Crypto Research

Wrapped tokens

Feb 23, 2021

Bitcoin is digital gold and, like gold, it is becoming increasingly difficult to move and use as digital money. As the network ages and transaction fees increase, its use as a medium of exchange gradually decreases. However, there are a number of other solutions that could make Bitcoin a lot more practical. Many speak of off-chain scaling solutions like the Lightning network. But there is another really exciting option, namely “Wrapped Bitcoin (WBTC)” or “Wrapped Token”.

A wrapped token is a cryptocurrency that is linked to the value of another cryptocurrency. In Wrapped Bitcoin (WBTC), it is an ERC-20 token that represents Bitcoin (BTC) on the Ethereum blockchain. It is a token that is 1: 1 covered with Bitcoin. You can think of it as a stable coin, while these are covered by dollars in bank accounts, WBTC is covered by Bitcoin, which are held on a depot wallet.

A major advantage of WBTC is the integration into the world of wallets, DApps and smart contracts from Ethereum, in order to enable participation in DeFi apps (decentralized finance), which are so popular with Ethereum. And you do that by converting Bitcoin (BTC) to Wrapped Bitcoin (WBTC). During this process, BTC is sent to a depot wallet, where WBTC are then created on Ethereum that corresponds to the number of BTCs sent. If WBTCs have to be exchanged for BTCs again, a so-called "burn request" is sent to the depot wallet and the BTCs are released again. These mechanisms are carried out and controlled by a Decentralized Autonomous Organization (DAO), which all happens in a fairly transparent way. For example, if you go to the dashboard on the WBTC website, you will see an overview of the order book. You can see how much wrapped bitcoin was created and by whom. You can also see the Ethereum addresses where they were created, as well as the Bitcoin address where Bitcoin is stored in the depot wallet.

At the moment, it seems like tokenized Bitcoin (WBTC) offers one of the most compelling application solutions for scaling problems. A simple Ethereum wallet is all you need.