Cryptocurrency enthusiasts are likely familiar with the presence of such cryptocurrencies as wrapped Bitcoin, but not everyone fully understands how they work, why we even need this technology in the first place, the distinctions between wrapped tokens and their original counterparts, and why it matters. So let’s start from the very beginning and explore the details of wrapped tokens to grasp their significance.

In 2024, a diverse array of cryptocurrencies is leveraging various blockchains. Many applications, platforms, and smart contracts have emerged, showing the potential to use tokens from various blockchains. Those acquainted with crypto tokens recognize that coins associated with a particular blockchain face hurdles when attempting to transition seamlessly to another. For example, ETH only works on the Ethereum network and can't be directly used on a blockchain, other than from Ethereum, like the Binance Smart Chain or Tron.

Now, think about the idea of using Bitcoin (BTC) on the Ethereum blockchain or Ethereum (ETH) on the Binance Smart Chain. Wrapped tokens become relevant in such scenarios. These tokens empower users to overcome this limitation, allowing the use of non-native assets on a third-party blockchain, and wrapped Bitcoin (WBTC) is a good example of this. 

What is WBTC

A Wrapped Bitcoin (WBTC) is a digital token generated on an alternative blockchain, like Ethereum, mirroring the price of the original Bitcoin. WBTC simplifies the process of transferring and utilizing Bitcoin on blockchains distinct from its original one. WBTC makes it easier to move and use Bitcoin on any blockchain that is different from its original blockchain. While you might have come across this explanation in various online articles, it sparks an important question: What exactly does it mean to "wrap" a Bitcoin, and why would someone choose to do that in the first place? Let's dive into the specifics.

A wrapped token can be seen as a mirror image of a cryptoasset that resides on a different blockchain but is intricately connected to the original token's value. The term "wrapped" gets its meaning from encasing the original asset within a digital vault known as a "wrapper." This wrapper allows the creation of a duplicate token on an alternative blockchain.

When the original asset is encased in this digital vault, it gives rise to a new token, facilitating transactions across various platforms. Wrapped tokens play a pivotal role by empowering the use of non-native assets across a variety of blockchains, forging essential connections between networks, and fostering interoperability in the vast landscape of cryptocurrencies.

These tokens showcase remarkable versatility, representing a broad spectrum of assets, including art, collectibles, commodities, various crypto assets, equity, stocks, fiat currencies, and even real estate. Because wrapped tokens are tethered to another asset, their management involves the oversight of a custodian entity responsible for the wrapping and unwrapping processes. Later on, we'll delve into the implications of this custodial aspect, exploring potential limitations within the decentralized realm of cryptocurrencies. 

Therefore, WBTC is an ERC20 token, with its price tethered to the original Bitcoin at a 1:1 ratio. Launched in January 2019 through a collaborative initiative involving Kyber, Ren, and BitGo, this token stands as a groundbreaking achievement, paving the way for seamless Bitcoin compatibility on the Ethereum network. At first glance, you might think a wrapped token is a bit like a stablecoin because both get their value from something else. However, the critical nuance lies in the fact that stablecoins typically peg their value to a fiat currency, whereas the value of a wrapped token is linked to an underlying asset on a separate blockchain.

How Does WBTC Work

This tech has a straightforward aim: Letting you transfer cryptocurrency across diverse blockchains without depreciation in value. But how does it work? Let’s break it down. The functionality of the Wrapped BTC relies on four crucial systems, each playing a distinct role:

Custodians: These folks are basically the guardians, looking after all the different assets that make up the wrapped tokens. 

Merchants: Exchange services. They're the ones handling the distribution of wrapped tokens. Merchants have the power to create or destroy (burn) these tokens as needed.

Users: Regular users on the Ethereum network handle all financial transactions related to wrapped tokens, ensuring the seamless flow of various transactions.

WBTC DAO Members: These are the decision-makers that oversee all three of the above. They're the ones who wield the authority to approve modifications to contracts and make decisions regarding the inclusion or exclusion of custodians.

In the usual flow of transactions that involve any type of wrapped tokens, a custodian becomes a key player. This custodian, whether acting as a merchant, a multi-signature wallet, a DAO, or a smart contract, holds a corresponding quantity of the underlying asset to match the total value of the wrapped tokens. Specifically, in the world of WBTC, the custodian ensures there's one BTC for each WBTC in circulation, and this custody info is securely stored on the blockchain. 

Now, let's dive into the nuances of the "wrapping" process. It commences with the trader dispatching BTC to the custodian's account, instigating the issuance of WBTC on the Ethereum network proportional to the transferred BTC amount. When there's a need to switch WBTC back to BTC, the trader requests a burn from the custodian, leading to the release of BTC from the reserves. It's important to note that, in the case of WBTC, the DAO smoothly takes on the roles usually associated with custodians and merchants.

How to Buy, Sell, or Unwrap WBTC?

Now, when the question “How Does WBTC work” isn’t bothering our readers’ minds anymore, let’s see how to convert our BTC to WBTC and vice versa.

	The process of creating WBTC and obtaining tokens is incredibly simple and involves the following steps:
1	A Bitcoin holder (you) contacts a merchant to initiate a transaction.
2	They begin a transaction to authorize the custodian for minting WBTC. The price of 1 WBTC equals 1 BTC plus the merchant’s fee.
3	The merchant sends the BTC from the Bitcoin holder to the custodian.
4	The custodian patiently waits for six confirmations of the BTC transaction.
5	The custodian executes a transaction to mint new WBTC tokens on the Ethereum blockchain.
6	The Bitcoin holder requests WBTC from the merchant.
7	The merchant conducts the necessary procedures, such as AML and KYC.
8	The Bitcoin holder and the merchant swap currencies, with the merchant receiving BTC and the Bitcoin holder receiving WBTC.

 

Briefly, just reach out to a merchant, toss in your Bitcoins, and voila! You get an equivalent quantity of "wrapped" tokens. Once your info is verified, your WBTC will be deposited  into your wallet of choice.

Selling WBTC for BTC is a piece of cake too. Whenever you feel like it, shoot a redemption request to a merchant. Once the request comes through, you'll find a stash of Bitcoins equivalent to your burned WBTC in your wallet. You can also exchange WBTC to a variety of other tokens, such as Solana (SOL) by using trustworthy exchange platforms like Binance, Coinbase, or KuCoin.

To convert your WBTC into BTC by unwrapping them, follow these steps:

1. Make sure your wallet has the required amount of WBTC.
2. In your wallet find WBTC, and hit up the "Unwrap" button.
3. Type in how much WBTC you want to swap for BTC.
4. Confirm the unwrapping, and watch the BTC roll into your Bitcoin wallet.

The WBTC will be debited from your WBTC wallet, and BTC will be credited to your BTC wallet. Keep in mind the necessity for two separate wallets, as BTC cannot be received in your WBTC wallet.

What Advantages Does WBTC Offer?

Wrapped Bitcoins bring together the best of both worlds, drawing on the strengths of Bitcoin and Ethereum. Bitcoin, with its massive user base and loads of liquidity, joins forces with Ethereum's tech prowess, especially its smart contracts that handle crypto transactions.

Bringing BTC into the Ethereum scene not only makes exchanges and payments easier but also ditches the need for juggling two separate nodes — one for BTC and one for ETH. Dealing with WBTC is like a breath of fresh air, streamlining everything with just an Ethereum node. Plus, by harnessing the Ethereum blockchain as its core, WBTC transactions gain a significant boost in speed, ensuring a more efficient and dynamic process.

Is WBTC Secure?

The security of BTC bridges is a hot topic in the DeFi community, stirring ongoing debates about custodians' role in safeguarding real BTC. From a technical side, a wrapped Bitcoin token is deemed secure and reliable, typically built on reliable platforms like Ethereum (ERC20) or Binance Smart Chain (BEP20), inheriting the strong security features of these networks.

But here's the catch — BTC tokens have a significant downside. It boils down to having to rely on the custodian holding the assets. If said custodian decides to unlock and pass the real Bitcoin to someone else, WBTC token holders could end up with an asset of reduced value — a mere wrapper.

Is WBTC Different From BTC?

Yes, Wrapped Bitcoin stands apart from actual Bitcoin. Functioning as an ERC20 token on the Ethereum blockchain, WBTC is backed by a 1:1 bitcoin tokenization mechanism. It's crucial to grasp that holding WBTC doesn't translate to possessing real bitcoin. Several features inherent in Bitcoin are foregone during the tokenization process to WBTC, including the capacity for instant payments through the Lightning Network,  the security provided by the Bitcoin network, and certain privacy aspects associated with Bitcoin.

Nevertheless, transforming BTC into WBTC opens up new possibilities.