What Is Wrapped Bitcoin?

Bitcoin and Ethereum are two of the most well-known blockchains, but they don’t naturally interact with one another. 

That separation has long challenged users who want to move value between networks. Wrapped Bitcoin (WBTC) was introduced to bridge that gap, allowing Bitcoin holders to participate in the growing Ethereum-based decentralised finance (DeFi) space.

Wrapped Bitcoin is a tokenised version of Bitcoin designed to be compatible with Ethereum applications. It mirrors Bitcoin's value but exists in a form that can be used on Ethereum-based platforms. This makes WBTC especially useful for trading, lending, or earning yield. 

On a crypto exchange, for instance, WBTC can offer the benefits of bitcoin while also giving users access to Ethereum-native services.

What Is Wrapped Bitcoin (WBTC)?

Wrapped Bitcoin is an ERC-20 token on the Ethereum blockchain that represents bitcoin at a 1:1 ratio. For every unit of WBTC in circulation, a trusted custodian holds one actual bitcoin in reserve. This ensures that WBTC always mirrors the price of Bitcoin and remains fully backed at all times.

Because it uses Ethereum’s token standard, WBTC can be integrated into various Ethereum-based applications, including decentralised exchanges (DEXs), lending platforms, and smart contracts. This compatibility allows Bitcoin holders to interact with financial tools that aren’t available on the Bitcoin network.

Wrapped Bitcoin was first launched in 2019 through a joint initiative involving BitGo, Ren, and Kyber Network, aiming to improve liquidity and usability across blockchain platforms.

How Does Wrapped Bitcoin Work?

The process of creating Wrapped Bitcoin is known as "wrapping." To wrap bitcoin, a user sends their bitcoin to a custodian, typically a trusted third-party organisation responsible for securely storing the asset. 

A merchant then mints the equivalent amount of WBTC on the Ethereum blockchain, issuing the ERC-20 tokens to the user.

If the user wants to redeem their bitcoin, the process is reversed. The WBTC tokens are burned (destroyed), and the custodian releases the corresponding amount of bitcoin back to the user. This system guarantees that WBTC is always backed by actual bitcoin, making it a dependable representation of the original asset.

The entire process is transparent and verifiable on the blockchain. Smart contracts are used to handle minting, burning, and transferring tokens, helping to automate the system and reduce reliance on intermediaries.

Why Use Wrapped Bitcoin?

Wrapped Bitcoin allows users to do more with their BTC by unlocking access to Ethereum's decentralised finance (DeFi) ecosystem. With WBTC, holders can take part in a range of financial services that aren’t available on the Bitcoin network, such as lending, borrowing, staking, or trading on decentralised exchanges.

Another advantage is efficiency. Transactions on Ethereum are typically faster and cheaper than those on the Bitcoin blockchain. This can be especially useful for users who need quicker settlement times or are participating in high-frequency trading strategies.

Also, WBTC enables more flexibility in managing assets. Because it is an ERC-20 token, it integrates seamlessly with Ethereum wallets, smart contracts, and dApps, expanding Bitcoin's utility without compromising its value.

What Are the Risks and Considerations of Wrapped Bitcoin?

Despite its advantages, Wrapped Bitcoin carries a few important risks. One of the main concerns is custodial risk. 

Since a central custodian holds the original bitcoin, there is some reliance on that entity to manage the assets securely and honestly. If the custodian is compromised or fails to uphold its obligations, the backing of WBTC could be affected.

While useful, smart contracts can also introduce vulnerabilities. Bugs or exploits in the underlying code could lead to the loss or mismanagement of funds. Users need to trust that the contracts involved in minting and transferring WBTC are thoroughly audited and secure.

Regulation is another factor to consider. In the UK, the Financial Conduct Authority (FCA) has tightened oversight of crypto assets. While Wrapped Bitcoin is not classified as legal tender, it may still fall under existing securities or e-money regulations. 

Investors should stay informed on compliance requirements, particularly when using WBTC in DeFi platforms or for financial gains.

Wrapped Bitcoin vs. Bitcoin: What Are the Differences?

While Wrapped Bitcoin represents the same value as Bitcoin, several key differences exist in how each functions. Most notably, WBTC is minted, not mined. It exists as a token on the Ethereum blockchain and is created through a centralised wrapping process, whereas Bitcoin is generated through decentralised mining.

Wrapped Bitcoin is programmable, meaning it can interact with smart contracts and be used within dApps. Native Bitcoin, on the other hand, does not support this level of functionality, limiting its use in more complex financial systems.

Bitcoin, Unwrapped for the Ethereum Era

Wrapped Bitcoin brings Bitcoin’s value to a new blockchain, offering more utility and access. This is especially true for those looking to engage with decentralised finance in a flexible way.