Over the past few years, cryptocurrencies have gained immense popularity around the world. While there have been a lot of ups and downs in the industry, the recent acceptance of cryptocurrency by the Government of India has had a positive impact upon the market. Investors were previously feared of Government’s stance regarding the digital, blockchain-based currency. But since February 1, 2022, prices of tokens such as Bitcoin and Etherium have surged by over 10%. However, not that the income generated via trading cryptocurrency will be taxed, people are want to know more about the technology and different types of digital currency such as Wrapped Bitcoin and Wrapped Ethereum.
Bitcoin and Ethereum are cryptocurrencies that run on blockchains. Now, different blockchains have different functions, features, and protocols. Because of this difference, they are not able to interact with each other. While this increases the security of a blockchain-based digital asset, it creates immense difficulties for the development of an interoperable exchange or system of cryptocurrencies where the data of one crypto gets transferred into another crypto.
The problem with native Bitcoin and Ethereum tokens
However, for decentralized finance to exist, the exchange of information from one to another cryptocurrency is crucial. Some recent blockchains like Polkadot have tried to solve the interoperability issue, but the industry at large needs to overcome the communication issue between the oldest and the biggest cryptocurrency networks like Bitcoin and Ethereum so that it can be easy for decentralized exchanges to handle such transactions.
What is Wrapped Bitcoin?
This is where Wrapped cryptocurrency comes in. In simple words, a Wrapped token represents a cryptocurrency based on a separate blockchain and is worth the same, but can be used on non-native blockchains and later, redeemed for the original cryptocurrency. Putting it in reference, Wrapped Bitcoin is a digital token that has the same value as one Bitcoin but is based on ERC-20 (Ethereum’s blockchain), which makes it usable on the Decentralised Finance ecosystem, which is largely based on the Ethereum blockchain technology.
- As mentioned in a research paper published by Binance in August 2020, Wrapped Bitcoin or WBTC is an ERC-20 digital asset backed by Bitcoin (BTC) in a 1:1 fashion.
- The digital asset functions with projects such as Kyber Network and REN being the Merchants who mint and burn WBTC tokens, and BitGo being the Custodian who holds BTC and the keys to mint WBTC tokens.
- When a user wishes to exchange BTC for WBTC, he/she will be required the send his/her BTC to a Merchant. The Merchant will initiate a WBTC mint request and send the BTC from the user to the Custodian. The Custodian will then mint the corresponding WBTC, which will be subsequently transferred to the user via the Merchant.
- When a user wishes to redeem his/her BTC with WBTC, the Merchant would communicate with the Custodian and transfer the user’s BTC back to him/her, while the WBTC token will be burnt.
What is Wrapped Ethereum?
For those wondering about what is wrapped Ethereum is – it is a tradable version of ETH that is compatible with the decentralized finance protocols. This has been created as the native form of Ethereum does not support the ERC-20 standard, which is very efficient and fast for Decentralized Finance ecosystems. With wETH, investors can trade directly in other Ethereum-based altcoins and pledge their funds into Decentralized Exchanges that function on ETH protocols.
Why should one use and invest in WBTC or wETH?
- As mentioned on a website called wbtc.network, WBTC brings greater liquidity to the Ethereum ecosystem including decentralized exchanges.
- Wrapped Bitcoin converts Bitcoin into an ERC-20 based format, which can also be used to create smart contracts.
- With Wrapped Bitcoin based on ERC-20 blockchain technology, exchanges, wallets and crypto-based payment apps only need to handle an Ethereum node, which makes it easier to manage transactions occurring on the decentralized finance ecosystem.
- The current market cap of Wrapped Bitcoin is Rs. 812.4B and there are more than 262.0K WBTC is circulation as of now, according to Coinbase.