Hi Publish0x community! Welcome back in this new article of my “Easy & Short Cryptocurrencies Made Accessible” area.
In this article we talk about more features of Wrapped Bitcoin!
In the last E&S article I introduced you Wrapped Bitcoin (WBTC) and I said that is an ERC-20 token issued with a dedicated smart contract that allows its supply to be varied so that its value is constant at 1 Bitcoin. Specifically, every time a bitcoin (BTC) is immobilized, 1 Wrapped Bitcoin token (WBTC) is issued.
How does the wrapping process work?
- A merchant sends a BTC amount to the custodian for the wrapping token minting process.
- The custodian then creates WBTC on Ethereum based on the BTC amount sent.
- When WBTC needs to be exchanged back for BTC, the merchant sends a burn request to the custodian and the BTC value is released from the reserves.
Main features of Wrapped Bitcoin
There are several interesting features of Wrapped Bitcoin, not for investors, who as we will see later have greater agility in operating with the classic version anyway, but for projects that by relying on the Ethereum blockchain can finally access liquidity in Bitcoin.
- Stable Bitcoin: In the sense that the price is always replicated, almost perfectly. Why does this happen? Because the moment there is a deflation between the price of WBTC and BTC, it would be enough to buy the former, liquidate it, and then sell the resulting Bitcoin to have an economic advantage. In markets as efficient and liquid as cryptocurrency markets, it is very difficult for such things to happen. We can therefore regard Wrapped Bitcoin for all intents and purposes as an exact replica of Bitcoin, a kind of stable coin that is pegged to the value of BTC.
- ERC-20 token: That is, of the type that can run on the Ethereum blockchain. This allows liquidity in BTC to be accessible even through a project that is not compatible. The implications for smart contracts and decentralized Apps are huge and this is the reason why WBTC has become so popular in recent months.
- Bridge: The great challenge of the present and the future of the cryptocurrency world is cross- and integrated operations on different blockchains. Wrapped Bitcoin works precisely to provide this specific inter-operability, succeeding brilliantly both on the technical side and instead on the security side. As we will see later, the BTC representing the circulating WBTCs are guarded, and verification of existence and ownership is in the public domain.
Risks of Wrapped Bitcoin (wBTC).
Unfortunately, yes, as with so many other things, WBTC has risks.
The first critical issue lies in the fact that bitcoins are deposited to the custodian. In this case one can be quite comfortable about capital flight. However, there remains a (very low) risk associated with any external attacks.
The same applies to cryptocurrency bridges. However, this eventuality is more likely.
We have experienced firsthand the effects of an attack on Wormhole Bridge, one of the platforms considered best by the crypto community. We should therefore be aware that in the event of a successful offensive, bitcoins "parked" at a bridge would be at risk of falling into the hands of malicious attackers. Or the bridge could have technical malfunctions that go to compromise the funds.
Finally, even wrapped bitcoins invested on DeFi platforms would have risks related to attacks, smart contract problems, and bugs.
Have you already used wBTC into DeFi?
Next Sunday I’ll introduce to you a new cryptocurrency.
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