Bitcoin is the first, largest, and most-reputed cryptocurrency in the world. The technology used in Bitcoin is a “peer-to-peer electronic cash system”, that remains unchanged. New innovations are happening in various parts of the blockchain ecosystem.
Decentralized Finance (DeFi) is one of the prime examples of such an innovation. Wrapped Bitcoin (WBTC) plays a prominent role in Bitcoin’s growing trend in DeFi lending. Wrapped Bitcoin combines both the worlds to bring both the value and liquidity of Bitcoin to make it usable in the DeFi world.
In this article, let’s understand more about what is WBTC, how it works, fees, and much more.
What is Wrapped BTC (WBTC)?
Wrapped Bitcoin (WBTC) is an ERC20 token that represents Bitcoin. 1 WBTC = 1BTC. It is possible to convert BTC into WBTC and vice-versa. As WBTC is an ERC20 token, you can transfer it faster than Bitcoin. The best advantage of WBTC is its integration into Ethereum wallets, dapps, and smart contracts.
WBTC was launched on the Ethereum Mainnet in January 2019. It was introduced as a collaborative project between BitGo, Ren, Dharma, Kyber, Compound, MakerDAO, and Set Protocol. This project was planned to bring more liquidity into the Ethereum network using Bitcoin. Decentralized Autonomous Organization (DAO) called the WBTC DAO controls this project. The circulating supply of WBTC is 105,686 and the maximum supply is the same as Bitcoin that is 21 million.
Apart from WBTC, there is another project called imToken which created an ERC20 token called imBTC. This token also represents one BTC. The circulating supply of imBTC is 1,674. Bitcoin holders can hold Wrapped Bitcoin as an asset while using DeFi dapps like Compound to borrow or lend money.
How can you exchange BTC for WBTC?
The user, merchant, and the custodian are the three key players in the exchange process of Wrapped BTC. To swap BTC for WBTC, the user will request a WBTC merchant. The merchant will then distribute WBTC in exchange for bitcoin or vice versa. There is a Know Your Customer (KYC) process required for verification.
The merchant will act as a middleman between the user and the custodians. The merchant presents the transaction request to the custodian. The custodian will decide whether to grant or deny the transaction request to mint or burn WBTC. The minting and burning process will take place between the merchant and the custodian through an atomic swap.
When a merchant enters a minting request through an Ethereum smart contract while sending BTC to the custodian, the process is launched. Here, the custodian waits for the confirmation on the Bitcoin blockchain. Then, the custodian will approve the request and the merchant will get the WBTC.
To get the tokens, the user has to register in a trusted exchange or atomic swap with the merchant. The user will then get WBTC, which is a bitcoin wrapped in an Ethereum blanket. Hence, it is called “Wrapped Bitcoin”.
Similar to other financial services, WBTC also comes with a certain amount of cost. The fees will include:
Custodian Fees: The custodian collects these fees when the merchant chooses to mint or burn the wrapped tokens.
Merchant Fees: Merchant takes this fee as a payment from the user for helping them swap their BTC with WBTC.
Sidechain Transaction Fees: To prevent spam on the sidechain, there is a fee that will be shared among all entities running a sidechain node.
How can you use WBTC to generate interest from BTC?
There are a few ways to use WBTC to generate interest from BTC. They are:
Lending on Compound
The compound now accepts WBTC. It uses an algorithm to calculate the interest rates based on demand and supply. If you have a loan, then the value of your collateral should be above a certain threshold to prevent the liquidation of your assets. You can also lend WBTC to Compound users and earn interest from it.
Yield Farming on Maker
The first step in Maker is to wrap your BTC into WBTC. Then, you can generate DAI using your WBTC. After generating DAI, you can convert it back into BTC through an exchange, reinvest it, or allow it to continue producing DAI.
Staking on Synthetix
Yield farming on Synthetic is quite straightforward. Firstly, you have to provide WBTC to the curve liquidity pool and earn Curve LP tokens as a reward for your contribution. Then, you can stake your Curve LP tokens in Mintr. Both the staking process and claiming your rewards will take place in the LP Rewards tab on Mintr. When you wish to cash out, you can select “Claim and Unstake” and your tokens are liquidated into SNX and REN, and then it will be traded for BTC on exchanges like Binance, OKEx, and Bilaxy.
Future of WBTC
The future of WBTC is all about how you use WBTC, what the developers will build using WBTC. WBTC is a permission-less ERC20 token that becomes another building block for DeFi applications. Each user can verify each Bitcoin held in the custody. The users can perform the verification by comparing the exact number of Bitcoin stored with the total supply of WBTC via Etherscan. With this transparency, trustworthiness is generated to the digital currency.
WBTC provides more BTC holders into the DeFi space. This helps in the development of the DeFi ecosystem. The users can benefit from programmability and reduced transaction fees on Ethereum. Also, they can access the growing amount of DeFi applications.