What Is Wrapped Bitcoin? A Complete Guide

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If you’re somewhat familiar with the cryptocurrency world, you’ve heard about or even owned bitcoin. While it has made a big name for itself as the leading cryptocurrency, it still has some limits to its functionality. This is what led to the creation of Wrapped Bitcoin.

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Read on to learn about what Wrapped Bitcoin is, how it works and whether you should invest in it.

What Is Wrapped Bitcoin?

Wrapped bitcoin, or WBTC, is a community-led, tokenized version of bitcoin that is based on the Ethereum blockchain. It’s backed by bitcoin on a 1:1 basis, which means that users can always swap one bitcoin for one wrapped bitcoin and vice versa.

How Wrapped Bitcoin Works

Now that you know the basic concept, it’s time to see how wrapped bitcoin works.

Key Roles in Wrapped Bitcoin Activities

These are the key actors in wrapped bitcoin minting, burning and receiving:

• The user is an individual who wants to create, mint or burn wrapped bitcoins.
• The decentralized autonomous organization consists of several institutions that hold the keys to the contract that controls the addition and removal of merchants and custodians.
• Merchants initiate the process of minting and burning and distribute tokens to users.
• Custodians are the ones who hold the assets and provide the security of tokens.

Creating New Tokens

The process of new wrapped token creation is called minting. If a user wants to mint some WTBC, they need a verified merchant and a custodian. During the process, the merchant initiates a transaction that gets carried out by a custodian.

Redeeming Bitcoin for Wrapped Tokens

The opposite of WTBC minting is called burning. When a user wants to redeem bitcoins for wrapped tokens, the merchant requests a burn by sending the corresponding amount of WTBC back. The process gets completed by the custodian.

Receiving Wrapped Bitcoin

When a user wants to receive wrapped bitcoins in exchange for their bitcoins, they need to request it from a merchant. The merchant verifies the identity of the user and executes the transaction.

The Benefits of Wrapped Bitcoin

Wrapped bitcoin has its advantages over other cryptocurrency.

Access to Ethereum’s DeFi Ecosystem

The most straightforward benefit of wrapped bitcoin is that users can move their holdings between the Bitcoin and Ethereum blockchains easily. This way, they get access to several DeFi products and services in the Ethereum system, which they wouldn’t be able to access with just bitcoin.

Increased Speed

Transactions on the Ethereum network are faster than on the Bitcoin network. Contrary to bitcoin, wrapped bitcoin is settled on the Ethereum blockchain, which allows more rapid movement between Ethereum wallets and exchanges.

Liquidity

Many decentralized exchanges suffer from low liquidity — a lack or low level of liquidity can lead to higher price volatility or users not being able to sell their tokens. The possibility of bitcoin being converted into WTBC brings bitcoin’s liquidity to the Ethereum ecosystem.

Is Wrapped Bitcoin as Good as Bitcoin?

The price of wrapped bitcoin is always tied to bitcoin’s price, so the value of wrapped bitcoin will never exceed bitcoin’s. This means that there’s no point in buying wrapped bitcoin instead of bitcoin just for the profit.

However, wrapped bitcoin may still be a good choice. Besides the increased speed of transactions, what makes wrapped bitcoin powerful is the access it provides to DeFi products and services in the Ethereum ecosystem. Bitcoin holders who want to take advantage of the functionalities that DeFi apps and smart contracts offer may want to consider looking into purchasing wrapped bitcoins.