What Is Wrapped Bitcoin? – The Defiant

Incompatibility is inevitable when you have dozens of blockchain networks with their own smart contract formatting. This is why Bitcoin cannot simply be transferred to Ethereum in its original state. Bitcoins can be wrapped as Ethereum-compatible ERC-20 tokens, making that into Wrapped Bitcoin (WBTC).

Wrapped Bitcoins are to Bitcoin what the USDT stablecoin is to the dollar. Both circumvent incompatibility via a new, compatible digital asset anchored into the original one. But, is there more to wrapping than it meets the eye?

Why Do We Need Wrapped Tokens?

The simplest way to convert tokens is through a centralized exchange. For instance, Binance Convert allows for cryptocurrencies to be exchanged for no fee. If one were to convert Bitcoin into Avalanche, those coins could then be sent to a non-custodial wallet that links into the Avalanche ecosystem of dApps.

Likewise, the same could be done for BTC-ETH conversion. The question then is, why do we need wrapped tokens? The answer is related to cryptocurrency volatility. Case in point, what if one wants to use Bitcoin as a collateral on Ethereum’s lending dApp like Aave? As the dominant cryptocurrency with the largest market cap, Bitcoin is the least volatile cryptocurrency.

This means that Bitcoin would be a better collateral for a loan than a more volatile cryptocurrency. Otherwise, more volatile collaterals could trigger loan liquidation. On smart contract platforms that have an even lower market cap than Ethereum, this is even more important to consider.

This is where wrapped tokens come in. A wrapped token represents cryptocurrency on another blockchain, so it can be used as such, with its price pegged to the original. Similarly, USD Coin stablecoin represents paper USD banknotes on a blockchain so that dollars can be used on blockchain networks as stable digital assets.

Resolving Blockchain Interoperability

Each blockchain network has its own set of validators, governance rules, native tokens, and even smart contract formatting. For example, while Ethereum has ERC-20 smart contract standard, TRON (TRX) has TRC-20 tokens. Likewise, Binance Smart Chain (BSC) uses BEP-20 standard to deploy its tokens.

There are two main ways to deal with this incompatibility mess and interface different blockchain networks, i.e., transfer digital assets:

• Layer 0 networks: Cross-chain networks like Polkadot or Cosmos that create an ecosystem of interoperable blockchains, serving as the internet of blockchains.
• Blockchain bridges: Cross-chain network protocols that convert tokens using smart contracts. When a user deposits their tokens into a conversion smart contract, they are locked. The user can then withdraw them as tokens compatible with the blockchain network.

What The Merge Means For Proof-of-Work Miners

Ethereum Classic’s Hash Rate Is At An All-Time High

It is the second interoperability method that generates wrapped tokens. In the case of…