A wrapped Bitcoin (WBTC) is a way to represent Bitcoin on the Ethereum blockchain. Bitcoin and Ethereum are the top two cryptocurrencies in the world, but they can’t normally interact with each other—hence the need for wrapping.
Bitcoin on the Ethereum Blockchain
Bitcoin is the oldest and most valuable cryptocurrency due to its unique scarcity, security, and decentralization. It pioneered the trail that many digital currencies have subsequently followed and hasn’t looked back since.
Ethereum has become the world’s second most valuable cryptocurrency because of the vast DeFi ecosystem it supports. Ethereum’s programmable smart contracts allow developers to build applications for lending, borrowing, providing liquidity, and much more.
Despite both having valuable use cases, Ethereum and Bitcoin cannot interact directly within each other’s blockchains.
To navigate around this hurdle, a group of developers came up with a token that represented the value of Bitcoin in 2019. This Bitcoin token can integrate with Ethereum-based wallets, DeFi applications, and smart contracts.
Known as Wrapped Bitcoin (WBTC), holders get the best of both worlds. Wrapped Bitcoin follows Bitcoin’s price exactly but is usable with Ethereum-based products.
Benefits of Wrapped Bitcoin
Before Wrapped Bitcoin, it was much more cumbersome to participate in DeFi with Bitcoin. Wrapped Bitcoin enables Bitcoin investors to keep holding on to it as an asset while also using DeFi dApps like Compound or Aave to borrow or lend money. They can also swap Wrapped Bitcoin for other Ethereum tokens like Chainlink, Tether, or Shiba Inu with a DEX like Uniswap.
Wrapped Bitcoin has bridged the gap between the two blockchains. People can participate in DeFi by buying Wrapped Bitcoin instead of the original Bitcoin.
Some Downsides of Wrapped Bitcoin
While there are plenty of advantages that Wrapped Bitcoin serves, there are some considerable differences between WBTC and BTC.
Wrapped Bitcoin is simply a copy of Bitcoin that is compatible with Ethereum. It exists completely separate from the Bitcoin blockchain. As a result, there is no mining of Wrapped Bitcoin.
Furthermore, there is a different amount of Wrapped Bitcoin and Bitcoin in circulation. Wrapped Bitcoins are created through a Decentralized Autonomous Organization (DAO). The WBTC DAO currently is in charge of minting new Wrapped Bitcoins. Members are able to vote on upgrades and changes. Since there is a governing body behind Wrapped Bitcoin, it is inherently less secure than Bitcoin.
How to Buy Wrapped Bitcoin
There are few ways to purchase Wrapped Bitcoin.
One of the easiest methods though is trading through an Ethereum-based DEX like Uniswap. By holding a balance of Ethereum or any other Ethereum-based token, users can instantly swap for Wrapped Bitcoin. You can then use your WBTC with all kinds of DeFi applications without having to sell your actual Bitcoin holdings.
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