Today we start to see another crypto. As probably have you already read from the title, we will talk about Wrapped Bitcoin (WBTC)!

In the last review, I talked about ApeCoin (APE), If you missed my last review, you can recover it here:

OVERVIEW

Let's start with the basic: what is a WBTC?

The project is part of the Wrapped Tokens initiative started by Kyber Network, BitGo y Republic Protocol. The initiative, which began on Jan. 24, 2019, sought to create a token representing Bitcoin within the Ethereum blockchain. The goal was to create a bridge that would allow Bitcoin users to inject liquidity into the greedy DeFi and DApp ecosystems that were emerging and growing at the time.

To achieve this goal, these three figures joined forces to create a centralized custody platform managed by BitGo, with which one could interact using a series of smart contracts or smart contracts on Ethereum. This created a federated governing body that could represent the token by giving a high degree of trust by decentralizing some token management parameters. In this way, all participants are assured that their money is not only safe, but also guarded by reputable entities in the ecosystem.

Wrapped Bitcoin (WBTC) 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. It is therefore effectively a stablecoin collateralized 1:1 with BTC, similarly as USDT is collateralized 1:1 with USD.

Image source: https://cryptoandfire.com/wrapped-bitcoin-review/

Why Wrapped Bitcoin?

The token was created because BTC can only be used on their native blockchain, which, however, as they do not support smart contracts, do not make DApp development possible. Since the Wrapped Bitcoin WBTC is an ERC20 token with the same value as BTC I can use it on Ethereum or Ethereum-compatible networks, thus on platforms such as Curve or Uniswap. In this way I can trade on the Ethereum blockchain but get exposure on BTC. I can then do farming, lending, trading and so on using BTC.

Bitcoin Wrapped and Bitcoin: what is the link?

It is actually a very close link, because each WTBC in circulation corresponds to one Bitcoin in custody. This leads to several very interesting features of WBTC:

• Full equivalence: What this means. It means that when we are in possession of a Wrapped Bitcoin or any fraction thereof, we can be assured today that we can convert it into the classic version, thanks to the intermediary role occupied by BitGo. This is why using WBTC is just as safe, in terms of value, as operating in BTC. Security is, of course, inextricably linked to the credibility that the intermediary has in this case. It might be complicated to trust a less transparent design. But with the current setup we have mathematical certainty that the underlying exists and that no fractional reserve system is being used. A huge step forward from several stable coins circulating pegged to fiat currencies.
• Representation: With such a system behind it, everyone can exchange WBTC with reasonable certainty that there is a Bitcoin behind it. And that means for a huge number of DApps, DEX, as well as smart contracts to be able to reference or use as collateral something that has the exact same value as Bitcoin and is also physically represented by it. With BTC remaining the best-capitalized cryptocurrency in the world, it is not hard to see how beneficial this is for these types of projects, as they include in the most interesting and vibrant circle in the crypto world, what is historically regarded as blockchain gold.

DEEPENING

In the previous section OVERVIEW 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.

Image source: https://cemac-eco.finance/bitcoin-satoshi-vision-price-on-april-1-2020-the-10000-at-your-fingertips/

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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