wrapped BTC

Wrapped BTC (wBTC): What is it and what is its purpose?

Introducing Wrapped Bitcoin.

As we have introduced in the DeFi article (see DeFi article), this subindustry of the crypto market has generated many developments and products linked to or derived from other cryptocurrencies and technologies. To create more interoperability the DeFi and many blockchains developments have facilitated the interrelationship between them in an unexpected way. The ERC20 tokens concept has led to the possibility of originating tokens that reflect other cryptoassets, such as the Wrapped BTC (wBTC).
wrapped BTC
Source: cryptoast.fr

What is Wrapped BTC (wBTC)?

The wrapped BTC, or wBTC, is an Etherium ERC20 token that is backed 1 to 1 with the main BTC cryptocurrency so it can have its value, and to transfer this value to the decentralized finances so BTC is able to operate in that ecosystem. The same creators of this token classify it as the first BTC-backed ERC20 token with equal parity. It is also fully verifiable and transparent in the same way as the BTC.

wrapped BTC
Source: CoinMarketCap

What is their purpose and why are these tokens needed?

The wBTCs bring greater liquidity to the Etherium ecosystem along with the decentralized Exchanges (DEXs) and financial applications. Today most of the volume of cryptocurrency trading is captured by bitcoin, and wBTC can change that by moving the magnificent liquidity that bitcoin has to DeFi through Decentralized Exchanges (DEXs).

One of the most outstanding purposes of the wBTC is the possibility of creating Smart Contracts for BTC since this way is easier to integrate than using the original Bitcoin blockchain which has more rigidity and less functionality for this purpose.

So BitGo, Kyber and Ren, among other members of their existing community, jointly created the wBTC and launched it in October 2018 to take advantage of the BTC's liquidity and create smart contracts with its support. In addition, by bringing the value of the BTC into the Etherium ecosystem, it can be made interchangeable with other ERC20 tokens that would otherwise be more difficult because they are not directly interchangeable with BTC.

The wBTC's primary mission is to bring the high liquidity that characterized BTC to the decentralized ecosystem of DeFi and DEXs and thus enhance all decentralized applications or dApps

logo wBTC
Source: blog.kyber.network

Also, the wBTC modality allows amateur investors who started with the BTC to get started in other cryptos and jump to the ERC20 tokens with more confidence and easiness of use so they can get started in the world of Etherium-based tokens and DeFi.

What does it work how is its governance?

At the beginning, Kyber Network and Ren formed an initial pool of wBTC tokens from their own BTC stock in order to ensure initial liquidity and offer the first batch of wBTCs available on the DEXs (Decentralized Exchanges) to the first users and buyers.

BTCs are redeemed for wBTC at a ratio of 1:1 and can be deposited in Kyber Network, Ox or MakerDAO (see articles on Kyber, Ox, and DAI in MakerDAO). For this purpose, users have to go through a KYC (Know Your Customer) or identity verification system. The custodian of the BTCs would be BitGo, which will create an equal amount of wBTCs that will then be distributed to the purchaser.

The most important principle that governs this operation is transparency, through a supply test of the wBTCs that are registered in the blockchain and that allows to control the 1:1 parity ratio existing between the wBTCs and the BTCs deposited in the custodian platform.

On the contrary, when wBTC token holders wish to exchange them for BTCs again, the tokens are burned, and users can then claim their original BTCs.

The issuance and burning of this tokens are recorded and therefore verifiable in the blockchain. The transaction history and technical details of the wBTCs are recorded in the Etherium Etherscan.io blockchain browser

There is also a wETH or wrapped ETH and other classic cryptocurrencies with the same mechanism.

Pros and cons in a few words

PROS: As we have said before, its great advantage lies in transferring the enormous liquidity of BTC to the DeFi through the wBTC which is redeemable with all its tokens without friction which is not the case with the BTC. This links and transmits the growth and strength of BTC to the DeFi and the Etherium network.

CONS: Despite these strengths, its weakness lies in the fact that custody is centralized in an agent external to the system, which implies a risk as we do not know if it is taking good care of BTC deposits and that this ecosystem still has a very problematic scalability until the Etherium 2.0 network upgrade is launched.

Market Performance and Ranking in the DeFis

The performance of this ERC20 token has followed the trail of the DeFi sub-market with an exponential increase from the end of the second quarter of 2020 until now, as we can be seen in the graph below, the supply of this token literally skyrocketed from June this year, given the demand it experienced in order for the BTCs to be able to interact with platforms such as Compound (see Compound article), which has its own native token that is a true reflection of the movements it makes within its ecosystem. 

supply wBTC
Source: flipsidecrypto

As it can be seen in the CoinMarketCap table below, the wBTC price is equal to the BTC from which it comes with a slight variation. Of course its total supply is the same as the BTC’s and the current supply at the time of writing this article is 123,411 tokens, representing a total capitalisation of $1,926.73 million. It’s got a rank 15 which is very high as it follows the trail of the cryptocurrency where it comes from.

wBTC table
Source: CoinMarketCap

Another important figure is its ROI since its launch which represents a 345%.

As it is obvious, its market price graph is parallel to the BTC’s one, what is more significant and different is the graph that represents its capitalization that has experienced an unprecedented increase since the end of June of the current year.

In the DeFi token ranking, the wBTC ranks third after Uniswap and Maker and ahead of Compound, Aave and Curve Finance, all of them are Etherium-based.

DeFi pulse tokens
Source: defipulse.com - Top 10 Ranking of more significant tokens of this submarket.

Conclusion

WBTC is therefore a token that faithfully reflects the crypto that it comes from, which expands the opportunities for us to make our BTC funds more profitable in a relatively new ecosystem with very interesting returns given its development, but which is not without risk as it is an investment that is mainly placed in decentralized lending platforms. Given its development in recent months, we can say that it is having a great success and maybe this is just the beginning as its potential is yet to be developed.

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