Wrapped Bitcoin (WBTC)

What is Wrapped Bitcoin (WBTC)?

Wrapped Bitcoin is an innovative digital currency that represents Bitcoin on the Ethereum blockchain. It is a token that mirrors the value of Bitcoin, allowing Bitcoin holders to participate in decentralized finance (DeFi) ecosystems without having to sell their Bitcoin. This is achieved by "wrapping" Bitcoin into an ERC-20 token, enabling it to be used in the Ethereum ecosystem. In this beginner's guide, we'll delve into the mechanics of Wrapped Bitcoin and explore its significance in bridging the gap between Bitcoin and Ethereum's DeFi applications.

How does Wrapped Bitcoin work?

The process of creating Wrapped Bitcoin involves locking up Bitcoin in a smart contract and minting an equivalent amount of WBTC as an ERC-20 token on the Ethereum blockchain. This token can then be used in Ethereum's DeFi applications for lending, borrowing, trading, and earning interest, among other functionalities.

To ensure the value of WBTC stays pegged to Bitcoin, a network of custodians holds the actual Bitcoin. These custodians are responsible for issuing and redeeming WBTC tokens when users want to convert their WBTC back to BTC or vice versa. This system ensures that for every WBTC in circulation, there is a corresponding Bitcoin locked in reserve.

Users interested in obtaining WBTC must go through a merchant who facilitates the conversion process. The merchant accepts the user's BTC, interacts with the custodian to lock up the BTC, and then provides the user with the equivalent WBTC. Similarly, when converting WBTC back to BTC, the process is reversed.

Conclusion

Wrapped Bitcoin brings the liquidity of Bitcoin to the Ethereum ecosystem, enabling Bitcoin holders to engage with the burgeoning DeFi space. This not only enhances the utility of Bitcoin but also enriches the Ethereum platform with increased liquidity and participation. WBTC makes it possible to use Bitcoin for various applications beyond its original scope, such as participating in smart contract-based applications, trading on decentralized exchanges, and accessing lending platforms. Through this innovative approach, Wrapped Bitcoin serves as a critical bridge between the leading cryptocurrency and the versatile platform of Ethereum, opening up new possibilities for users and developers alike.