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What is Wrapped Bitcoin (WBTC)?

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PDAX

July 11, 2022

3 min read

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Bitcoin (BTC) might be the most popular cryptocurrency, but it's  the Ethereum (ETH) network that currently dominates the market for decentralized applications (dApp). Because these two blockchains are completely separate, Bitcoin can’t be directly used to invest and take part in the dApp economy on Ethereum. 

The solution is to come up with another token which can represent Bitcoin, but whose coding is compatible with Ethereum’s ERC-20 token standard. Called “Wrapped Bitcoin” (WBTC), this token is practically the same as Bitcoin–but which exists outside of the Bitcoin blockchain. The name itself suggests how it's pretty much like a Bitcoin, but wearing the outer shell of an Ethereum token. 

WBTC is able to track BTC’s price in real time, so one WBTC can always be exchanged or “unwrapped” for one BTC and vice versa. In this sense, wrapped tokens function similarly to stablecoins, but one whose value tracks another cryptocurrency instead of a fiat currency. 

“Wrapped” cryptocurrencies are becoming increasingly popular as they are able to extend the utility of the tokens they represent beyond their native blockchains, especially with the emergence of more and more Layer-1 blockchains competing with Ethereum.    

Why use WBTC?

Since WBTC is an ERC-20 token, this means that it can conveniently be used on dApps and decentralized finance (DeFi) platforms based on Ethereum, while still retaining the value of Bitcoin:

WBTC can be kept in the same wallet with your other tokens - For the convenience of active traders, WBTC can be useful for keeping “BTC” in the same wallet as with your other ERC-20 tokens instead of having a separate wallet for BTC alone. 

WBTC can be swapped on decentralized exchanges (DEX) - WBTC allows its holders to use Ethereum-based DEXs such as Uniswap or Sushi to trade with other ERC-20 tokens. Users can also choose to acquire WBTC directly from a DEX for the same value of BTC–instead of buying BTC.

WBTC can be used as collateral for crypto loans - Crypto lending platforms such as Compound and Aave can only accept ERC-20 tokens as collateral. With WBTC, borrowers now have the option of using it as collateral instead of trading their Bitcoin a differently denominated token. Since WBTC is tied to the price of Bitcoin, this has the added advantage of the loan not being directly affected by price fluctuations happening on Ethereum.

Tokenomics

WBTC is the 17th most traded coin according to market capitalization as of July 2022. The current supply of WBTC can be viewed at any time on the WBTC order book which now stands at 259,438.83 WBTC, backed by 260,903.85 BTC. 

The supply of WBTC is always dependent on the current demand as new WBTC tokens are minted alongside an equivalent amount of BTC held in collateral. WBTC is maintained by a 60-strong partner network comprising of merchants, custodians, and DAO members. 

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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.

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