Unot one of the most striking and controversial projects in the world of decentralized finance (DeFi) it is wBTC or Wrapped BTC. And it is that wBTC, is a ERC-20 token about the Ethereum blockchain that aims to: bring Bitcoin to the DeFi world.
For that, wBTC is a token that has been created to be exchanged with a value of 1: 1 with the Bitcoin. That is, to issue 1 wBTC it is necessary to block 1 BTC, and in the same way, by burning or withdrawing 1 wBTC we get 1 BTC in exchange. What is controversial in all this is that although wBTC is a widely used token in DeFi, its custodial operation makes this token a CeFi or Centralized Finance token.
Despite this, it allows us to do something that we normally cannot do with Bitcoin: Interact with the ecosystem of smart contracts de Ethereum, and with it the entire growing world of DApps and the DeFi that are being created in that blockchain.
Without a doubt, a very curious project that allows us to respond to the thousands of people who seek to transform their bitcoins into a dynamic financial and economic tool that leverages their positions. That is why we open this space for you to know this interesting project and everything it has to offer.
Getting to know wBTC
The wBTC project is part of the Wrapped Tokens initiative started by Kyber Network, BitGo y Republic Protocol. The initiative that began on January 24, 2019, sought to create a token that will represent Bitcoin within the Ethereum blockchain.
The goal of this was to create a bridge that would allow Bitcoin users to inject liquidity into the avid DeFi ecosystems and DApps that were being born and growing at that time.
To achieve this, these three figures joined their efforts to create a centralized custody platform managed by BitGo, with which it was possible to interact using a series of smart contracts or smart contracts on Ethereum. In this way, a federated governance body was created that could represent the token, giving a high degree of trust, while decentralizing certain token management parameters.
In this way, all participants are guaranteed that their money is not only safe, but is also guarded by renowned entities in the ecosystem. You can learn more about this project by reviewing its whitepaper.
But BEWARE! As we have said, this is a currency where they act as the central entity. That is to say, it is not a decentralized token in any way.
How does Wrapped Bitcoin (wBTC) work?
The way Wrapped Bitcoin (wBTC) works is quite simple. Basically what this system does is ask Bitcoin users to send their bitcoins.
First of all, we have a user interface that will allow us to make a deposit of BTC in exchange for wBTC. This system issues us a Bitcoin address that is under the control of BitGo who will receive the BTC from users interested in wBTC, blocking and guarding their holdings.
Once BitGo has the BTC in its possession, a wBTC issuance order is issued for the same amount of Bitcoin that has been locked in BitGo. This issuance of tokens happens in Ethereum and is possible thanks to the smart contracts that have been built for this purpose. That is to say, this issue must go to an Ethereum address, since wBTC is an ERC-20 token. In the same way, the opposite can be done, being able to convert wBTC into BTC.
To maintain transparency, wBTC has a public order book. From there you can check the amount of Blocked BTC and the amount of wBTC issued. It is also possible to observe the different transactions within the system. At the same time, you can also observe a token test, observing the addresses and the amounts of BTC blocked in said addresses, which makes the system quite transparent in this regard.
Of course, this is the basic operation of wBTC, since behind that much more is hidden and it is what we will know next.
Creation and burning of tokens in wBTC
Two of the most important tasks of wBTC is to create (minting) and burn (burning) wBTC tokens in such a way that the stability of the system is always perfect. To better explain the importance of these two functions, imagine the following scenario:
Pedro has decided to transform his bitcoins into wBTC and thus be able to participate in the project Compound.
In this way, Pedro enters the system and goes to one of the intermediaries that can offer him wBTC. This intermediary will allow you to send Pero your Bitcoin to a BTC address in the custody of BitGo. Once the BTC is sent, the intermediary will detect the transaction, wait for it to be carried out and confirm it, proceed to the issuance of wBTC in the same amount of BTC that has been blocked. So for example, if Pedro sends 1 BTC, the system will issue him 1 wBTC within the Ethereum blockchain.
At the end of his operations, Pedro can withdraw his wBTC and take it back to Bitcoin. At this point, the wBTC process is contrary to the issuance process, as the wBTC is taken and burned. With the burning of the wBTC, the broker orders the release of the BTC in the same amount of wBTC that has been burned in the direction that Pedro specifies. In this way, the system is balanced.
The above example is quite clear, to create wBTC you need to inject BTC, and when you withdraw wBTC, the injected BTC leaves the system and the wBTC ceases to exist.
Of course in this system every detail is taken care of to the maximum. For example, to create wBTC the software expects the transaction in question to have at least 6 confirmations. And the same happens when we withdraw wBTC, in this case, the software waits for there to be 25 confirmations in the Ethereum network for the withdrawal request to be taken as valid and at that point, the withdrawal and burning process of tokens begins.
Both situations are designed to prevent the system from being deceived through attacks such as double spending, and to ensure the irreversibility of said transactions.
Another important point within wBTC is that this system only allows the creation of wBTC after carrying out a KYC / AML process. Due to this, you must bear in mind that to participate in it you must give your personal data, and if you are a lover of privacy and anonymity it may not be the best option for you, as it could be DAI de MakerDAO. However, there are also some platforms that allow you to buy it in a decentralized way, such as Curves o Bamboo Relay.
Roles within the system
The above leads us to believe that there are a number of well thought out roles within wBTC. And yes, there are, those roles are the following:
Custodian. This role falls to the institution or party that owns the asset in question. In the case of wBTC, this role is played by the BitGo company recognized worldwide for this task. The custodian will be the one who has in his possession all the bitcoins you send.
Merchant. In this case we are talking about the institution or party to which the wBTC tokens will be minted and burned. This role is handled by Kyber and Republic Protocol.
User. This role is occupied by the holders of the wBTC token.
WBTC DAO Member. The role of these members is to participate in the governance of the protocol that makes wBTC possible.
Looking at these roles, especially the custodian role, makes the centralized nature of wBTC very clear, so don't be fooled: wBTC is not a decentralized token in its operation.
wBTC is a project that has federated governance, which means that there are several participants who make decisions within the system.
The roles we described above show us this reality, and we can see that governance is jointly exercised by both custodians, traders and wBTC members. DAO.
This governance system allows two things:
Leave the most critical parts of the system in few hands. For example, having the custody of BTC in the hands of BitGo guarantees not only that you have one of the largest custody infrastructure in the crypto world, but also that you have insurance in case something goes very wrong. The rest of the governance for protocol evolution issues remains in the hands of all participants, giving ample room for decision to those who promote the system.
It allows governance to be expanded gradually. When the project started there were only three members, but today there are more than 40, which clearly shows that the strength and confidence in the project is very great.
Of course, governance processes are controlled by multi-signature smart contracts, which means that decisions must be taken, voted on and only those that have the required voting level will be accepted. This is designed to maintain the highest level of decentralization within the system, and also the highest possible level of security in all aspects of it.
Although there are more than 40 members within wBTC, its DAO only has representation of 16 of them. Among these members are Airswap, Compound, DDEX / Hydro, Dharma, MakerDAO, Gnosis, theocean, Set Protocol, Blockfolio, OmiseGO, GOPAX, Loopring Protocol, Kyber Network, Bitgo and Republic Protocol. Certainly a well-nurtured and recognized group of participants in the DeFi world.
Now, the wBTC DAO functions can be divided into:
Control and verify the development of smart contracts that control wBTC. This in order that everyone who is part of the DAO can be sure that the protocol is safe to use.
Verify and audit that the issuance of wBTC tokens corresponds to the BTC blocked by BitGo within the multi-signature wallet designed to block funds in the system. This is to maintain transparency and trust in the system.
Serve as custodians of wBTC smart contracts. This is that without the approval of the majority of the DAO participants, a change in the smart contracts cannot occur, preventing it from being manipulated unilaterally.
In this way, even though wBTC is not a decentralized token in its operation, certainly many eyes in the community ensure that its operation is adequate and secure.
Advantages and disadvantages of wBTC
One of the great advantages of this token is the ability to unite the enormous economic potential of Bitcoin, with the flourishing DeFi ecosystem of Ethereum. This means that Bitcoin users and hodlers have a new method to revalue their cryptos, investing them in the growing DeFi world. In short, it improves the usability of Bitcoin and Ethereum as blockchains and their own ecosystems.
On the other hand, another advantage of wBTC is that being an ERC-20 token, it can be quickly implemented in different platforms for frictionless trading. Similarly, the system also allows the use of atomic swaps y sidechains. Ultimately, this would make the exchanges much faster for your participants.
Despite this, wBTC also has weak sides. First and foremost, and as we have already indicated, it is a centralized custody system. This means that your crypto is controlled by an outside actor who may or may not take care of your money.
On the other hand, it does not solve scalability problems, in fact, it can increase them. Bitcoin and Ethereum at the moment have faced serious scalability issues. This shows that its technology must evolve to face this serious problem. In the case of Bitcoin, the bet on Lightning Network is clear. But in Ethereum, these problems continue as the Raiden Network (the Lightning equivalent) is not widely used, and Ethereum 2.0 holds promise even for the future.
This token has multiple use cases, but the most important would be the following:
Allowing Bitcoin hodlers to participate in the DeFi ecosystem while remaining anchored in the price of Bitcoin.
The DEX they can benefit from creating wBTC pairs to simulate the Bitcoin market within their system. Many traders are "just Bitcoin" and adding this option allows to attract more of these traders to the DEX. In this way, liquidity is expanded and they are strengthened.
Using wBTC with atomic swap and sidechain allows better trading between various cryptocurrencies. For example, if you transform your BTC to wBTC you can then use this wBTC to convert it into another currency that has an ERC-20 token in Ethereum, and then simply withdraw for that other crypto. The good thing about this system is that the cost of this type of operation should be lower than making a direct exchange in a centralized exchange, although this depends on the cost of Gas in Ethereum and other variables that may or may not be beneficial for a economic exchange.
As you can see, wBTC is a curious token with interesting possibilities. Known as the “bitcoin that is not bitcoin,” this token seeks to bring more investment to the DeFi world from Bitcoin hodlers.
The final question here is: Has the strategy been successful? Well, at present, wBTC has about 106.792 tokens in circulation, approximately 1,8% of the total of Bitcoin currently circulating.
Still, let's hope it won't be long before a much more decentralized Bitcoin on Ethereum is born. Perhaps with a structure similar to what DAI did for traditional fiat-backed stablecoins.