What is wBTC? Everything you need to know

Did you know that Bitcoin (BTC) is now intertwined with the Ethereum blockchain? Wrapped Bitcoin (WBTC) is an ERC-20 token that went live on the Ethereum network on January 30th, 2019

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WhitePark Capital

8 min readFeb 6, 2019

Wrapped Bitcoin (WBTC) is an ERC-20 token that went live on the Ethereum network on January 30th, 2019; WBTC takes the price of Bitcoin — or as the community leading this initiative likes to say, “the stability of Bitcoin” — and implements it into the Ethereum blockchain so that users can leverage the capabilities of the Ethereum network.

You might be wondering what the capabilities of the Ethereum network are? Well for starters, the Ethereum blockchain has faster transaction times, lower transaction fees, and more advanced smart contract capabilities; but before we dive into the benefits — or as the community leaders of this initiative like to say, “ the flexibility” of Ethereum — we should take a look at the history of this project and its purpose.

What is Wrapped Bitcoin?

The main purpose of WBTC is to bring the functionalities of the Ethereum network to the most dominant cryptocurrency on the market — Bitcoin.

WBTC was first announced on October 26th, 2018 on the Kyber Network blog; in the original post, author Loi Luu puts a lot of emphasis on liquidity — or lack thereof, when it comes to trying to trade on a decentralized exchange (DEX) with a token that is not Ethereum based (ERC-20).

So instead of complaining about the lack of a solution, Kyber Network teamed up with crypto-custodian BitGo, as well as blockchain tech company REN (formally known as Republic protocol) to deliver the solution to the liquidity problem: Wrapped Bitcoin, aka, WBTC; a token created to “bring Bitcoin’s liquidity to the decentralized ecosystem on Ethereum and enhance all decentralized applications,” according to the project’s initial press release.

How it Works

At the end of the day, WBTC is an ERC-20 token that is backed 1:1 with Bitcoin. However, WBTC has a unique governance structure and consensus mechanism that differs from that of Bitcoin and Ethereum.

WBTC is a DAO project — Decentralized Autonomous Organization — that uses a Federated Governance model. In other words, the community has a voice in terms of decision making and the direction of the project; however, the custodians that store the Bitcoin and burn the WBTC, and the merchants that WBTC are minted to and burnt from, are the gatekeepers into the governing body.

The custodians and merchants are the primary members of the DAO, and the network is governed by multi-sig contracts that require signatures from the DAO members before a new individual is allowed to join or leave the governing body.

At launch, WBTC had 25 merchant partners, and BitGo was declared to be the first — and only — custodian; however, the project has alluded to the idea that there will be more custodians in the future.

The role of custodians on the WBTC network is to safeguard assets as well as hold the keys that allow new tokens to be minted. Custodians work directly with the 25 partner merchants, and merchants are the only individuals on the WBTC network that WBTC tokens are either minted to or burnt from.

The consensus on the Wrapped Bitcoin network is pretty straight-forward, WBTC uses a Proof-of-Reserve consensus mechanism; all that means is that each WBTC is backed by an equivalent amount of BTC, and this is verifiable by observing the transaction history on-chain; this information is also observable on the WBTC Dashboard. Currently, there are 72.4214 WBTC and 72.4216 BTC ($248,692.22) in the Wrapped Bitcoin reserves (as of February 5, 2019).

So How Do I buy, sell, or redeem WBTC?

So let’s say you want to buy WBTC so that you can use a token with Bitcoin’s value in an Ethereum smart contract that you wrote. First, you would get in contact with one of WBTC’s 25 partner merchants and send them a request that contains the amount of Bitcoin you would like to deposit in return for the WBTC.

When the Merchant receives that request, they do a KYC and AML check, and if all is well, they release an amount of WBTC equivalent to the amount of BTC that you initially deposited (remember, the rate is 1:1).

Now let’s say you want to sell/redeem your WBTC for BTC. In this case, you would send a redemption request that contains the amount of WBTC you would like to burn to redeem an equivalent amount of Bitcoin.

When the merchant receives the request, and if all is well, then they take the amount of WBTC you sent, burn the WBTC so it no longer exists, and give you the equivalent amount of Bitcoin in return.

Use cases

The Wrapped Bitcoin Whitepaper lays out a few use-cases for WBTC.

Increased transaction speeds: Blocks on the Ethereum network are confirmed in about 15 seconds — compare that to Bitcoin’s block confirmation time of about 10 minutes, and you see that there is a clear advantage when it comes to transaction speed.

Interoperability: A majority of altcoins are ERC-20 tokens, and for this reason, it is extremely difficult to use your wealth in Bitcoin for operations that are not interoperable with Bitcoin — whether that means a DApp or decentralized exchange. So by bringing a token that represents one Bitcoin per one token onto the Ethereum blockchain, the token becomes interoperable with nearly every ERC-20 token in existence.

Reduces intermediaries: Because The value of Bitcoin is now tied to an ERC-20 token, individuals no longer have to convert from Bitcoin to Ethereum before they can use the DApps they want to use or trade on their preferred decentralized exchanges.

Improved transparency: And because of WBTC’s unique Proof-of-Reserve consensus mechanism, individuals have a direct look into the available reserves and circulating supply of WBTC.

Smart Contracts: The smart contract capabilities on the Ethereum network are more advanced than those on the Bitcoin network in the sense that it allows developers to write their own programs. By implementing a token backed by Bitcoin into the Ethereum network, an individual can essentially create a smart contract on Ethereum that pays out in Bitcoin — because WBTC can be redeemed for Bitcoin at any time.

Improved Liquidity to decentralized exchanges: And last — but certainly not least — WBTC can be used to enhance the liquidity on decentralized exchanges and DApps. A majority of the trading done on decentralized exchanges is done in ETH trading pairs. If an individual only holds Bitcoin and would like to trade, then they are out of luck on most DEX’s — unless they go through an intermediary to convert their Bitcoin to ETH first. However, WBTC changes that. Since WBTC is an ERC-20 token, WBTC will provide greater liquidity to decentralized exchanges since it is already interoperable with other Ethereum-based tokens.

Shortcomings

Although WBTC brings the stability of Bitcoin to the Ethereum network, which allows users to leverage the features of Ethereum, yet, be able to redeem their ERC-20 token for Bitcoin at any time — WBTC does fall short in a few areas. The first being that it has a single point of failure.

At the moment, BitGo is the sole custodian of WBTC; and although BitGo is one of the only trusted custodians in the blockchain and cryptocurrency space, it is still just one entity. If an individual found a way to breach BitGo’s security, that individual could essentially make off with all of the keys that allow new WBTC to be minted.

And although the WBTC project is a DAO, being part of the decision making body is rather exclusive — as a matter of fact — the DAO members act as gatekeepers, and have full control over who is allowed to join or leave the DAO — which doesn’t sound very democratic or decentralized when you think about it.

These shortcomings may not be enough to deter the majority from using the Wrapped Bitcoin token; however, these features of the WBTC network are not exactly in line with the ethos of blockchain technology and cryptocurrency, which promote decentralization, maximum security, opensource technology, and community-led project development.

But new ideas lead to new projects

Although the WBTC token has its advantages and disadvantages, the ideology behind this token is unprecedented, and it allows users to do a few things that weren’t necessarily possible or as easy to accomplish before the token existed — especially for decentralized exchanges and smart-contract writers.

By backing an ERC-20 token 1:1 with Ethereum, decentralized exchanges are now able to provide more liquidity than before, practically creating BTC/ERC-20 trading pairs because as long as a user has WBTC, they can redeem it for BTC at any time and vice versa. This is a huge step from where DEX’s stood before the release of this token, with most only offering ETH/ERC-20 trading pairs.

In addition, it would not be surprising to see some unprecedented smart contracts created over the next few months that allow users to practically receive payouts in BTC because once again, the WBTC can be redeemed for Bitcoin at a merchant at any time.

It will be interesting to see how consumers, developers, DApps, and DApp users use WBTC — but we are sure that new applications, smart contracts, and decentralized exchanges that have found clever ways to use the WBTC are going to surface sooner than later.

wBTC Dashboard & WhitePaper:

For more information on digital assets, feel free to reach out to WhitePark Capital at vs@whitepark.capital, and be sure to check out our website www.whitepark.capital

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