As we’ve explained earlier on in our article about Wrapped Bitcoin, WBTC is an interesting ERC20-based token, backed by Bitcoin. Issued on the Ethereum ecosystem, it acts as a unit that can be stored in wallets, used in smart contracts and transferred to dApps. To date, over 115K of WBTC has already changed hands, currently coming second only to Chainlink in terms of market cap. So, why is this asset so popular?
Let’s say you’ve got Bitcoin in your wallet and have heard a lot about DeFi this summer when the aggregated weekly volume on DEXes broke past the $8-billion mark. You really want to put your capital to good use and try this “DeFi thing” even though the numbers have dropped almost twice by December 2020 – what are you going to do to connect Bitcoin and Ethereum?
WBTC can solve this problem, and the solution is as elegant as easy. In 2019, the founders of a joint project of three organizations BitGo, Kyber Network and Ren suggested to wrap the oldest and largest cryptocurrency on the market in the ERC20 standard, to integrate Bitcoin into the Ethereum blockchain – et voila!
There’s no more need to run a separate Bitcoin node if you’re a DEX, ERC20 wallet or another dApp. The liquidity associated with the BTC market is brought to the Ethereum blockchain and the transaction time is now reduced.
According to the official custodian of the project BitGo, WBTC users will be able to utilize Bitcoin in a wide variety of new decentralized use cases, including on decentralized exchanges (DEXs), as collateral for stable coins or lending, for payments and flexible smart contracts within the Ethereum ecosystem. The leading use cases will be powered by important decentralized projects including Kyber Network, Republic Protocol, MakerDAO, Dharma, Airswap, IDEX, Compound, DDEX, Hydro Protocol, Set Protocol, Prycto, RadarRelay, and Gnosis.
How WBTC works
As the official website states, to receive WBTC, a user requests tokens from a merchant, the merchant then performs the required KYC/AML procedures and verifies the user’s identity. Once this is completed, the user and merchant execute their swap, with Bitcoin from the user transferring to the merchant, and WBTC from the merchant transferring to the user.
The significance on Wrapped BTC and similar projects is clear. It connects the DeFi space to the market for bitcoin. It also means that the bitcoin held as collateral for WBTC is essentially being HODLed, unless holders of WBTC opt for redemption. With more BTC being HODLed, scarcity increases, which can potentially have a positive impact on the price of bitcoin.