If you’re new to crypto you might have come across the term Wrapped Bitcoin. But what is Wrapped Bitcoin and what is it used for? Well, if this is you, then you’re in luck. In this article we’re going to discuss what wrapped Bitcoin is and how you can access it.
What is Wrapped Bitcoin?
Wrapped Bitcoin is an ERC20 token and represents Bitcoin on the Ethereum network. One Bitcoin can be exchanged for 1 Wrapped Bitcoin in order to use Ethereum wallets, Dapps and access the DeFi space. In other words the “wrapping” or conversion of Bitcoin allows you to access the Ethereum network. It was cooperatively started by Bitgo, Kyber Network, and Ren Protocol in 2018. The symbol of Wrapped Bitcoin is wBTC.
In terms of value, one wBTC equals one Bitcoin. Having a BTC backed token on the Ethereum network allows for holders of Bitcoin to take advantage of decentralized finance. However, there will likely be a large crowd of Bitcoin holders who will never use wBTC because of their resolve to not use any networks other than Bitcoin itself.
And this makes sense because there are numerable risks with using DeFi applications. For example, it’s much safer to keep BTC on a hardware wallet then using Dapps like MetaMask to trade your Bitcoin that has been converted to wBTC. There are a number of reasons why a Bitcoin holder might be interested in trading his or her Bitcoin for wBTC. As we mentioned, there are a number of incentives in participating in decentralized finance.
Using Wrapped Bitcoin for DeFi
For example, one can loan their wBTC on Oasis and receive DAI stable coins in return therefore receiving a form of interest on their Wrapped Bitcoin.
Why would an investor want to do this? The same reason anyone takes out any loan in general – they need to pay their bills, but they don’t want to liquidate their investments. Additionally, one might want to leverage their tokens in order to buy an entry for a new ICO Initial Coin Offering) that they want to get their hands on.
There are also incredible lending protocols on DeFi such as AAVE and Compound where token holders can send their wBTC to a smart contract which allows other users to borrow your tokens. This yields an incredible opportunity to earn passive income on your wBTC that isn’t available on the Bitcoin protocol. However, as stated above, DeFi lending rewards come at a risk, so do your own research before you jump into the world of DeFi.
What are the risks of wBTC?
Just because one Bitcoin equals one wBTC doesn’t mean that they’re the same. One reason Bitcoin maximalists love Bitcoin so much is because of the security of the nework. Because DeFi is newer than Bitcoin, there are bugs and scams that can happen on DeFi protocols that don’t exist in the Bitcoin network. When you. lock up your wBTC in a lending protocol such as AAVE, this is much riskier than holding Bitcoin on a hardware wallet. Even a company as reputable as AAVE isn’t immune to being hacked. Of course, Bitcoin isn’t totally immune to danger either, but there’s no denying that using DeFi has significantly more risks than the Bitcoin protocol.
If you enjoyed this article, you might also want to check out What Is Karura? The DeFi Hub of Kusama.
This article is not financial advice. Please do your own research before purchasing cryptocurrency.
Aaron is passionate about blockchain and has been an investor in cryptocurrencies for the past years. He enjoys engaging with other people in the cryptocurrency community online, particularly on Telegram, and learning from experts.