What is a Wrapped Bitcoin (wBTC)

Bitcoin (BTC) has always stood out as the most reliable and valuable asset in cryptocurrencies. But it runs on a network that cannot handle complex financial apps. Meanwhile, a strong and quick DeFi ecosystem has grown on another blockchain, Ethereum. There, people can lend money, borrow it, trade assets, and even earn yields.

That's when Wrapped Bitcoin, or wBTC, stepped in to help.

What are Wrapped Tokens

A wrapped cryptocurrency is a digital asset that acts as a copy for your original asset (e.g., Bitcoin), but issued on a different, more functional network (e.g., Ethereum). This copy is always pegged to the value of the original asset at a 1:1 ratio. It is only issued after an equivalent amount of the original asset is securely locked by a special custodian.

How Wrapped Tokens Work

People often wonder about wrapped tokens and how they actually function. The whole idea behind them relies on a solid promise. Each wrapped token gets backed by the real original coin in a one to one ratio.

Three Key Participants in the Ecosystem

Wrapped tokens rely on a few centralized organizations to keep the chain moving. The entire protocol runs on a custodial model. That model breaks down into three major roles that handle different parts of the process.

1. Custodian. This is the entity physically keeping the Bitcoin being locked up. To some degree, the custodian could be thought of as the digital safe for all this to occur within. The keys used to mint new tokens are kept with this custodian. So are the processes for destroying, or burning, the old ones when necessary. The core role is to ensure the 1:1 ratio is kept in place each and every time.

2. Another important role in the system is occupied by merchants. They represent a kind of intermediary, normally big exchanges or specific projects. They take tokens from everyday users and pass along requests to the custodian. The request is to issue new wrapped tokens in exchange. If you ever want to wrap your Bitcoin or unwrap it later, you go through one of these merchants to get it done.

3. Then, there's the DAO, which provides organizational governance. They are responsible for overseeing the entire protocol on a day-to-day basis. The group relies on a multisignature system for security. That means big decisions, such as adding a new merchant or changing the rules, need agreement from several parties. The idea here is to avoid the possibility of one company fully controlling the process.

The “Wrapping” and “Unwrapping” Process

The process of converting tokens to wrapping tokens and vice versa is easy but highly controlled.

Wrapping process (creation):

1. You send your regular tokens to a merchant (intermediary).

2. The merchant, after receiving the regular tokens, requests a new issuance of tokens from a custodian.

3. The custodian locks your tokens in their reserve wallet. This collateral is kept in “cold storage”- that is, a highly secure vault.

4. Once the lock is confirmed, an equal amount of wrapping tokens (ERC-20 token) is created on the Ethereum network by minting, and sent to your wallet.

Deployment process (getting back):

1. You send your wrapping tokens to the Merchant, requesting original tokens in return.

2. Your wrapping tokens is being burned on Ethereum.

3. This is followed by the custodian seeing confirmation of the destruction of the tokens and, from the reserve, unlocking and sending to you the corresponding amount of original tokens.

Trust Guarantee

Because the processes involve a third party-the Custodian-users need to be sure that their Bitcoin is safe, that it will not vanish. Herein comes a Proof of Reserves mechanism.

The PoR is a public audit that utilizes cryptography in order to confirm that the Custodian indeed holds enough regular token to cover all wrapping tokens issued in circulation.

Transparency: the custodian publicly discloses the addresses of its wallets holding the regular token reserves. Since the regular token blockchain is transparent, the existence of those funds can be independently verified by anyone.

1:1 verification: the PoR ensures that, when one wrapping token is issued, a corresponding regular token will be locked in reserve. It prevents the custodian from issuing a token without collateral, thus giving the basis for trust.

What is a Wrapped Bitcoin

The main differences between Bitcoin and Wrapped Bitcoin come in with where they operate and what they can do.

Bitcoin is the original cryptocurrency, and it only runs on its own blockchain network. Wrapped Bitcoin (WBTC) adheres to the ERC-20 standard, which is a universal Ethereum token format. This opens the way for WBTC to connect with thousands of apps and wallets already out there in the Ethereum world.

The centralized nature of WBTC—particularly its reliance on BitGo and the possibility of asset freezing—sparked the creation of more decentralized Bitcoin-wrapping alternatives like tBTC and BTC.b, which aim to act as trustless bridges using cryptographic methods or decentralized signatory networks; however, despite their ideological alignment with Bitcoin’s principles, WBTC remains dominant thanks to its superior liquidity and efficiency.

Another Examples of Wrapped Tokens

Wrapping is not only limited to Bitcoin; the idea of "wrapping" is used as a basic principle for building a unified and interconnected Web3 network.

One of the most popular wrapped tokens is the Wrapped Ether, WETH. WETH is an ERC-20-compliant version of ETH. Therefore, it can combine with DEX protocols and the lending protocols that are built for ERC-20 tokens. Unlike WBTC, it is much simpler to wrap ETH into WETH because this happens through a smart contract on the same network, and there is no requirement for a third-party custodian.

Examples of other wrapped tokens:

• WBNB: Wrapped BNB token.
• WMATIC: Wrapped Matic token.
• WCHZ: Wrapped Chiliz token.
• WXTZ: Wrapped Tezos (XTZ) token.

Wrapped Bitcoin is among the most important technical solutions in the world of digital currencies. Indeed, this solution resolved the problem of the isolation of the most expensive asset and allowed trillions of dollars of Bitcoin to fuel the development of decentralized financial systems.

We hope that after going through this article, you now know what is wrapped Bitcoin. But does the idea of wBTC contradict the very principles of BTC centralization?