Bitcoin (BTC), despite its popularity and the pioneering position in the crypto world, cannot be used within blockchain-based decentralized apps (dApps). The underlying BTC blockchain that the world’s leading cryptocurrency is based on does not natively support dApp functionality.
At the same time, the second-largest blockchain, Ethereum, has a thriving variety of dApps in the areas of finance and payments, NFT, gaming, and more. A number of technologies and projects have been introduced to enable the use of the Bitcoin crypto on Ethereum. Wrapped Bitcoin is by far the largest of these projects.
What Is WBTC?
Wrapped Bitcoin (WBTC) is an Ethereum-based crypto token that maintains a 1:1 peg to Bitcoin and is used to enable transfers and use of Bitcoin on the Ethereum blockchain. WBTC belongs to the family of wrapped tokens, and is currently the leading wrapped token by market cap. WBTC has nearly 100 times higher market cap than the 2nd largest wrapped crypto, WNXM.
The top 3 wrapped cryptocurrencies by market cap
Bitcoin holders cannot directly transfer their BTC funds to Ethereum due to the token format differences between the two leading blockchains. In order to use their crypto on Ethereum, Bitcoin holders may swap the funds for WBTC and take advantage of Ethereum’s rich dApp ecosystem.
At any time, they may also swap their WBTC for BTC at the 1:1 rate and get the funds back on the BTC blockchain.
The 1:1 peg and the cross-chain transferability are guaranteed by the WBTC custodian, BitGo, a US-based blockchain technology company that introduced the wrapped token in early 2019.
WBTC Wrapping Procedure
As the first step in the wrapping of BTC into WBTC, a user sends their bitcoins to an address maintained by BitGo on the BTC blockchain. BitGo then issues the same amount of WBTC to the user on Ethereum.
In reality, you might not get exactly the same amount of WBTC for your BTC funds. This is largely because Ethereum charges fees for any transaction involving the use of the chain. These fees are charged by Ethereum and have no relation to BitGo.
After you get your WBTC on Ethereum, you can use this cryptocurrency as any other Ethereum-based token. This means an array of opportunities in the areas of DeFi, blockchain gaming, blockchain-based social media, gambling, video streaming, and more.
When you need to swap your WBTC back to BTC, you send the required amount to BitGo’s address on Ethereum and receive your crypto funds back on the BTC blockchain.
Proof of Assets and WBTC DAO
Since the 1:1 peg and the entire WBTC functionality are guaranteed by one private company, BitGo, some users might have concerns regarding the safety of their funds or the capability of BitGo to ensure the peg.
In order to address such concerns, BitGo has implemented a control mechanism with two important elements – Proof of Assets (PoA) and the WBTC DAO (Decentralized Autonomous Organization). PoA is BitGo’s transparently maintained reserve of Bitcoin funds to ensure enough liquidity to maintain the 1:1 peg. Any user may check the state of the reserve on the blockchain. BitGo has a section on their website that lists its Ethereum address with the WBTC funds, and its Bitcoin addresses containing the BTC reserves. At any given time, BitGo pledges to have at least as much BTC cryptocurrency in reserve as the amount of WBTC it has issued to users.
A snapshot of Proof of Assets from the WBTC website showing the amount of WBTC issued and the reserve of the BTC funds
The second control element is the WBTC DAO, a decentralized entity that oversees the operations of WBTC and ensures that the project’s sole custodian, BitGo, adheres to the rules of operating the platform, including the correct maintenance of the reserve funds.
WBTC is a great Bitcoin-pegged crypto for any crypto trader or investor who would like to make the most of Ethereum’s rich ecosystem of dApps. Being the largest wrapped token, it is usually the go to coin for any person who would like to put their Bitcoin funds to use on Ethereum, a practice that is growing steadily. As this growth continues, expect WBTC to gain further prominence in the world of crypto.