When my favourite crypto lending platform, Hodlnaut announced that it was accepting Wrapped Bitcoin into its fold and even offering a lucrative interest rate of 6.2% APY, it piqued my curiosity as I didn't know what Wrapped Bitcoin was all about. So this article involves me documenting my learning. I hope it will be of use to some of you out there.
Bitcoin vs Ethereum
In the midst of my research, I realized that before I went on to explore Wrapped Bitcoin, I must first understand the differences between Bitcoin and Ethereum. Thankfully, there's a succinct CNBC video that got me up to speed on the differences between these two popular cryptocurrencies. Although both Bitcoin and Ethereum function on blockchain technology, Ethereum's blockchain features a crucial component called the smart contract, which is not available on Bitcoin blockchain. When you are on Ethereum's blockchain, you will be able to leverage its smart contracts to program your digital assets and exchange not just money, but also things like property and stock. Hence, compared to Bitcoin which is first and foremost a payment technology, Ethereum boasts a wide array of real-world applications as it empowers you to conduct varied decentralized finance (DeFi) transactions that range from trading to banking and even gambling.
Bitcoin + Ethereum = Wrapped Bitcoin
Given Bitcoin's status as the granddaddy of all cryptocurrencies and Ethereum's extensive range of DeFi applications, three corporations BitGo Inc, Kyber Network and Ren (formerly Republic Protocol) collaborated together to come up with the concept of wrapped bitcoin in January 2019. Basically, wrapped bitcoin synergizes the best of Bitcoin and Ethereum and "wraps" Bitcoin so that users can use it as an ERC-20 token that can be harnessed on the Ethereum blockchain. This newly minted wrapped bitcoin will be securely kept by a custodian known as BitGo.
Now when you wish to carry out a transaction with a merchant that supports Ethereum, your wrapped bitcoin will be sent to his or her Ethereum's address. After the merchant redeems the desired amount of wrapped bitcoin (WBTC), the custodian burns the remaining WBTC and then returns the equivalent amount of bitcoin back to your account. Therefore, you benefit from the convenience and speed of Ethereum-based transactions without losing the value (and prestige!) of your Bitcoin assets. The best of both worlds, if there ever was one!
Wrapped Bitcoin Gaining in Popularity
According to a research study conducted by Arcane Research, about 189,000 Bitcoins are currently on the Ethereum blockchain, which represents more than 1% of the world's circulating supply of Bitcoins. This number apparently increased four times over the last year. This could be due to the falling prices of Bitcoin recently, which prompted many crypto investors to turn to such DeFi applications so as to secure better returns for their Bitcoin assets. Probably this is why Hodlnaut introduced WBTC to its mix of crypto offerings this month!
I hope my research has helped you understand certain key points about WBTC. But here is the million-dollar question: will you hold on to your Bitcoin or convert them to WBTC? Please let me know in the comments below.
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