Wrapped Bitcoin, also known as WBTC, is a form of Bitcoin that is tokenized on the Ethereum blockchain. It is a type of ERC-20 token, which means that it can be stored and traded on Ethereum-compatible wallets and exchanges. The main purpose of wrapped bitcoin is to make Bitcoin more accessible to the decentralized finance (DeFi) ecosystem.
The process of creating WBTC involves minting a new ERC-20 token, which is backed 1:1 by Bitcoin. This means that for every WBTC token that is minted, there is an equivalent amount of Bitcoin held in reserve. This reserve is audited regularly to ensure that it is sufficient to cover the outstanding WBTC tokens in circulation.
One of the main advantages of wrapped bitcoin is that it allows users to bring their Bitcoin onto the Ethereum blockchain, where they can access a wide range of decentralized finance (DeFi) applications and protocols. This includes lending and borrowing platforms, stablecoins, and decentralized exchanges. This allows users to access a wider range of financial services than they would be able to with Bitcoin alone.
Additionally, wrapped bitcoin also allows users to take advantage of the smart contract functionality of the Ethereum blockchain. This includes the ability to create and execute complex financial transactions, such as derivatives, without the need for a centralized intermediary.
The process of creating WBTC requires a process called “wrapping” and “unwrapping” where the BTC is locked in a smart contract, and the equivalent amount of WBTC is minted, and when the WBTC is converted back to BTC, the smart contract unlocks the BTC. This process is done through authorized custodians who are called “merchants” that hold the BTC in reserve, and the minting and burning process happens through them.
In conclusion, wrapped bitcoin is a form of Bitcoin that is tokenised on the Ethereum blockchain. It allows users to bring their Bitcoin onto the Ethereum blockchain, where they can access a wide range of DeFi services.