By Larry Wright
Cryptocurrencies have been successful in building a sizable ecosystem of ardent supporters and entrepreneurs from all across the globe. Current innovations in the cryptocurrency industry, such as the introduction of wrapped Bitcoin as well as other wrapped cryptocurrencies, have been drawing a lot of interest too.
Blockchains, the mechanism that forms the basis of cryptocurrencies like Bitcoin and Ethereum, may be implemented using a variety of procedures. However, all blockchains differ from one another both in terms of their functionality and the fundamental algorithms on which they’re built.
As a result of such a significant distinction, the degree to which two networks are interoperable with one another decreases, too, making one ledger coin really incompatible with the other one. Some people would think that this feature symbolizes the integrity and safety of every blockchain; however, that’s not always the case.
The absence of interoperability places limitations on the notion of an environment that allows the content and details to be easily shared and traded. As a result, wrapped cryptocurrency coins came forth as an answer to the issue of permitting connections across the initial blockchain platforms.
If you want to trade bitcoins on the Ethereum blockchain, you’ll need to download some specialized programs in order for the transaction to go through successfully. This is comparable to attempting to play a PC videogame on a Mac computer. Because of something that’s called a wrapped token, the method of doing this on a network is, fortunately, very straightforward. But what precisely seems to be a wrapped token, and just how does its functionality come into play?
A wrapped token is, in actuality, a token that acts as a representation of a cryptocurrency that exists on a different blockchain yet retains the identical value as the underlying cryptocurrency. The wrapped token, in contrast to the actual coinage, could be utilized on some non-native distributed ledgers and afterwards redeemable for the underlying virtual currency.
Another of the most significant advantages of wrapped tokens is that they provide more portability across digital currencies and blockchains that are incompatible with one another. This opens the way for activities such as bitcoin financing and Ether loaning on decentralized finance marketplaces. Both the usefulness of digital currencies and the accessibility of decentralized applications are increased as a result of this development.
Wrapped Bitcoin, also known as wBTC, is a customized form of bitcoin that is interchangeable on Ethereum and has the same value as bitcoin. This utility token was developed so that consumers may participate in the decentralized finance (DeFi) ecosystem that Ethereum supports.
One other advantage is a boost in process efficiency, which occurs when wrapped bitcoin activities complete the blockchain quicker than regular bitcoin transactions. This was just an introduction to the idea of WBTC; let us now find out more about it.
The accompanying guide will provide you with a comprehensive introduction to wrapped digital currencies, including such WBTC, including an explanation of their relevance, advantages, and many other relevant topics. So, let’s move on!
What is Wrapped Bitcoin?
When it was originally introduced in January 2019, the very first wrapped Bitcoin, also known as WBTC technology, had the intention of bringing Bitcoin’s possibilities and viability to the Ethereum platform while also allowing for the versatility of an ERC-20 token. While unwrapped Bitcoins cannot be utilized for DeFi transactions, wrapped Bitcoins may be used to make purchases in the DeFi environment or with any other Ethereum-based decentralized app.
The development of decentralized finance (DeFi), which currently encompasses loans, futures, commodities, and other sorts of transaction systems totalling thousands of dollars, resulted in the requirement for wrapped coins to be created.
Because of the high level of interest in utilizing Bitcoin (BTC) in DeFi systems, Bitcoin had to be turned into an ERC-20 compliant token before it could take part in the ecology, which was primarily built on Ethereum, and that’s how the notion of wrapped bitcoins came into being.
There’s no doubt in the fact that wrapped bitcoins are major contributions to the realm of cryptocurrencies. Even if the valuation of a WBTC is identical to the worth of a Bitcoin, the functionality of the WBTC has been vastly improved, which opens the door to the potential of using Btc for more use instances, such as DeFi.
Essentially said, a Bitcoin owner has the ability to lend Bitcoin via the use of smart contracts by merely linking their account to a decentralized database or blockchain of any kind.
In return, the Bitcoin true owner will receive a predetermined rate of interest every year. Lenders put up their cryptocurrency holdings as collateral, which means that if they fail to make their payments, the lender is entitled to take possession of their holdings. If the valuation of a commodity diminishes during a market downturn, investors and lenders may still make money utilizing this kind of financing.
Moreover, it should be noted that though wrapped BTC will always be less secure and trustworthy than Bitcoin (BTC) due to the fact that it is managed by humans rather than by computer code, each Bitcoin and Ethereum activity executed by WBTC is audited on a frequent basis to improve confidence and openness.
Consumers may double-check the authenticity of the WBTC tokens upon that Ethereum network by confirming the amount of BTC delivered to the WBTC account on the Blockchain network. On-chain monitoring is also available for the reversal process, which consists of destroying WBTC in exchange for BTC.
Now, let us talk about how WBTC actually work. The development and administration of WBTC standards are primarily the responsibility of three different actors, each with a unique and essential role to play- DAO, merchants and custodians.
First and important is the Decentralized Autonomous Organization (DAO), which is made up of 17 individuals from the DeFi sphere. These individuals will possess a multi-signature agreement which would permit the addition or elimination of WBTC businesses and custodians.
Second, there are merchants who function as supervisors and are in charge of starting the procedure of minting. They mint wrapped tokens by transferring a specified quantity of Bitcoin to the custodian and submitting an application for the minting of an equal volume of wrapped tokens in response to the needs of market participants and buyers.
Last but not least, there are the custodians, who are similar to vaults in that they ensure dependability and safety to WBTC and guarantee that almost all WBTC is completely secured and validated via several on-chain processes. You have an idea how vaults work, right? That’s exactly what these custodians do too. They also create new Bitcoins and return a proportion of WBTC that is comparable to the original purchase price to the retailer.
Use of Wrapped Bitcoins in the Real World
WBTC trinkets may be used in a variety of different ways. Let’s go through a few of them and understand them.
To Serve as Security for Cryptocurrency Loans
Programs for decentralized finance (DeFi) provide users with the ability to borrow their virtual currency to other users in return for income or other benefits. In a comparable way, consumers now have the option of borrowing digital goods from DeFi technologies.
In order to make loaning and borrowing easier, it is necessary of users who desire to borrow that they supply some kind of collateral. In most cases, a portion of the lender’s cryptocurrency holdings is pledged as collateral in order to secure the loan until it has been completely repaid.
The Ethereum blockchain is home to a greater proportion of decentralized exchange (DeFi) applications. Because of this restriction, customers were only able to offer protection in the shape of Ether, which is Ethereum’s native coin, as we all know.
The fact that just one electronic item will be used as security in this transaction is potentially problematic since it might cause value swings alongside really restricting the lender’s options to pick collaterals.
The WBTC comes into action at this point as borrowing and lending patterns have been altered as a result of the introduction of WBTC. This is because wrapped bitcoins enable customers to utilize established coinages apart from ETH as collateral.
Not surprisingly, there are so many technologies that recognize wrapped Bitcoin as collateral, such as Compound Finance and Aave. So, if you’re worried about your company not accepting WBTC as security, don’t be concerned about that anymore, as more and more organizations are adopting this new technology literally every day.
Make Money Through Interest on Loans
As was just discussed, when members of DeFi loan their electronic products to borrowers, especially wrapped bitcoin, they are eligible to earn interest on such loans. The level of demand and availability has a significant influence on levels of interest rates. When it comes to generating interest on deposits made on Ethereum, the best mechanisms to use are Compound Finance and Aave.
Acquire a Holding of Governance Tokens
Governance tokens provide consumers with the opportunity to exercise some degree of control over the goods produced by a decentralized network as well as the functionality of those items. As compensation for loaning and borrowing wrapped bitcoins, individuals are eligible to acquire governance tokens on the blockchain.
Mining liquidity refers to the procedure of accumulating a governing token in conjunction with income on cryptocurrency investment. To reiterate, wrapped bitcoin enables individuals who are purchasers of bitcoin to take advantage of this possibility.
What are the Advantages of Utilizing Wrapped Bitcoins?
Many people are curious about the value benefits that wrapped cryptocurrency tokens may provide because of the unique features that wrapped Bitcoin (BTC) has. There’s no doubt in the fact that WBTC has so many advantages to offer, and it is due to these perks that many people consider changing their Bitcoin into wrapped BTC. The following is an overview of the economic benefits that may be obtained by using wrapped BTC.
Capacity to Access Ethereum
The most significant benefit of using WBTC is that you will have accessibility to the Ethereum platform. Bitcoin investors would have unbound access to the vast infrastructure of Ethereum-based services, which includes decentralized wallets, cryptocurrency exchanges, crypto algorithms, entertainment, and other decentralized programs that were primarily restricted to Ethereum only.
Wrapped cryptocurrency tokens, such as WBTC, have the potential to act as an essential foundation for gaining entrance to a broad spectrum of DeFi loaning and borrowing platforms too.
A Wide Variety of Profitable Applications
It is possible that the creation of new applications for wrapped Bitcoin, such as DeFi BTC, might offer the proper solution to all of the queries that investors have, notably the most prevalent one, which is “What is better: Bitcoin or Wrapped Bitcoin?”
Staking is one of the most prevalent capabilities offered by DeFi, and interestingly, WBTC may be capable of staking too. In the current state of the DeFi ecosystem, various iterations of staking methods are available for discovery, where participants are required to lock up their cryptocurrency holdings in smart contracts that employ staking techniques in order to be eligible for compensation once a certain amount of time has passed.
Here, customers are then able to efficiently utilize their bitcoin by converting their original tokens into wrapped Bitcoin and then using those in next-generation staking mechanisms.
In the realm of decentralized finance, yield farming is an additional major technology that might make use of wrapped Bitcoin. In essence, yield farming is a DeFi mechanism that differs significantly from staking, most notably in having far reduced lockup times. The use of WBTC in yielding farming techniques as Compound bolsters is a huge milestone, and an indication of the promising future WBTC has to offer.
Enhanced Capabilities of Operation
Comparing wrapped Bitcoin (BTC) to Bitcoin (BTC) would shine a spotlight on wrapped BTC’s superior features, which would be one of the comparison’s most noteworthy aspects. You could, for instance, be able to make use of the new functions by making use of the potential perks presented by Ethereum smart contracts.
One of the industrial data inside the blockchain industry, smart contracts allow for the creation of pre-programmed processes while also providing the flexibility necessary to create such procedures. On the other side, Bitcoin was originally incapable of supporting smart contacts; however, wrapped bitcoins are definitely capable of doing so.
Scalability
The importance placed on scalability is another important feature for everyone who owns a cryptocurrency. Bitcoins that have been “wrapped” may then be transferred more easily to the Ethereum ledger infrastructure. As a consequence of this, you will not be required to transmit the Bitcoin immediately, which will result in advantageous cost reductions when using wrapped Bitcoin.
Previous payments using wrapped Bitcoin are conducted more quickly and at a lower cost, which enables extra alternatives for both holding and transactions made. Moreover, there are about 1,100 million wrapped Bitcoins (WBTCs) in circulation around the globe, which means that the attractiveness of wrapped Bitcoins isn’t any longer a joke, and it’s definitely not something that would disappear in thin air today or tomorrow.
Liquidity
One further benefit that stands out immediately is the liquidity that is made available by WBTC Bitcoin. The vast and diversified ecosystem that Ethereum is a part of may give a number of advantages, but it may also be hiding certain issues in the foreground, such as lower liquidity.
Because of a lack of liquidity, decentralized exchanges and other platforms are unable to operate at their ideal levels. This is because a market cannot effectively perform its purpose in the absence of liquidity because it is unable to support the rapid trading of tokens.
WBTC, on the other hand, is seeing steadily rising levels of liquidity. WBTC helps to integrate the adaptability that is related to Ethereum with the liquidity that is connected with Bitcoins. As a result of this, wrapped Bitcoin has the potential to help close the volatility gap that exists for a wide range of centralized and decentralized financial products. This might be a significant advantage for investors.
Conclusion
An examination of the foundations of wrapped Bitcoin reveals that these newly created digital currencies may usher in a number of advantageous changes to the way in which users engage with DeFi environments.
Both Bitcoin, as well as Ethereum, have typically existed independently of one another, with no compatibility between the two possible. Bitcoin proprietors are unable to profit from the DeFi solutions that are built on Ethereum, in addition to the other decentralized apps that are part of the community in which Ethereum resides.
The capabilities that WBTC has the potential to assist in the implementation of Bitcoin on the Ethereum infrastructure in the shape of an ERC-20 currency. As a consequence of this, Bitcoin holders have the opportunity to play an important role in the developing community of DeFi apps.
Wrapped cryptocurrency tokens have the potential to offer up new avenues for assuring improved liquidity, in addition to their uses in DeFi. However, prior to your experimentation with wrapped cryptocurrencies, you should always educate yourself on their tech specs and the surrounding lore so as to ensure that you make the maximum out of your investments and you know exactly what you are dealing with.