What is wBTC? (Wrapped Bitcoin)
The Beginner’s Guide
In this way, wBTC operates as a bridge between bitcoin and ethereum, allowing Bitcoin users to access decentralized finance (DeFi) applications and for ethereum applications to gain additional liquidity.
To make this work, the process of going from BTC to wBTC depends on three entities:
- Custodians – Minting wBTC and keep its bitcoin reserves secure.
- Merchants – Distribute wBTC to users and destroy excess wBTC
- DAO – a decentralized autonomous organization responsible for smart contract changes and the addition or removal of merchants and custodians
Once wBTC has been deposited in a user’s Ethereum address, the asset can be used in the network’s financial applications for savings, lending, and investment services, in a way that may offer advantages over existing options.
Compared to processes in which credit is evaluated by a financial institution, wBTC users can put their bitcoin to work without divulging private information.
How does wBTC work?
Users who wish to deposit BTC and mint wBTC must go through a process that is carried out by merchants and custodians.
Once a user submits a request, merchants initiate a transaction to authorize the custodian to mint a corresponding amount of wBTC. The merchant then sends bitcoin to the custodian in exchange for the newly minted wBTC, which the user can then exchange their BTC for wBTC.
In order to redeem BTC for wBTC, merchants initiate a burn transaction and notify the custodians, who then release the corresponding amount of BTC to the merchant’s bitcoin address.Users then their wBTC to redeem BTC with the merchants, who burn the received tokens.
The smart contracts that create wBTC is controlled by a DAO composed of custodians, merchants, and agreed upon institutions. The DAO makes communal decisions such as changes to the smart contract that mints wBTC or adding/removing its members.
Why does wBTC have value?
wBTC derives its value from mirroring the bitcoin price, as it is backed 1:1 thanks to a reserve.
wBTC offers similar value to other projects that mint Ethereum tokens mirroring bitcoin’s price, like Keep’s tBTC, by allowing bitcoin holders to interact with the vast suite of DeFi dapps present on Ethereum without having to sell their assets.
When they decide to stop using these services, they only pay a small, additional fee to retrieve their bitcoin from the merchants.
Kraken's Crypto Guides
- What is Bitcoin? (BTC)
- What is Ethereum? (ETH)
- What is Ripple? (XRP)
- What is Bitcoin Cash? (BCH)
- What is Litecoin? (LTC)
- What is Chainlink? (LINK)
- What is EOSIO? (EOS)
- What is Stellar? (XLM)
- What is Cardano? (ADA)
- What is Monero? (XMR)
- What is Tron? (TRX)
- What is Dash? (DASH)
- What is Ethereum Classic? (ETC)
- What is Zcash? (ZEC)
- What is Basic Attention Token? (BAT)
- What is Algorand? (ALGO)
- What is Icon? (ICX)
- What is Waves? (WAVES)
- What is OmiseGo? (OMG)
- What is Gnosis? (GNO)
- What is Melon? (MLN)
- What is Nano? (NANO)
- What is Dogecoin? (DOGE)
- What is Tether? (USDT)
- What is Dai? (DAI)
- What is Siacoin? (SC)
- What is Lisk? (LSK)
- What is Tezos? (XTZ)
- What is Cosmos? (ATOM)
- What is Augur? (REP)
Why use wBTC?
Users may find wBTC appealing as a way to use their bitcoin in Ethereum’s applications and put their idle cryptocurrency to work in various yield-generating instruments.
Investors may also want to consider adding wBTC to their portfolio to gain exposure to bitcoin’s price action without interacting with Bitcoin’s network or purchasing it through a centralized exchange.