Key Takeaways
Wrapped Bitcoin (WBTC) is a token that represents Bitcoin (BTC) at a 1:1 ratio.
It allows people who own Bitcoin to use it on other blockchains and their decentralized finance (DeFi) platforms.
WBTC is backed by actual Bitcoin held in secure storage. It’s available on multiple chains, including Ethereum, BNB Chain, Solana, TRON, and Base.
You can use WBTC for lending, borrowing, earning interest, or trading within DeFi apps.
Introduction
Bitcoin is the first and most popular cryptocurrency, known for being secure and decentralized. However, Bitcoin’s blockchain doesn’t support certain financial applications that are mostly built on smart contract platforms like Ethereum, BNB Chain, and Solana.
Wrapped Bitcoin (WBTC) solves this problem by allowing Bitcoin to be effectively used on other networks. This means Bitcoin holders can access a wider range of decentralized applications and financial services without needing to exchange their BTC for a stablecoin or another cryptocurrency.
What Is Wrapped Bitcoin (WBTC)?
Wrapped Bitcoin, or WBTC, is a tokenized version of Bitcoin that can be used on other blockchains. In other words, each WBTC token represents one BTC held in reserve by custodians. For every WBTC issued, one BTC is stored by trusted institutions. Because of this, WBTC lets Bitcoin holders interact with decentralized apps (DApps) and exchanges on multiple networks.
How Does Wrapped Bitcoin Work?
When someone wants to get WBTC, they request it from an authorized merchant. The merchant collects necessary identity information from the user (KYC and AML procedures), receives Bitcoin from the user, and then requests the custodian to mint an equivalent amount of WBTC tokens on the target blockchain.
The custodian verifies the Bitcoin transaction, which typically requires confirmations on the Bitcoin network, and then mints the WBTC tokens to the merchant’s address. The merchant then transfers tokens to the user.
To convert WBTC back into Bitcoin, the merchant burns the user’s WBTC tokens by calling the burn function on the token contract. After the burn is confirmed on the blockchain, the custodian releases the corresponding amount of Bitcoin back to the merchant, who then transfers it to the user.
Security measures include:
Cold storage: Bitcoin is held offline by custodians to protect against hacking.
Multi-signature wallets: Multiple keys are needed to move Bitcoin reserves, enhancing security.
Public transparency: The total supply of WBTC and Bitcoin reserves are visible on blockchain explorers and audited regularly.
However, if you don’t want to go through the process of wrapping and unwrapping, you can simply trade your BTC for WBTC via the Binance exchange or Binance Wallet.
Why Use Wrapped Bitcoin?
Access DeFi and DApps across multiple chains
Most DeFi services like lending, borrowing, and yield farming are built on networks like Ethereum, BNB Chain, and Solana. By holding WBTC, Bitcoin owners can use their assets directly in these applications without having to sell or trade their BTC.
Faster and more flexible transactions
Compared to Bitcoin’s base layer, WBTC transactions on Ethereum and other blockchains can be faster and more cost-effective, especially when network scaling solutions or sidechains are involved.
Diversify your collateral
Initially, most DeFi protocols accepted only Ethereum’s native token, ETH, as collateral. Using WBTC as collateral adds an uncorrelated asset to the mix, helping users manage risks more effectively.
What can you do with Wrapped Bitcoin?
Lending and borrowing: You can deposit WBTC as security to borrow other cryptocurrencies or stablecoins on platforms like MakerDAO and AAVE.
Earn interest: Provide WBTC to liquidity pools and earn rewards or interest through yield farming.
Margin trading: Some platforms allow you to use WBTC when trading with leverage.
Governance: Some projects offer governance tokens to WBTC users, letting them vote on decisions.
How to Get Wrapped Bitcoin
There are multiple ways to get WBTC:
Crypto exchanges: you can trade between BTC and WBTC using exchanges like Binance or via the Binance Wallet.
Official merchants: Some authorized merchants can help you swap BTC for WBTC. For larger amounts, you might need to find a custodian focused on institutional clients.
DeFi apps: Some decentralized protocols let you swap or mint WBTC directly inside their apps.
Safety and Transparency
WBTC’s system balances usability with security by relying on a federated custody model. Custodians hold Bitcoin responsibly under strict protocols, and minting tokens requires both custodian and merchant approval, preventing unilateral control over token creation. The entire network is governed by a multi-signature DAO that collectively manages protocol changes and participant membership to ensure decentralization and accountability.
Quarterly third-party audits publish proof of reserves, confirming that each WBTC token is backed by real Bitcoin. All minting, burning, and transactional data are publicly available, fostering trust and transparency.
Fees and Transactions Costs
Transferring WBTC between wallets generally requires only blockchain network fees (e.g., Ethereum gas fees). Minting (wrapping) and burning (unwrapping) WBTC involve additional custodian and merchant fees, which vary depending on the service provider.
Limitations
While WBTC has many benefits, there are some things to be aware of. The reliance on custodians for Bitcoin reserves introduces a level of risk. Despite WBTC’s decentralized structure, it’s significantly more centralized than Bitcoin. Users must trust the custodians not to mishandle the reserves.
Also, the process of wrapping and unwrapping Bitcoin might involve fees and may take a while to conclude, so it’s better to plan transactions ahead of time, especially during periods of network congestion or high demand.
Closing Thoughts
Wrapped Bitcoin makes it possible to bring Bitcoin’s value into Ethereum, BNB Chain, Solana, and many other blockchain ecosystems. It allows Bitcoin holders to use their coins in new and creative ways without letting go of their BTC, connecting Bitcoin with a broader range of decentralized applications and financial services.
