Wrapped Bitcoin: the equivalent of a stablecoin for Bitcoin
When we talk about stable currencies, we automatically think about fiat currencies, but Wrapped Bitcoin is a curious project that can be called a kind of stable coin created on the basis of the ERC-20 token to buy Bitcoin and use it in DeFi projects.
The proposal is simple: to bring Bitcoin into the world of DeFi due to the fact that for wBTC you can buy a BTC offering 1:1 parity. Thus, in order to block BTC, it is necessary to issue a wBTC. The same as when burning or removing. This makes it both a CeFi (centralized Finance) token and a DeFi (decentralized finance) token.
Thanks to this, we can use Bitcoin to interact in the Ethereum smart contract ecosystem and with dApps.
A little history
According to Coinmarketrate.com, the project is part of the Wrapped Tokens initiative launched by the Cyber Network, BitGo and Republic Protocol. It started on January 24, 2019, and was aimed at creating a token that would represent Bitcoin in the Ethereum ecosystem.
Thus, they created a bridge between Bitcoin, DeFi and dApps to inject liquidity.
A centralized BitGo custodial platform was created to interact with Ethereum smart contracts, creating a federal management body to represent the token and ensure a high degree of trust, while decentralizing certain management parameters.
It should be noted that wBTC is a currency, and they act as a central entity. Hence the similarity with a stable coin.
How it works
The interface is very simple, as we are asked to send only those Bitcoins that we have in stock:
- First we will make a deposit, which will be changed from BTC to wBTC.
- We are given a Bitcoin address under the control of BitGo, where they will be blocked and protected.
- Then an order is issued to issue wBTC for the same amount as the deposited Bitcoins.
This last step takes place in the Ethereum blockchain thanks to smart contracts, both when buying wBTC and vice versa.
To ensure transparency, the wBTC has a public application book where you can check the number of blocked Bitcoins, as well as the number of issued wBTC. You can also see transactions and even evidence of the presence of tokens with their addresses and amounts blocked in them by the PTC.
To create a wBTC, you need at least 6 confirmations, and for their withdrawal – 25 in the Ethereum network.
Creating a wBTC requires completing the KYC/AML process, so you will need to provide your personal data. However, there are some platforms, such as Curve or Bamboo Relay, that allow for decentralized purchases.
System roles
The system consists of 4 roles:
- Custodian: BitGo will store all the Bitcoins that you send to its disposal.
- Trader: Kyber and Republic Protocol are the ones who issue and burn wBTC tokens.
- User: Holders of the wBTC token.
- wBTC DAO Member: Participants in managing the protocol that makes the use of wBTC possible.
System management
The aforementioned users participate in token management by providing two things:
- They leave the most important parts of the system in several hands, for example, custody in the hands of BitGo.
- This allows you to gradually expand the management. When the project was just beginning, there were only three participants in it, but today there are more than 40 of them.
All processes are controlled by smart contracts with multiple signatures, so decisions are made by voting, and only those that have the necessary level of votes are taken
Despite more than 40 project members, only 16 have real influence on the platform: Airswap, Compound, DDEX/Hydro, Dharma, MakerDAO, Gnosis, theocean, Set Protocol, Blockfolio, OmiseGO, GOPAX, Loopring Protocol, Cyber Network, Bitgo and Republic Protocol.
The DAO functions can be divided into 3 parts:
- Monitor and verify the development of smart contracts that manage the wBTC.
- Verification and audit that the issue of wBTC tokens corresponds to the BTC blocked by BitGo in a multi-signature wallet designed to block funds in the system.
- Serves as the custodian of wBTC smart contracts. Changes in smart contracts cannot occur without the approval of the majority of the DAO members.
Advantages and disadvantages
Benefits include:
- Combining the huge economic potential of Bitcoin with the developing ecosystem of DeFi Ethereum.
- As an ERC-20 token, it can be quickly deployed on various platforms, as well as used in atomic swaps and sidechains.
And disadvantages:
- This is a centralized escrow system.
- This does not solve the scalability problems in the respective networks, and may even exacerbate them.
Some usage examples
Among the numerous examples of the use of Wrapped Bitcoin, the following can be distinguished:
- DEX can benefit from creating wBTC pairs to simulate the Bitcoin market in their system.
- Using wBTC with atomic swap and sidechain allows you to improve trading between different cryptocurrencies. We can convert wBTC to any ERC-20 based token.
It is worth noting that the cost of these operations should be lower than on a centralized exchange. Although the cost of Ethereum gas and other variables that may affect the final cost should also be taken into account.
Wrapped BTC is trading at $42,486, as is Bitcoin.
Javier Molina, an expert and lecturer in cryptocurrency investment courses, explained about the smart contracts in Bitcoin offered by Wrapped BTC that this is not the purpose of the Cue Ball.
“Why is there so much interest in connecting Bitcoins with smart contracts? Very simple: make them more useful. So that they can interact in a DeFi environment in a simple way.
This, of course, is not the purpose of BTC. Its goal is to become a means of decentralized exchange of values, but when the time comes, we humans always try to use all kinds of tools.
Naturally, many people are interested in the question: can the fact that personal information is required to work with Wrapped BTC become an obstacle? Won’t this be the reason that staunch defenders of the privacy offered by Bitcoin will refuse the possibility of using their tokens in smart contracts?
Here we return to the eternal debate about privacy and disintermediation. This was definitely not in the minds of the creators of the project””