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November 30, 2022

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The Cryptocurrency Guide for the Perplexed: Wrapped Bitcoin (wBTC)

Bitcoin is underrepresented in decentralized finance (DeFi). Most of it happens on the Ethereum blockchain and the codes for ETH and BTC don’t play well together, so paying for your DeFi related shenanigans using BTC generally needs a little extra something. Enter Wrapped Bitcoin (wBTC).

Wrapped Bitcoin is an ERC-20 token used to represent Bitcoin on the Ethereum blockchain. It can be integrated into Ethereum wallets, decentralized applications (d’Apps) and smart contracts. You can convert your bitcoin using a WBTC partner into 1 wrapped bitcoin, and back.

Basically, you can think of it as Bitcoin with a little extra Ethereum-friendly code so you can use it on the Ethereum blockchain.

Who runs this?

First, a little history.

The protocol was launched in January 2019 as a way to bring the Bitcoin’s liquidity to the Ethereum network. A year and a half later, the records show there was more than $800 million worth of BTC converted into wBTC.

The wBTC protocol is controlled by a decentralized autonomous organization (DAO), which consists of 17 stakeholders within DeFi. There are 40 participants, including the DAO, wallets, merchants and exchanges, in the wBTC ecosystem as of December 2020.

What problems does WBTC solve?

DeFi’s growth over the past year has meant the need to find new sources of liquidity, and wrapped bitcoin provides interoperability between Bitcoin and Ethereum, allowing BTC holders to get in on the action on Ethereum’s ecosystem. The protocol converts Bitcoin into a wBTC token on ethereum that can be used on decentralized exchanges (DEX) and d’Apps running on the Ethereum blockchain.

Ethereum scales better than bitcoin, with an block time between 12 and 14 seconds compared to Bitcoin’s 10 minutes, which means Bitcoin holders who convert to wBTC don’t have to wait anymore. Add to that, d’Apps can now use Bitcoin payments in smart contracts for lending protocols, funds, predication markets on Augur, and token sales.

Money Making Options:

As of December 2020, protocols that allow for wBTC to be used as collateral to borrow digital assets include:

  • MakerDAO
  • Compound
  • Kyber Network
  • AAVE
  • Uniswap
  • Balancer

The above protocols allow lenders to accrue interest on the wBTC they offer to borrows through liquidity pools and money markets. Most of the platforms determine interest rates using an algorithm that adjusts based on fluctuations in supply and demand.

Let’s consider an example:

You can make 3% for lending wBTC in a pool on Compound. Traditional banks offer about 0.01%.

Yield farming refers to the process of hopping from crypto pool to crypto pool or DeFi platform to DeFi platform to maximize interest gained on loans. Some platforms have sweetened the pot some by giving both parties a chance to pick up the platform’s governance token, which confers specific benefits. The process of getting a secondary token in addition to interest is called liquidity mining, and wBTC is a way in for BTC holders.

How do I get my hands on some WBTC?

It’s an ERC-20 token so you can’t mine it. There’s no consensus mechanism. You can get some from a merchant, who will then jump through the know your customer/anti-money laundering hoops required by the government to verify your identity. After which, you perform the swap, with Bitcoin from the user going to the merchant, who then hands back WBTC.

You can do this on Airswap, CoinList, 0x, AAVE or Maker. Conversion generally comes without a cost, but converting back does. Users of wBTC also get hit with gas fees as normal from transacting in DeFi.

Wrapped Bitcoin is presently 16th largest by market cap, with a valuation of $10,965,930,065, and a circulating, total and maximum supply of 272,724 coins.

The price is $40,180.27 a coin, so save your pennies.

—Joseph Morton

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