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Written by Blockchain » Updated on: April 04th, 2025
Wrapped tokens have become an essential component of the blockchain ecosystem, enabling interoperability between different networks. One of the most popular wrapped tokens is Wrapped Bitcoin (WBTC), which allows Bitcoin to be used on the Ethereum blockchain. But what is blockchain, and how does WBTC function within this framework?
In this article, TopCoin9 will explore the concept of wrapped tokens, how WBTC works, and why it is crucial for the decentralized finance (DeFi) ecosystem.
Before diving into wrapped tokens, it is important to understand what blockchain is. A blockchain is a decentralized, distributed ledger that records transactions securely and transparently across multiple nodes. This technology eliminates the need for intermediaries, allowing peer-to-peer transactions to take place securely. Bitcoin and Ethereum are two of the most well-known blockchains, each with distinct functionalities.
- Bitcoin Blockchain: Primarily designed for peer-to-peer transactions and digital payments.
- Ethereum Blockchain: Built to support smart contracts and decentralized applications (DApps), enabling the development of DeFi solutions.
While Bitcoin is widely used for transactions and store of value, its lack of smart contract capabilities limits its use within DeFi. This is where wrapped tokens like WBTC come into play.
Wrapped tokens are cryptographic assets pegged to the value of another asset and are designed to bring interoperability between different blockchain networks. Essentially, they allow an asset like Bitcoin to be used on a blockchain that it was not originally designed for.
How Do Wrapped Tokens Work?
- A wrapped token is backed 1:1 by the original asset.
- The original asset is locked in a secure reserve.
- A custodian (a centralized or decentralized entity) mints the wrapped token.
- The wrapped token can be used in DeFi applications.
- When a user wants to convert back, the wrapped token is burned, and the original asset is released.
By using wrapped tokens, users can leverage assets like Bitcoin within smart contract ecosystems such as Ethereum.
Wrapped Bitcoin (WBTC) is an ERC-20 token that represents Bitcoin on the Ethereum blockchain. Each WBTC token is backed 1:1 by real Bitcoin, which is held by custodians such as BitGo, Ren, and other partners.
Key Features of WBTC:
- 1:1 Backing: Every WBTC token is backed by an equivalent amount of BTC held in reserve.
- Ethereum Compatibility: As an ERC-20 token, WBTC can be used in Ethereum-based smart contracts and DeFi applications.
- Transparency: Proof of reserves ensures that the amount of WBTC in circulation is always equal to the Bitcoin held in custody.
Read more: Blockchain Rollups: The Future of Ethereum Scalability
The process of wrapping and unwrapping Bitcoin into WBTC involves multiple participants, including custodians, merchants, and users.
Minting WBTC
Minting is the process of converting Bitcoin into Wrapped Bitcoin.
- A user initiates a request to a merchant.
- The merchant verifies and sends BTC to a custodian.
- The custodian locks the BTC and mints an equivalent amount of WBTC.
- The newly minted WBTC is sent to the user’s Ethereum wallet.
Once WBTC is minted, it can be used in various Ethereum-based applications, such as:
- Decentralized Exchanges (DEXs): Users can trade WBTC for other ERC-20 tokens.
- Lending & Borrowing Platforms: WBTC can be used as collateral on platforms like Aave and Compound.
- Yield Farming: Users can stake WBTC to earn rewards in liquidity pools.
If a user wants to convert WBTC back to BTC:
- The user sends WBTC to a merchant.
- The merchant burns the WBTC and requests a withdrawal.
- The custodian releases the equivalent amount of BTC to the user.
The decentralized finance (DeFi) sector has grown significantly, with Ethereum at its core. However, Bitcoin remains the most valuable and widely used cryptocurrency. WBTC bridges the gap between these two ecosystems.
Benefits of WBTC in DeFi:
- Increases Liquidity: WBTC brings Bitcoin’s liquidity into Ethereum-based applications.
- Unlocks New Use Cases: Holders can lend, borrow, and trade BTC in DeFi markets.
- Improves Efficiency: Transactions on Ethereum are faster and cheaper than Bitcoin’s network.
While WBTC offers several advantages, it also comes with some risks and challenges.
- Centralization Concerns: WBTC relies on custodians like BitGo, which raises concerns about centralization. If a custodian fails, funds could be at risk.
- Security Risks: Smart contract vulnerabilities could lead to exploits or loss of funds, as seen in past DeFi hacks.
- Regulatory Issues: Regulatory scrutiny of wrapped tokens and custodians could impact WBTC’s adoption in the long run.
Several other projects aim to bring Bitcoin to Ethereum and other blockchain ecosystems.
- RenBTC: Uses a decentralized network of nodes instead of a centralized custodian. Provides similar functionality to WBTC but with improved decentralization.
- tBTC: A fully trustless Bitcoin wrapper that does not require a central custodian. Uses threshold cryptography to ensure security and decentralization.
- sBTC (on Optimism & Arbitrum): Designed for Layer 2 Ethereum solutions, allowing BTC to be used on Optimistic and ZK Rollups.
As blockchain technology evolves, cross-chain interoperability is becoming a key focus area. Wrapped tokens like WBTC will continue to play a significant role in:
- Enhancing DeFi Growth: More Bitcoin holders will participate in Ethereum’s DeFi ecosystem.
- Bridging Different Blockchains: New solutions will emerge to connect multiple networks seamlessly.
- Improving Decentralization: More trustless wrapped Bitcoin solutions will be developed.
Wrapped Bitcoin (WBTC) is a revolutionary asset that bridges the gap between Bitcoin and Ethereum, enabling seamless participation in DeFi. By understanding what blockchain is, how wrapped tokens function, and the benefits of WBTC, users can take advantage of the growing opportunities in decentralized finance. While challenges like centralization and security risks exist, continuous innovation in cross-chain solutions will drive the future of blockchain interoperability.
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