How To Wrap Bitcoin for DeFi

By virtue of being the oldest and largest cryptocurrency on the market, Bitcoin can boast a massive user base and a liquidity pool of several dozen billion dollars. However, its blockchain functionality is relatively basic by modern standards. The WBTC DAO consists of governing members who decide on significant upgrades and changes to the protocol.

Popular Tokens on the Ethereum Chain

Moreover, wrapped tokens empower users by giving them more control over their assets. These tokens significantly boost the utility, flexibility, and accessibility of crypto assets across several blockchain networks, promoting a more interconnected and dynamic cryptocurrency economy. As Wrapped Bitcoin tokens adhere to the ERC-20 token standard, one can use them across the broader Ethereum ecosystem.

• The creation of Wrapped Bitcoin brings the world’s leading cryptocurrency Bitcoin into the world of Ethereum’s DeFi ecosystem.
• However, with the introduction of wrapped Bitcoin tokens, users can now access Ethereum’s smart contracts and dApps by leveraging BTC in a form that is compatible with the Ethereum blockchain.
• Before wBTC, there was no way to take advantage of smart contracts and decentralized applications (dApps) with Bitcoin, as it can’t natively run on the Ethereum network.
• When considering whether to use Wrapped Bitcoin (WBTC) or original Bitcoin (BTC), the choice largely depends on your specific use case and goals within the blockchain ecosystem.

Using a peer-to-peer transaction or an exchange, you send your BTC to the merchant and they send you the WBTC. Wrapped ETH opens up a whole new world of decentralized finance for ETH holders. With wETH, they can trade directly with other Ethereum-based altcoins and pledge funds to DeFi protocols.

What is Wrapped Bitcoin (wBTC)? Understanding wrapped tokens

As the adoption and versatility of wrapped tokens continue to grow, Wrapped Bitcoin stands out as a prominent solution in the ever-evolving landscape of digital assets and decentralized finance. The process of wrapping involves locking up the original digital asset on its native blockchain in smart contracts. After locking a certain quantity, the same amount is minted in the what is the difference between bitcoin and ripple form of a wrapped cryptocurrency on another blockchain.

Wrapped Cryptos and DeFi Interoperability

The concept of wrapping digital assets is not unique to Bitcoin, but Wrapped Bitcoin is currently one of the most prominent and widely adopted implementations. The wrapped tokens can be used in decentralized finance (DeFi) applications, decentralized exchanges, lending platforms, and other blockchain-based services that require ERC-20 tokens. In short, wrapped cryptocurrencies have the effect of allowing crypto assets to be used on non-native blockchains. Tokenizing bitcoin as an ERC-20 token allows the Ethereum ecosystem to benefit more fully from bitcoin’s liquidity. This provides greater liquidity to decentralized services and boosts the utility of crypto assets.

WETH

Despite both having valuable use cases, Ethereum and Bitcoin cannot interact directly within each other’s blockchains. Tech Report is one of the oldest hardware, news, and tech review sites on the internet. We write helpful technology guides, unbiased product reviews, and report on the latest tech and crypto news. We maintain editorial independence and consider content quality and factual accuracy to be non-negotiable. In a scenario wherein the user requests to unwrap BTC, the custodian has to burn the minted BTC and unlock the collateral.

Staking wBTC on some protocols also qualifies you to earn governance tokens that let you vote on master services agreement msa template free to download the protocol’s decisions. For example, when you stake wBTC on Compound, you receive $COMP, the native token of Compound which allows you to vote on things like staking model and protocol upgrades. To receive wBTC, a user has to request from a merchant like Aave, Airswap, Maker, Coinlist, or 0x. The merchant will carry out all the necessary KYC/AML requirements to verify the user’s identity.

Wrapped bitcoin has brought more liquidity to decentralized exchanges (DEXs) and other DeFi applications operating on the Ethereum blockchain. As the number of merchants, exchanges, and wallets accepting wBTC grows, so does the amount of bitcoin being converted into wBTC Ethereum tokens. According to DeFi analytics hub DeFi Pulse, the total value of the wBTC market grew from $665 million to $848 million between August 1 and September 20, 2020.

Once the transaction is finalized, you will then have the option to utilize your wBTC tokens on various DeFi platforms like Compound and MakerDAO. When you want to convert your wBTC back to bitcoin, you make a request again to the merchant and the wBTC is traded back. The merchant then destroys the wBTC in what is known as a burn transaction.

These tokens are typically locked within a smart contract, but since Bitcoin does not house an execution layer, the funds are held by a trusted custodian. Proof of this locked asset is then sent to the target blockchain, where an equivalent amount of wrapped tokens is minted to represent the original asset. Wrapped bitcoin (wBTC) is a converted version of bitcoin that can be used on Ethereum’s growing network of decentralized applications. The wBTC protocol has brought increased liquidity to the decentralized finance (DeFi) ecosystem and has given bitcoin holders access to a variety of financial services not previously available to them. In conclusion, Wrapped Bitcoin provides Bitcoin holders with expanded opportunities, broader accessibility, and enhanced functionality within the Ethereum ecosystem.

Additionally, it’s possible to purchase WBTC on decentralized phoenix arizona transsexual dating exchanges such as Uniswap, though you usually need to have a stash of ETH in order to purchase WBTC directly. Gemini allows you to store WBTC, but Kraken doesn’t offer purchase or storage. Now, the WBTC can be sent from the custodian’s account to the merchant’s Ethereum-compatible crypto wallet.