Wrapped Bitcoin brings new liquidity potential to crypto space

The launch of Wrapped BTC opens up a range of new liquidity options for the ERC20 token ecosystem

On January 31, blockchain security company BitGo launched a new bitcoin-backed ERC20 token called Wrapped Bitcoin (WBTC) – in partnership with Kyber Network and Ren – to bring bitcoin to the Ethereum network.

The Wrapped BTC project was first announced by BitGo in October 2018. In a blog post, BitGo CTO Benedict Chan stated that the purpose of WBTC is to “bring the stability and value of Bitcoin to Ethereum’s expansive ecosystem of decentralized applications.”

WBTC enables Ethereum users to effectively use bitcoin in all Ethereum-based decentralized applications, which have so far been limited to ether (ETH) and highly volatile ERC20 tokens.

WBTC will, therefore, be able to provide bitcoin liquidity to decentralized exchanges that run on the Ethereum network. Hence, for ERC20 token investors, being able to convert their tokens to bitcoin and vice versa has to potential to boost much-needed liquidity on DEXs while preserving all the security features of dealing on non-centralized exchanges.

Moreover, it standardizes bitcoin to the ERC20 standard so that bitcoin can be included in Ethereum-powered smart contract. Something that was previously not possible.

“WBTC users will be able to utilize Bitcoin in a wide variety of new decentralized use cases, including on decentralized exchanges (DEXs), as collateral for stable coins or lending, for payments and flexible smart contracts within the Ethereum ecosystem,” Chan stated.

Wrapped Bitcoin

How does WBTC work?

Wrapped bitcoin (WBTC) is an ERC20 token that is backed 1-to-1 with bitcoin, which is held by BitGo, who act as the custodian for the WBTC project. So, for every WBTC minted and bought by a user, one bitcoin is held with BitGo. Thus, the price of WBTC should remain the same as the price of bitcoin (BTC).

To receive WBTC tokens, a user has to reach out to so-called merchants, which are institutions that WBTC will be minted to and burnt from in the swap process. The merchant will then perform a KYC/AML check on the user to verify their identity. Once completed, the user and merchant execute the exchange and the merchant receives bitcoin while the user receives WBTC tokens.

According to the WBTC whitepaper, merchants play an integral role in the wrapped token ecosystem as they are the distributors. For WBTC, Kyber and Ren will be the first active merchants who hold keys to start minting new WBTC and burning WBTC. Together with Prycto, and Airswap, they have already minted WBTC from their own BTC holdings to provide instant liquidity to WBTC users, according to a press release.

Moreover, from the outset, four further merchants are facilitating BTC/WBTC conversions including Dharma, ETHfinex, GOPAX, and Set Protocol.

Therefore, WBTC can already be used on financial DApps such as bZx, Compound, Dharma, and dYdX.

At the launch, the WBTC project was supported by 26 community members, with more expected to follow soon. The full list of members includes DolomiteDharmaIdexRadar RelayBlockfolioSwitcheoNetworkBZXEthfinexdY/dXimTokenCoinGeckoAirSwapCompoundDDEXHydroGnosisGOPAXLoopring ProtocolMakerDAOOmiseGOPryctoRenSet ProtocolThe OceanKyber Network, and BitGo.

WBTC transparency and governance

As trust is a key component of any new cryptographic asset, BitGo and its project partners want to ensure that full transparency is provided for the WBTC ecosystem. To achieve this Bitgo have ensured that:

  • all WBTC smart contracts have been audited by several third-party audit firms including Solidified Technologies, ChainSecurity, and Coinspect.
  • the first WBTC mined and burnt can be observed on the Ethereum blockchain to show that WBTC is backed 1-to-1 by BTC.
  • WBTC comes with a dashboard that enables users to validate the amount of WBTC that have been minted as well as the amount of bitcoin that are backing the outstanding supply of WBTC.

As a governance model, the WBTC project has decided to set itself up as a DAO (decentralized autonomous organization) as opposed to a centralized incorporated company. This creates a scenario where consensus about the projects future steps needs to be achieved among the DAO members as opposed to one company deciding how WBTC will evolve.

Moreover, it greatly reduces the risk of WBTC suddenly disappearing because its operator is shutting down. Hence, the DAO governance model provides an extra layer of security for its users.

“When we first announced WBTC, we expected that the token would create additional liquidity for decentralized exchanges. Since then, we’ve been thrilled to see other applications and use cases, from decentralized lending to collateralization and insurance — that can be built on top of this infrastructure even without our involvement,” BitGo’s Chan said in the official WBTC launch announcement.

Bitcoin on Ethereum?

While bitcoin maximalists may not like the idea of ‘their’ coin suddenly being used on the network of its biggest competitor, Ethereum users – especially traders and investors – should rejoice at the newfound ability to use bitcoin on Ethereum.

Through the tokenization of bitcoin, Ethereum users can now use bitcoin as a tradable asset on decentralized exchanges, use it as a base currency for DApps, and write smart contracts that pay out in BTC instead of ETH.

Interestingly, this is could also mean that bitcoin could become more popular as an ICO funding currency, should startups conducting token sales add WBTC as a currency option during their crowdsales. How this, in turn, would affect the price of bitcoin is difficult to say but it could mean that the price of bitcoin could – to some degree – correlate more with the performance of the ICO market, in the same way as ether has.

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