Digital assets are divided into two major classes – coins and tokens. While coins have their own blockchains, tokens don’t, and they have to be used on other blockchains. This is just one of the major differences between the two, but it’s not the only difference.
The crypto industry has advanced significantly though, and coins can now be modified to run on other blockchains that are not originally theirs. In other words, they can be converted to tokens or tokenized. Tokenization simply means converting something of value into a token that can be used on a blockchain application.
Bitcoin is an asset of value commonly referred to as digital gold. Therefore it can be converted into a token that runs on Ethereum and other blockchains. This process is called bitcoin wrapping, and it makes bitcoin compatible with Ethereum blockchain.
The resulting token is called wrapped bitcoin. In this guide, we’ll discuss what wrapped Bitcoin (WBTC) is, how it works, and why it is important.
What is Wrapped Bitcoin?
Before now, if you’re a bitcoin fanatic and you don’t want to use any other cryptocurrency, you’ll not be able to use things like decentralized finance (DeFi) applications. Those days are long gone now. It is now possible to use bitcoin to access DeFi by converting them to wrapped bitcoin.
WBTC is an ERC-20 token backed 1:1 ratio with bitcoin. Wrapped bitcoins are held in reserve by leading crypto custody company BitGo Trust. You can wrap and unwrap bitcoin using certain wallets, like the ones provided by CoinList.
Like any other digital asset, wrapped bitcoin has a supply, but the supply is made public, unlike other ERC-20 tokens for the sake of maintaining the transparency that regular bitcoin is known for.
Why are Wrapped Bitcoins Important?
Because you cannot use the regular bitcoin to provide liquidity to DeFi platforms, Wrapped BTC makes this possible. Ethereum is responsible for running the majority of the DeFi ecosystem (and DApps), not Bitcoin. This places a limit on Bitcoin users, making it impossible for them to use the ecosystem without selling their bitcoin to buy ERC-20 tokens.
However with the launch of wrapped BTC, many DeFi networks now allow users to use WBTC as collateral for borrowing. Such networks include MakerDAO, Dharma, Compound, and Kyber Network. The Ethereum-compatible WBTC can then be locked up in a smart contract while the borrower accesses the loan in ether.
WBTC is important as collateral on DeFi platforms because of its large market cap which makes it more stable than Ethereum. Also, there’s need to explore alternative assets to serve as collateral on DeFi platforms and the total value locked in DeFi for WBTC has seen a rapid increase, making it more attractive as a collateral asset.
How to Get WBTC
If you’re a Bitcoin user looking to explore the DeFi ecosystem, you can now do that with WBTC, but how can you do that? First you need to get some of it. There are a few options when it comes to buying WBTC.
CoinList is one of the best merchants where you can buy some WBTC, but you may need KYC to be able to do that. You can also go through a decentralized exchange (DEX), or simply mint some of it. The minting process creates a new WTBC and you need to do it through a merchant as well, only in this case, you’ll pay a minting fee in addition to the price for the minted WBTC.
With WBTC, there is now a bridge between Bitcoin and Ethereum, which are the two biggest cryptocurrency blockchains. This is a major progress in developing the crypto industry.
Conclusion
Are you a diehard Bitcoin fan looking to explore the world of DeFi? Well, now you can do that using WBTC without having to sell and buy tokens you don’t want to touch. Get some WBTC and start exploring today.
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