Wrapped Bitcoin Use Case
There is a lot you can do with your Bitcoin apart from serving as a store of value for you. Your Bitcoin can be wrapped into an ERC-20 token to enable you to partake in the various opportunities that abound in the DeFi ecosystem.
Your wrapped bitcoin (WBTC) enables you to borrow, lend, or stake on various DApps running on Ethereum network, without converting it to ETH.
What is Wrapped Bitcoin?
Just as Stablecoins like Tether (USDT) and USD Coin (USDC) are pegged to dollars, so is one WBTC pegged to one BTC. It is just a wrapped version of your existing bitcoin.
Wrapped Bitcoin (WBTC) was introduced in 2019 to make it possible to use bitcoin on various DApps and DeFi protocols running on Ethereum blockchain. It was created by a community of three companies, including BitGo, Kyber Network and Ren, to help bitcoin owners engage in DeFi activities while retaining the price action of their bitcoin.
The Ethereum blockchain is mainly used for building DeFi applications (DApps) and carrying out DeFi transactions. Due to this, it has been impossible for bitcoin owners to interact with DeFi protocols because bitcoin can’t be used on Ethereum blockchain.
With the invention of Wrapped Bitcoin, Bitcoin holders are now able to partake in yield farming, lending, margin trading, and several other DeFi transactions.
How does Wrapped Bitcoin/ wBTC work?
A custodian monitors the transaction between BTC and wBTC. They lock an equal amount of Bitcoin as the number of tokens wrapped. This custodian could either be a DAO (Decentralized Autonomous Organization) or a smart contract.
In order to obtain wBTC, you must get it from a merchant like Kyber, DeversiFi, or Airswap. Then they will carry out Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) checks to validate your identity. The merchant then makes a transaction with a custodian, who mints wBTC tokens and sends them to the merchant.
You will then be able to swap your bitcoin for wBTC with the merchant through a centralized exchange (CEX), decentralized exchange (DEX), or atomic swap. Only merchants can exchange your wBTC for BTC.
Many DApps, games, decentralized exchanges (DEXs), and various smart contract-driven platforms operate on Ethereum blockchain. You have to convert your BTC into WBTC before you can interact with these different platforms. Here is what you can do with your wrapped Bitcoin.
Wrapped Bitcoin Use Case: Margin Trading Wrapped Bitcoin/ wBTC
If you’re an advanced trader who is interested in margin trading to get leveraged returns, you can trade your wrapped bitcoin on margin while retaining the price action of bitcoin. WBTC also gives you an opportunity to lend your wrapped Bitcoin to other margin traders in a DeFi protocol.
A platform like Fulcrum allows WBTC holders to margin trade ETH, stablecoins, and other ERC-20 tokens. This is one way to generate a lot of profit on WBTC. However, it is important to note that margin trading comes with a lot of risks.
Wrapped Bitcoin Use Case: Provide Liquidity to Decentralized Exchanges
It’s no doubt that bitcoin has the highest number of holders or investors. Wrapped bitcoin makes it possible for a large amount of liquidity to flow from bitcoin holders into various DEXes so as to keep the exchange running adequately.
Wrapped bitcoin owners can pool their assets in a DEX’s smart contract to provide asset liquidity for traders to swap between currencies easily. Providing liquidity offers so much speed and convenience to a decentralized exchange. Some of the decentralized exchanges that you can provide liquidity to are Uniswap and Sushiswap.
These protocols have wBTC pools which you can provide liquidity to in exchange for some rewards. For instance, the biggest DeFi farm right now per total value locked (TVL) is SushiSwap’s WBTC/ETH pool. If you are a liquidity provider with your wBTC on this pool, you can participate in its 20% yearly return or reward. Kindly note that this expected ROI could rise or fall for this farm. More profitable liquidity pools are expected to be launched soon on Sushiswap.
Wrapped Bitcoin Use Case: Yield Farming and Interest
There has been a growing demand for wBTC lately by bitcoin users seeking high-yield platforms. According to a report by Genesis, more than half of the wBTC in circulation are locked up in Compound, a DeFi lending protocol.
WBTC holders can earn interest on their wrapped Bitcoin by investing in a liquidity pool that has attractive interests. Many liquidity pools use an algorithm based on supply and demand to determine the interest rates offered.
Rather than moving from one liquidity pool to another to find the best possible interest rate, a platform like Unagii harvests the best yields automatically. All you need to do is deposit some wrapped Bitcoin and Unagii will find the best pool with the best interest for you.
Wrapped Bitcoin Use Case: Lend your WBTC
WBTC is earning an average of 5.6% APR on Compound, which is a lot greater than the interest paid by most banks on savings accounts. Users who currently hold BTC can easily wrap their BTC into wBTC and could then deposit it into a lending pool on Compound protocol to earn interest.
In addition, lending assets like WBTC on Compound allows users to earn COMP tokens, the governance token that gives holders a right to vote on decisions on Compound protocol. The Comp token is a reward for lending assets to the protocol because, the more wBTC you lend, the more COMP tokens you get.
WBTC holders also earn rewards by lending out their WBTC to the protocol so that other users can use it for margin trading.
Wrapped Bitcoin Use Case: Borrow Against Your WBTC
One of the easiest things you can do with your WBTC is borrow against it in lending protocols like Maker and Compound, without third party paperwork and interference.
For instance, if you want to get a loan of $30,000 to sort out some debts, you can deposit some wBTC as a collateral for the loan on a protocol like Compound. Then you can borrow the desired loan as a stable coin. You can also steadily and easily repay the debt. .
In other words, if you want instant liquidity or purchasing power without sacrificing your BTC holdings, you can borrow against WBTC in DeFi. You can even use your borrowings to buy more WBTC!
In addition, the COMP tokens that lenders earn in the compound protocol, borrowers get some too. Whenever a borrower pays an interest on a loan, they earn some rewards. This has increased the demand for borrowers to pay for WBTC loans on Compound, which leads to an increase in how much lenders earn.
Wrapped BTC and other Tokenized versions of BTC
Apart from wBTC, other tokenized versions of bitcoin exist. For instance, a crypto exchange, Huobi Global, launched its own version of wrapped bitcoin called Huobi BTC (hBTC), in 2020. Every hBTC is pegged to BTC.
If you want to buy hBTC, you need to deposit BTC into your Huobi Global exchange account and then withdraw hBTC. You can reclaim your BTC by depositing your hBTC into your account and withdrawing BTC. This method contrasts with that of wBTC, which is only redeemable by merchants.
Another tokenized version of BTC is renBTC. It was launched in 2020 and provides a more decentralized alternative to wBTC and hBTC. In order to own some renBTC, you must send bitcoin to Ren’s protocol, which will lock it up in a smart contract. The protocol will validate the details of the transaction and return a minting signature. The mining signature will be used to mint renBTC, an ERC-20 token pegged to bitcoin. Ren protocol also lets you burn your renBTC to redeem the bitcoin you locked up.
Other wrapped bitcoin tokens in addition to those include :Synthetix’s sBTC, Keep Network’s tBTC, Tokenlon’s imBTC, BoringDAO’s oBTC, pNetwork’s pBTC
At an advanced level, others include, PieDAO’s BTC++, ACoconut’s acBTC, and mStable’s mBTC are all backed by many wrapped versions of bitcoin. For instance, acBTC is backed by sBTC, wBTC, pBTC, and imBTC.
What is the Future of Wrapped Bitcoin?
Due to the great benefits that wBTC has offered in the DeFi space, developers are working hard to advance the uses further. Currently plans are in place to introduce wBTC into more complex decentralized finance uses.
For example, you could be able to stake your wBTC and then, instantly, re-staking your rewards in a separate pool. Developers are also working on DeFi platforms that pay staking rewards directly with crypto rather than DeFi tokens. You could stake wBTC but receive ETH directly as a staking reward.
The use of wrapped bitcoin is an innovative breakthrough in the world of DApps. It enables holders of wrapped bitcoin to conveniently trade and earn on Dapps with their wBTC. Hence, WBTC could be referred to as one of the building blocks for DApps.
In conclusion, in the cryptocurrency space, there have been existing demands for effective bridges between major blockchains such as Bitcoin and Ethereum. As we’ve seen, WBTC is meeting this demand successfully.
Several people lend on DeFi and earn passive income by doing so. While this process is simple enough to do with native ERC-20 tokens, bitcoin holders can’t partake in this with bitcoin. Such users could retain their money in bitcoin by wrapping it into an ERC-20 token, wBTC, so as to reap the benefits of lending in DeFi.