What is Wrapped BTC (WBTC) and How to use it in DeFi
Thanks to the wonders of tokenization, bitcoin holders can deploy their digital gold (in tokenized form) in the fast-growing DeFi markets to earn double-digit yields. Wrapped BTC (WBTC) has emerged as the market-leading tokenized bitcoin asset, reaching the top ten digital assets by market capitalization in early January 2021.
In this guide, you will learn what WBTC is, how it works, how you can use it in the DeFi markets to earn investment income, and what other tokenized bitcoin alternatives are out there.
What is Wrapped BTC?
Wrapped BTC (WBTC) is an ERC20 token — backed 1:1 by bitcoin — that enables bitcoin holders to use tokenized bitcoin in Ethereum-powered decentralized applications and trade it on decentralized exchanges.
To tokenize BTC into WBTC, bitcoin holders need to use “merchants,” such as AirSwap or WBTC.cafe and their BTC will be held by a custodian.
The process to mint WBTC and receive the tokens works is as follows:
- A bitcoin holder accesses a merchant to start the transaction
- The merchant initiates a transaction to authorize the custodian to mint WBTC to the merchant’s Ethereum address.
- The merchant sends the bitcoin holder’s BTC to the custodian.
- Custodian waits for six confirmations of the BTC transaction
- Custodian creates a transaction to mint new WBTC tokens on Ethereum.
- The bitcoin holder requests WBTC from the merchant.
- The merchant performs required AML and KYC procedures on the bitcoin holder.
- The bitcoin holder and merchant perform an atomic swap or utilize an exchange with the merchant receiving BTC and the bitcoin holder receiving WBTC.
Conversely, Ethereum users can swap ETH, USDT, or any other Ethereum-based token to WBTC on a decentralized exchange like Uniswap or Kyber to gain access to the tokenized bitcoin asset.
Is Wrapped BTC “Real” Bitcoin?
Wrapped Bitcoin is not Bitcoin.
WBTC is an ERC20 token that operates on the Ethereum blockchain. While it’s backed 1:1 by bitcoin through the token’s minting mechanism, you are not holding actual bitcoin when you hold WBTC.
Many of Bitcoin’s features are lost following tokenization into WBTC, including:
- The security of the Bitcoin network
- The ability to make instant payments via the Lightning Network
- Some of Bitcoin’s privacy aspects
By turning BTC into WBTC, new possibilities emerge.
Most notably, the ability to take part in the growing decentralized finance market to earn yield on the “digital gold.”
As a result, DeFi users have been especially receptive to tokenized bitcoin.
Deploying Wrapped BTC in DeFi
Today, WBTC has a market capitalization of over $4.6 billion, making it one of the largest digital assets by total market value.
The parabolic rise of WBTC can be attributed to two factors: the booming DeFi market and the bitcoin rally.
.,mAs WBTC’s market capitalization chart shows, when the DeFi boom kicked off in mid-2020 — primarily powered by yield farming protocols — the amount of WBTC in issuance received a substantial boost, followed by a steady rise in line with bitcoin’s price rally.
What Can You Do With WBTC?
In today’s DeFi market, you can utilize WBTC in a number of ways, including:
- As collateral for securing crypto-backed loans
- To earn interest in decentralized lending pools
- To earn liquidity mining/yield farming revenues
- To margin trade on decentralized derivative exchanges
Ethereum-friendly bitcoin HODLers can use WBTC as collateral to take out crypto-backed loans to use for their business or to deploy leveraged crypto investment strategies, such as engaging in yield farming.
Conversely, WBTC holders can deposit their funds in a decentralized lending protocol as a liquidity supplier to earn interest. On Compound and Aave, for example, WBTC depositors currently earn 0.09% and 0.02% APY, respectively.
WBTC holders who are comfortable taking on more risk can deposit WBTC in liquidity pools to earn fees and liquidity mining rewards (typically in the form of protocol tokens). Recently launched protocols, such as Curve Finance and Harvest, for example, accept WBTC for its liquidity pools. While yield farming is much riskier than simply lending tokens, the expected APYs are also much higher.
Experienced traders can also use WBTC to margin trade on decentralized derivatives trading platforms, such as DDEX and Fulcrum. Instead of depositing bitcoin on centralized derivatives exchanges, traders can deploy WBTC on non-custodial, smart contract-powered derivatives trading applications to enhance fund security while trading.
WBTC Alternatives: renBTC and BTCB
Wrapped BTC is not the only tokenized version of bitcoin. In the top 100 digital assets by market capitalization, you will also find renBTC and BTCB.
Like WBTC, renBTC is an ERC20 token that represents bitcoin on the Ethereum blockchain. Launched by the Ren Project, a protocol that provides inter-chain liquidity for DApps, renBTC now has a market capitalization of $500,000. Similar to WBTC, renBTC is primarily used by DeFi investors on the Ethereum network.
BTCB is one of the fastest-growing tokenized bitcoin tokens, operating on Binance Chain as a BEP2 token and on Binance Smart Chain as a BEP20 token. At the time of writing, BTCB has a market capitalization of over $200 million, boosted by its popularity as a leading pegged coin in the growing DeFi ecosystem on Binance Smart Chain.
Arguably, the best way to tokenized BTC to turn it into BTCB on Binance Smart Chain is using Binance’s cross-chain asset conversion service, Binance Bridge.
Binance Bridge allows users to convert leading digital assets into pegged coins on Binance’s blockchains with only a few clicks.
BTCB holders can then deploy the BEP20 version of the pegged bitcoin token in Binance Smart Chain-powered DeFi apps to earn DeFi returns.
On Beefy Finance, for example, BTCB holders can earn over 12% APY — paid out in BTCB tokens — by simply depositing their funds into the protocol. For bitcoin holders who want to earn high yields while remaining exposed to the price developments of bitcoin, Beefy providers an exciting product.
Securely Store Tokenized Bitcoin in Trust Wallet
To securely store BTCB and any other tokenized bitcoin token, you can use Trust Wallet.
Trust Wallet is one of the world’s leading non-custodial, multi-currency crypto wallets that enables anyone across the globe to securely store digital assets and interact with Web3.0 applications directly within the app.
If you are looking to deploy tokenized bitcoin in a decentralized lending or trading pool, for example, you can simply open Trust Wallet’s in-app DApp Browser to access the protocol, and execute your transactions on-the-go, all while retaining complete control over your funds.
Download Trust Wallet now to start exploring DeFi and Web3.0.