Over the past year, we’ve seen a tremendous amount of growth within the DeFi space.
One of the more notable developments has been the creation of Wrapped Bitcoin (wBTC), an Ethereum ERC20 token fully-collateralized with BTC and proof of reserves that are hashed on the Bitcoin network.
Wrapped Bitcoin follows a consortium model where entities perform specific roles to provide stability, security and liquidity. In this model, the four major ecosystem actors can largely be defined as:
Custodians: The institution or party who holds the asset. Custodians control the keys to mint new tokens.
Merchants: An institution or party which issues or burns wrapped tokens. Merchants play a key role in distribution of the wBTC.
Users: The holders of the wrapped token. Users can leverage wrapped tokens to transfer and transact like any other ERC20 token within the Ethereum ecosystem.
WBTC DAO Members: Individuals with the authority to govern custodians, merchants and users. DAO members are responsible for authorizing any contract changes along with the addition and removal of custodians.
What’s the benefit of wrapping Bitcoin?
Given that Ethereum blocks are created every ~15 seconds, wrapped Bitcoin provides users with higher transaction processing speeds than Bitcoin at a lower cost.
On the flip side, we’ve seen that most decentralized exchanges only offer ETH-based trading pairs and therefore cannot benefit from the massive popularity and liquidity that Bitcoin provides.
With this in mind, wBTC can bridge this liquidity gap and provide more support on decentralized exchanges and more notably, DeFi applications.
We’re already seeing this with the recent integration of wBTC into Compound and the amount of wBTC being minted across the board. As of writing today, 558 BTC (valued at $5.8M) has been locked and minted into wBTC with the asset primarily being used on Compound, Uniswap, and Nuo Network.
As there are trade offs with anything, users who decide to transact with wBTC are doing so at the cost of security. While Ethereum is still fairly secure in terms of decentralized networks, it does not compare to the goliath of global computing power that Bitcoin uses to secure its network. Moreover, the model for wrapping tokens has been considered to be rather centralized as users are relying on a handful of custodians and merchants to custody and mint your assets. Regardless, the teams that have created wBTC have set up a rather robust system with the inclusion of the wBTC DAO.
Other Wrapped Tokens
While wBTC has certainly gained the most traction as a wrapped asset, there are a few other examples currently in practice. Most notably, Radar Relay introduced the first instance of wrapped assets with the introduction of wrapped Ether (wETH).
“The reason you need wETH is to be able to trade ETH for other ERC-20 tokens on decentralized platforms like Radar Relay. Because decentralized platforms running on Ethereum use smart contracts to facilitate trades directly between users, every user needs to have the same standardized format for every token they trade. This ensures tokens don’t get lost in translation”
Other obscure uses include wrappedKitties, a 1:1 ERC20 token backed by ERC721 Cryptokitty assets.
In short, it’s important to recognize the constant innovation the Ethereum network is providing. By providing a liquidity bridge for Bitcoin, it’s safe to assume that the ecosystem will continue to evolve over the coming years.
While the use-cases for wrapped tokens may be somewhat limited today, the possibilities are endless. We at Fitzner Blockchain are bullish on Ethereum as a Programmable Store of Value and look forward to more developments within the wrapped token sector.
If you or your company think you could benefit from integrating WBTC into your business, feel free to reach out to us here!
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