bitcoin creatively, from earning interest on lending platforms to engaging in faster, Ethereum-based transactions.

Whether you’re newly exploring DeFi or looking to increase the possibilities of your Bitcoin holdings, Wrapped Bitcoin offers a bridge to exciting possibilities. Want to keep an eye on WBTC and thousands of other cryptocurrencies? Visit and bookmark our?markets page?to stay updated on the latest trending tokens, news, and price movements ?

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Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.