Bitcoin is a digital store of value. Ethereum is a global decentralized virtual computing platform. These two projects are the most popular and widely adopted in the crypto industry. Which is why it was inevitable that some developers would eventually consider a cross-platform asset that combines unique features from both.
This cross-platform asset is known as Wrapped Bitcoin or WBTC. Here’s a closer look at our token of the week.
Background
Smart contracts on the Ethereum network allow for the creation of digital tokens that can be backed by other assets. This technique has been used to create stablecoins, such as USDC which was discussed last week. Other developers have used this technique to create proxies for publicly-traded companies and gold on the Ethereum network.
Crypto companies BitGo, Ren, and Kyber came together to create WBTC, an ERC-20 token backed by Bitcoin. Each WBTC is backed 1:1 by an underlying BTC. Since the Bitcoin network is public, this collateral can be easily verified. Thus, it serves as the perfect bridge between Bitcoin and Ethereum.
Use cases
Bitcoin’s immense value cannot be fully utilized in the emerging field of decentralized finance or DeFi. DeFi applications are primarily based on the Ethereum network, which is incompatible with Bitcoin’s underlying blockchain.
However, WBTC bridges that gap. It allows users to stake, borrow, lend, and use smart contracts with the world’s most popular digital asset. Now, BTC can be used as collateral for securing crypto-backed loans, to earn interest in decentralized lending pools, to earn liquidity mining/yield farming revenues or to margin trade on decentralized derivative exchanges.
Tokenomics
WBTC is managed by a group called the WBTC decentralized autonomous organization (DAO). This DAO currently has 30 members, including the original three founding members, who act as custodians for the wrapped Bitcoin. Users can reach out to one of these WBTC partners to wrap or unwrap their BTC.
A proof-of-reserve system can be used to verify that each WBTC is, indeed, fully backed by a legitimate BTC. This level of transparency has helped make WBTC popular, with Bitcoin worth over $8 billion locked on the platform. In fact, 1% of all outstanding BTC are wrapped in this way.
Recent developments
WBTC has seen increased transactions and adoption in recent months. Last week, it was added as a payment method on the BitPay platform. This means it can now be used for merchant services and cross-border transactions. WBTC was also on the list of accepted cryptocurrencies when the city of Williston in the U.S. state of North Dakota announced local residents can pay their utility bills in crypto.
Final Thoughts
WBTC serves as a bridge between Bitcoin’s store of value and Ethereum’s decentralized applications. This token allows users to use BTC as part of smart contracts that unlock the benefits of DeFi. As such, it adds incremental value to both blockchain networks.
