What Is Wrapped Bitcoin (wBTC): How Does It Work?

An ERC-20 Token wBTC brings Bitcoin to the Ethereum blockchain. This means that liquidity of the largest cryptocurrency by market cap can also be used on the Ethereum platform. Users and developers should be able to use BTC for dApps on the Ethereum blockchain. wBTC tracks the price of Bitcoin one to one and should be able to be used as a medium of exchange on decentralized exchanges (DEX).

Wrapped Bitcoin (wBTC) is a project of the BitGo developer, which has teamed up with Kyber Network and Ren. The aim was to achieve acceptance of Bitcoin on the Ethereum decentralized network. Since hype around DeFi, there has been a real use case that is making wBTC increasingly popular in the area of decentralized financial services.

So it’s time to take a closer look at Wrapped Bitcoin.

How Does Wrapped Bitcoin Work?

Basically, wBTC works like a classic stablecoin — only without the stability of value. A stablecoin is covered by reserves of a stable, regulated fiat currency. On the contrary, Wrapped Bitcoin is covered by real BTC reserves that are owned by BitGo.

Since wBTC value corresponds to a price of the cryptocurrency developed by Satoshi Nakamoto, one wBTC always corresponds to exactly one BTC in terms of price. The three founding members formed a DAO (decentralized autonomous organization), which continues to develop the project to this day. Several partner companies are involved in the DAO. These include custodian banks, which cover BTC reserves. Traders, in turn, are responsible for minting new wBTC and burning existing ones. Among the best-known partners, there are Curve, Swipe, UniSwap.

The idea behind Wrapped Bitcoin is to solve ever-increasing liquidity issues on the Ethereum network. At least since the rise of decentralized financial services (DeFi), this has become a serious problem. Accordingly, there was a need for another source of liquidity besides Ether (ETH). wBTC solves this problem by bringing a fast, inexpensive, and popular currency to the network with BTC.

The influence of DeFi sector is particularly evident due to the rapid increase in 2020. This year, users blocked almost 1,000 percent more wBTC in DeFi apps than in previous years. WBTC is now listed on many well-known stock exchanges. The best known include Binance, UniSwap, OKEx, and Huobi.

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