With the rise in transaction fees it has become extremely difficult to used bitcoin as our digital assets even though it is considered as the king of all the digital currency. This problem can be easily solved by the so called Wrapped Bitcoin(WBTC) making BTC more practical.
Thanks to ethereum blockchain which make this thing possible. WBTC Under the ethereum blockchain act as a connection bridge between the Bitcoin and DeFi ecosystem. This is the wonder of blockchain mechanism in cryptocurrency. Now lets understand the mechanim behind WBTC
What is Wrapped Bitcoin(WBTC)
In plane english as name suggest it is wrapping of Bitcoin with and Ethereum blockchain inorder to make it useable in the DeFi environment.
Wrapped Bitcoin is a tokenised form of Bitcoin, where the Bitcoin is converted into an ERC 20 asset on an Ethereum Blockchain. Just like in stable coin where DAI is backed by USD, WBTC is also backed by Bitcoin(BTC).
The most important feature of WBTC is it allowed us to acess the Ethereum Blockchain with BTC by acting as a bridge between them. It also allowes BTC users to trade BTC in a completely decentralised and trusted manner by interacting with the DeFi ecosystem.WBTC is governed by Multisig, where signature of all member are required in order to initiate the chain.
There are four participient involved in WTBC they are the custodian who hold the asset like Bitgo, Merchant and businessman who are responsible for KYC and identification of users like kyber and Ren, users who like to redemed and mint the WBTC and the DAO who are the custodian and merchant.
Mechanism behind WBTC
In order to convert BTC to WBTC users have to first request the merchant of WBTC by sending some BTC and completing the KYC and AML.
The best way is sending BTC in this case is through atomic swap as it require changing of changing of different asset from different blockchain.users can then send the BTC in exchange for ERC 20 token without needing to trust to any couterparty. They will send the token to the custodian(bitgo) who initiate the mint and create WBTC and further send to ETH address. Holder of WBTC will then send the token to the merchant either by atomic swap or directly.
The custodian like Bitgo will make a transaction on the wrapped contract and wait for ETH confirmation. Lastly it will send back to the merchant and will complete a seperate ETH transaction confirming the burn transaction.
WBTC as a bridge between Bitcoin and DeFi ecosytem
WBTC convert BTC in the ERC 20 format under the above mechanism. This helps in creating a smart contract for Bitcoin. Hence it make BTC used as a medium by of exchange allowing to take part in DeFi ecosystem.
So the main advantage of WBTC is instead of converting BTC to other ERC token it can now mint WBTC and join the DeFi family. This also means we can now trade BTC in a completely decentralised way through DeFi plaform like kyber network and uniswap withouth relying on centralised ecxhange. In addition to this WBTC can also be used to earn interest on DeFi protocol like Compound.
A boon to DeFi and ETH ecosystem.
Knowing its advantage and useful area the market is beginning to take interest on WBTC.Since WBTC can bring greater liquidity to the ETH and DeFi ecosystem, and also to the Decentralised exchange(DEX) the Maker(MKR) governance has approved WBTC as there collateral asset in the Maker protocol.
Making it possible to unlock DAI using BTC. This makes WBTC the second most valuable collateral in the DAI ecosystem as it could reduced their rely on Ethereum.
WBTC is also one of the most fastest growing protocol on kyber network. Recently in May 2020 cointelegraph had reported of minting 1000 WBTC on ETH network, bringing the total BTC locked in WBTC token to 2300. Thus the system behind this project is to mint WBTC everytime BTC is taken in, and to burn WBTC everytime BTC is redemed.
Even though there is a concern about centralisation in ETH ecosystem as it involved a centralised custodian like Bitgo. WBTC is lot more userfrindly because only a simple ERC20 wallet is all we need to store the WBTC. This project all also gives room for those who only hold BTC to join the DeFi Revolution.