If you want to know what Grayscale Bitcoin Trust is and how it can be beneficial for you, read this guide.
Ever heard of the acronym WBTC? It stands for Wrapped Bitcoin. This is an ERC20 token that denotes Bitcoin (BTC), the top cryptocurrency by market cap. But how did it all begin and what does this token entail? Read on to find out.
WBTC is closely tied to Bitcoin since its launch was inspired by BTC – the world’s top cryptocurrency launched in 2009. But eleven years later, there have been minor improvements to the digital asset’s blockchain.
Accordingly, the need for advancement in the world of cryptocurrency and specifically, the blockchain led to the launch of other projects. One such project is Wrapped BTC, which was launched in January 2019 on the Ethereum blockchain.
The launch of Wrapped Bitcoin can be tied to the efforts of top investors in the Decentralized Finance (DeFi) ecosystem. These investors are not limited to Compound, MakerDAO, and Set Protocol. They have a common goal of increasing the Ethereum network’s liquidity through the use of Bitcoin. Specifically, there will be more liquidity when it comes to DeFi dApps.
Decentralized Autonomous Organization (DAO) is currently in charge of WBTC. This organization has the goal of improving decentralized financial services. Its project has been tagged WBTC DAO.
WBTC offers the major properties of Bitcoin, which is value and liquidity. However, the ERC20 token took it one step further to enable the use of these features in DeFi, a blockchain ecosystem.
A single WBTC is now equivalent to one Bitcoin. WBTC can be converted to BTC and so can BTC be switched to the asset. WBTC as an ERC token is faster to transfer compared to BTC. This asset can also be integrated into smart contracts, ETH wallets, and Dapps.
Wrapped Bitcoin comes with several features that have translated into immense benefits. For starters, incorporating Bitcoin with Ethereum provides more liquidity, which offers more collateral sources for DeFi dApps.
The latter is best appreciated when consideration is given to the high number of popular DeFi dApps that rely on collateral. There’s MakerDAO, for instance, and it requires an investor to lock their assets before borrowing other virtual currencies. Coupled with that, Ethereum’s value is smaller compared to a Bitcoin. And this limits the growth of DeFi protocols.
Another notable benefit of Wrapped Bitcoin lies in its ability to enable Bitcoin investors to hold the asset and at the same time, use DeFI dApps. These apps can be used to borrow or lend funds.
The Bitcoin and Ethereum blockchain are unable to communicate with one another, hence, people have to be trusted to facilitate transactions. Besides, Bitcoin’s level of security is higher than that of WBTC due to its heavy reliance on organizations and even people to manage its system. This differs from the management of pure code.
Nonetheless, the project’s managers establish WBTC’s trust and improve transparency by carrying out audits regularly. It also publishes every on-chain transaction and verification for both the Bitcoin and Ethereum network.
It, therefore, makes it possible for an individual to verify the BTC amount that was transferred to a WBTC address on Bitcoin’s blockchain. Likewise, they can confirm if these transactions match the generation of WBTC on Ethereum’s blockchain. Users can also track the burning of Wrapped BTC to get BTC.
DAO governing members are in charge of updates and changes that take place on the protocol. These members are responsible for selecting those that can be Merchants and Custodians of the system.
Merchants help users to convert their BTC to WBTC. But first, the users must communicate with the Merchants. A Merchant initiates the minting or burning process of WBTC tokens only after verifying the user’s identity.
Custodians, on the other hand, store the BTC that is undergoing wrapping and execute the minting and burning of the tokens on Ethereum’s blockchain. After the successful burning of WBTC, the user’s BTC stored by the Custodian is returned to them. And when WBTC is minted again. the user’s BTC is deducted and held by the Custodian.
WBTC tokens can be acquired by trading on decentralized exchanges. BTC can also be exchanged for the ERC20 token by using ETHfinex, GOPAX, AirSwap, Set Protocol, and other WBTC sellers.
After acquiring Wrapped BTC, there are two major uses you can put it to. The first is to use Compound in borrowing or lending the token. The second is to use the asset for margin trading.
The token takes the benefit of BTC one step further by offering higher liquidity on the Ethereum network. The token is also a building block for DeFi applications, which is evident in TokenSets. The latter helps in the creation of products that can trade WBTC and ETH automatically.