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Wrapped Bitcoin (WBTC) is a tokenized version of Bitcoin, equal to it in price,  that runs on the Ethereum blockchain.

WBTC is compliant with ERC-20 — the basic compatibility standard of the Ethereum blockchain — allowing it to be fully integrated into the latter’s ecosystem of decentralized exchanges, crypto lending services, prediction markets and other ERC-20-enabled decentralized finance (DeFi) applications.

WBTC is also backed by Bitcoin at a 1:1 ratio via a network of automatically monitored merchants and custodians, ensuring that its price is pegged to Bitcoin at all times and allows users to transfer liquidity between the BTC and the ETH networks in a decentralized and autonomous manner.

Why Use Wrapped Bitcoin?

By “wrapping” BTC in the ERC-20 standard, WBTC enables full integration of a Bitcoin-like asset into this advanced environment of financial decentralized applications, bringing along the immense liquidity associated with the BTC market.

In addition, Wrapped Bitcoin makes the job significantly easier for exchanges, wallets and payment services that work with Ethereum: instead of having to run two separate nodes for ETH and BTC networks, they can support WBTC operations with just an Ethereum node.

Finally, Ethereum blockchain’s faster average blocktime — about 15 seconds vs 10 minutes respectively — increases the speed with which WBTC can be transacted, compared to actual bitcoins.

How WBTC Works?

Wrapped Bitcoin uses a fairly simple model in which a custodian or group of managers hold bitcoin and create wBTC. Every wBTC created represents one “real” bitcoin — that is, the original, un-tokenized BTC — in the custodian’s vault. Once created, the process can be reversed and wBTC can be redeemed for real BTC. Wrapped Bitcoin — or wBTC — is thus far the most dominant and valuable form of tokenized Bitcoin.

In this way, wrapped bitcoin is similar to a stablecoin pegged to fiat currency in a 1:1 ratio. The benefit of wrapping bitcoin is that this process is a centralized, trusted approach that may be, and often is, compliant with financial regulations. Once wBTC is created, it functions just like any other ERC-20 token. Some consider this centralized approach to bringing bitcoin into the Ethereum ecosystem to be contrary to the decentralized and permissionless ethos of Bitcoin and cryptocurrency, broadly.

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