Wrapped Bitcoin (WBTC) is an ERC20 compatible token that represents Bitcoin (BTC). WBTC is the first ERC20 coin pegged 1:1 to Bitcoin and is managed by the decentralized organization WBTC DAO. BitGo, Kyber Network, and Ren had the idea to launch the token in 2019.

WBTC works like any other stablecoin, except for the fact that Bitcoin is provided instead of what would normally be a FIAT dollar or euro. Through a WBTC partner, 1 Bitcoin can be converted to 1 Wrapped Bitcoin, and vice-versa, and like Bitcoin, WBTC has a limited supply of 21 million coins.

The key advantage to WBTC is the fact that it integrates Bitcoin with Ethereum compatible wallets, dApps, and smart contracts.

What are WBTC key features and how does it work?

In essence, WBTC standardizes Bitcoin to the ERC20 format, essentially allowing smart contracts to integrate Bitcoin transfers. WBTC brings greater liquidity to the Ethereum ecosystem including decentralized exchanges (DEXs) and financial applications. Since the majority of trading volume takes place on centralized exchanges with Bitcoin. WBTC is helping to change that by bringing Bitcoin’s liquidity to DEXs and making it possible to use Bitcoin for token trades.

The two parties responsible for the security and reserves of the token are custodians and merchants:

Custodians are responsible for maintaining reserves that support WBTC. They also create new coins, this refers to the process of creating new wrapped tokens and is initiated by a merchant and performed by the custodian.

Merchants, on the contrary, burn tokens. Burning is done when WBTC needs to be transferred back into BTC. The amount to be ‘burnt’ is deducted from the merchant’s WBTC balance (on-chain) and the supply of WBTC is then reduced. Merchants also resort to custodians when there is a demand for tokens with a request for minting. And they are also responsible for the supply of coins to markets.

What can Wrapped Bitcoin be used for?

For BTC holders, using Wrapped Bitcoin provides an opportunity to join the decentralized finance market or DeFi. WBTC allows access to all usual functions, such as farming and quick swaps.

As a default, Uniswap and other leading Ethereum-based DEXs support WBTC, and it can also be used on large centralized exchanges, like Binance.

Bitcoin is a cryptocurrency with a capitalization of hundreds of billions of dollars. And WBTC is actively promoted by the biggest players in the DeFi industry since it allows them to leverage some of BTC’s dominance. Since it is a permission-less ERC20 token, WBTC can be used as a building block for DeFi applications. One such example is with TokenSets, a platform that automatically trades between WBTC and ETH to capture gains in both assets.