Wrapped Bitcoin cryptocurrency: Branching out the DeFi sphere

The crypto sphere has welcomed a lot of innovations over the years—from NFTs, play-to-earn crypto games and even crypto ATMs, among others. However, limitations such as interoperability between blockchains hinder the progress of digital assets.

Now, a breakthrough is on the rise aiming to eliminate this gap and bring liquidity into the DeFi ecosystem—the wrapped Bitcoin. 

The invention of wrapped Bitcoin has improved the interoperability of digital currencies, no matter what blockchain they operate on. Think of it as taking your bitcoins and wrapping them around another chain, merging cryptocurrencies for improved functionality.

To learn more about this innovation, continue reading below!

Defining wrapped Bitcoin

Wrapped Bitcoin, also known as wBTC, falls under the category of wrapped cryptocurrencies. These tokens operate on non-native blockchains but hold the same value as the original asset. To put it into reference, wBTC is an ERC-20 token representing Bitcoin on a 1:1 ratio. It aims to bring Bitcoin to the Ethereum blockchain, further unlocking the potential of greater liquidity in the DeFi system. 

This allows investors, traders, entities and decentralised applications (dApps) to join the Ethereum blockchain while still taking advantage of Bitcoin features and price. The BitGo Trust, one of its founders, holds the reserves for wrapped wBTC and has made the circulation accessible to the public for better transparency.

How wrapping of Bitcoin works

With the help of merchants like 0x, Coinlist, Airswap or Maker, users can easily wrap or unwrap their Bitcoin funds. You also have the option to unwrap your wBTC back into BTC whenever you want. This makes it the perfect way to improve your investment strategies, as well as jump from the Bitcoin ecosystem to DeFi apps on the Ethereum blockchain simultaneously. 

For example, you can register at Coinlist and fund your account with BTCs. Once you’re done, select the ‘wrap’ option on the platform and input the number of coins you want to wrap. Additionally, buying wBTC is also possible through exchange platforms, including ​​Huobi Global, Coinbase and Binance, to name a few.

Various wBTC models you should know

Although wBTC has only been released in 2019, it already has different models that integrate BTC on the Ethereum blockchain. Check out the most common wrapping protocols in the market below:

Trustless

The trustless BTC wrapping model is considered to have a more advanced method when producing wrapped tokens through a decentralised network. In this model, the custodial responsibilities of a third party will be transferred to smart contracts. 

Your Bitcoin funds are securely placed within a network contract but the platform won’t have the power to implement adjustments without your consent. So, if you’re looking for a more autonomous and trustless system, this model suits you best. 

Synthetic assets

One of the reasons why wBTC is continuously gaining traction in the crypto market is because of synthetic assets. This type of token has values attached to derivatives. 

With this type of model, your BTC will be locked or wrapped into a network contract with liquidity pools and native tokens backing it instead of Bitcoin.

This was pioneered by the Synthetix DEX, a derivatives liquidity protocol. The platform offers sBTC which is backed by 800% of a BTC’s value in SNX and is considered to be the network’s main governance token. 

Centralised

The centralised model mainly depends on an intermediary in the issuance of wBTC. Simply put, you rely on a centralised third party to maintain the market price of your digital assets.

In this case, they will put your coins on a smart contract and distribute corresponding ERC-20 tokens with the same value as Bitcoin. However, some investors stray away from this strategy due to the complete dependence on firms for storing their assets. 

Wrapped Bitcoin vs Bitcoin: Why go for wBTC?

You might reason out that using ETH to explore the features of the Ethereum blockchain is way easier than wrapping your Bitcoins. Why should you convert your BTC to wBTC when you can just invest in other digital assets that can be used for dApps? What benefits would it exactly give you, and how could it improve your overall crypto journey? 

Take a look at its advantages:

Liquidity

The creation of wBTC has opened doors for more diverse liquidity in the Ethereum ecosystem. This is especially true since decentralised exchanges (DEX) within the network do not have enough liquidity to reach optimal function, preventing investors from trading their assets efficiently. But with the rise of wBTC, the liquidity gaps between CeFi and DeFi products are eventually being bridged.

Improved scalability

If scalability issues are one of your biggest concerns, then wrapping your Bitcoins might just do the trick. Once the wrapping has been completed, wBTC will now function on Ethereum’s blockchain, making transactions much faster and cheaper.

Decentralised finance (DeFi)

It is believed that the rise of DeFi has given birth to the wrapped Bitcoin cryptocurrency. This crypto innovation has effectively launched centralised finances that were once decentralised, which allowed users to replace banking institutions and provide liquidity in exchange for rewards like Compound.

Aside from that, using wBTC provides more features compared to regular Bitcoin. For instance, wrapped tokens can be utilised Ethereum blockchain’s smart contracts, improving the overall safety and autonomy among users. 

Final verdict: Is wrapping Bitcoins a good idea?

In the developing ecosystem of cryptocurrencies, bridging the gap between Bitcoin and Ethereum blockchain is a major step towards better interactivity. Approximately US$800,000,000 worth of Bitcoin has already been converted into wBTC in just a year, an obvious sign that this innovation is here to stay.

With the invention of wrapped tokens such as wBTC, the capital efficiency and liquidity continually increase for decentralised exchanges since assets are transferred in various chains. As an investor, you can also benefit from cheaper and faster transaction processes when managing your funds. 

This has prompted developers to expand the concept of wrapped Bitcoins into more complicated DeFi schemes, opening new doors for future crypto advancements.