What is Wrapped Bitcoin
Wrapped Bitcoin (wBTC) is a modified version of bitcoin, equal to its price, that can be used on Ethereum. The token was created to allow users to interact with Ethereum’s decentralized finance (DeFi) ecosystem. An additional benefit is improved transaction speed: wrapped bitcoin transactions clear faster than bitcoin transactions.
- As mentioned in a research paper published by Binance in August 2020, Wrapped Bitcoin or WBTC is an ERC-20 digital asset backed by Bitcoin (BTC) in a 1:1 fashion.
- The digital asset functions with projects such as Kyber Network and REN being the Merchants who mint and burn WBTC tokens, and BitGo being the Custodian who holds BTC and the keys to mint WBTC tokens.
- When a user wishes to exchange BTC for WBTC, he/she will be required the send his/her BTC to a Merchant. The Merchant will initiate a WBTC mint request and send the BTC from the user to the Custodian. The Custodian will then mint the corresponding WBTC, which will be subsequently transferred to the user via the Merchant.
- When a user wishes to redeem his/her BTC with WBTC, the Merchant would communicate with the Custodian and transfer the user’s BTC back to him/her, while the WBTC token will be burnt.
What is the project trying to achieve?
Wrapped bitcoin uses smart contract functionality for bitcoin transfers to provide a way for bitcoin holders to access DeFi. In doing so, it brings the greater liquidity of the world’s largest cryptocurrency to the DeFi arena.
For new WBTC to be produced or minted, a so-called merchant places a request with another party, the custodian. WBTC’s white paper specifies that the merchant sends bitcoin to the custodian, which mints the WBTC and sends it to the merchant’s wallet on the Ethereum blockchain. The merchant can then swap the wrapped bitcoin with an end-user in exchange for the equivalent amount of bitcoin. Merchants are responsible for carrying out know-your-customer and anti-money laundering processes with the end-users.
Custodians are the institutions that hold the backing of bitcoin and mint the token. For WBTC, BitGo is the sole custodian as of October 2021. The founding merchants were Kyber Network and Ren, though others have now joined. In June 2021, it was reported that more than 1% of bitcoin was held in wrapped bitcoin tokens.
Removing WBTC from circulation – for example when a user wants to convert WBTC back to bitcoin – is accomplished through burning, a process that can be carried out only by a merchant. The merchant calls the “burn” function in the governing contract, and its WBTC balance is reduced. The custodian is then free to release the held bitcoins to the merchant, who can reimburse the end user.
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