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What is wBTC? (Wrapped Bitcoin)

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Wrapped bitcoin (wBTC) allows ethereum applications to integrate a cryptocurrency backed by real bitcoin reserves. 

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.

To learn more about WBTC, you can follow its Twitter or peruse the wBTC white paper.

What is wrapped bitcoin wbtc


Who created wBTC?

wBTC was first announced in October 2018, but was later launched and created by a consortium of Bitgo, Kyber Network, and Republic Protocol in January 2019. 

Upon launch, wBTC was immediately available to use in popular Ethereum DeFi dapps like Compound, Dharma, bZx, and dYdX. 

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.

Governance

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. 

The DAO launched with 16 initial members including all custodians and merchants along with several others such as MakerDAO, Blockfolio, Gnosis, and Loopring


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.


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.

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