When one hears the word “wrapping” related to Blockchains and Cryptocurrencies for the first time, one tends to feel very confused and maybe even worried. What does it mean when Blockchain developers tell you that you can wrap Bitcoins in Ethereum? Are they talking about new ERC20 tokens?
The answer is “no” and “yes”. No, wrapped Bitcoins are true Bitcoins that exist in the original Bitcoin Blockchain, the same Blockchain that Satoshi Nakamoto’s team created in 2009 and has been running for over 10 years. Wrapped Bitcoins are regular BTC coins. Nothing else. However, yes, they now exist as ERC20 tokens in the equation, and in a very legitimate and precise way.
One wrapped Bitcoin is one authentic BTC coin that still belongs to Nakamoto’s original Blockchain with its associated public and private keys in the BTC Network, but now has been locked inside of an Ethereum smart contract with one ERC20 token pegged to it. The ERC20 token becomes a sort of tokenized certificate inside the Ethereum Network that carries the value of the real Bitcoin.
The technology of wrapping translates into the possibility for real Bitcoins to penetrate a new territory and fuel action within it. The relation then between this Bitcoin and the wrapping ERC20 token, is more or less like the relation between 100 US Dollars that one may have in a bank account and a $100 check that they sign to use in lieu of those actual Dollars. The check is not new money, but rather just a new medium for how one can use those dollars. Thus, a wrapping ERC20 token can be thought of like this check.
There is a project that, over the last few months, has been publishing progress on this kind of idea to develop technology that allows Bitcoin transactions within the Ethereum Blockchain. It is a community project that has become known as “Wrapped Bitcoin”. What they have developed is, precisely, a wrapped Bitcoin, in the correct sense. They give Bitcoin the power to penetrate and provide liquidity to Ethereum.
Wrapped Bitcoin has developed and launched an ERC20 token, WBTC, that is pegged in value to BTC coins in a 1:1 ratio. This new asset has been created by an alliance of three partners: Bitgo, Kyber Network and Republic Protocol, as it is explained in a publication issued by Bitgo under the title, “The Power of Bitcoin with the Flexibility of ERC20”.
Bitgo is an organization providing “security, compliance, and custodial solutions for blockchain-based currencies”. Kyber Network and Republic Protocol are two highly respected decentralized exchanges. The alliance of these three partners might represent a certificate of safety and serious future backup for any interested developers who would like to try to build on the new WBTC and also for any investor wanting to hold WBTC.
During the last few weeks, a lot of activity has been seen in social media in relation to the launch of WBTC. Tweets sharing the news or congratulating are abundant.
Besides Kyber, WBTC has been listed in IDEX, Switcheo Network and Airswap. WBTC is also visible already in CoinMarketCap.
According to WBTC’s news release, “WBTC brings greater liquidity to the Ethereum ecosystem including decentralized exchanges (DEXs) and financial applications. Today, the majority of trading volume takes place on centralized exchanges with Bitcoin. WBTC changes that, bringing Bitcoin’s liquidity to DEXs and making it possible to use Bitcoin for token trades” (source).
In this release, WBTC creators emphasize on the cost-lowering value that WBTC can represent for future projects that need interoperability. “WBTC standardizes Bitcoin to the ERC20 format, creating smart contracts for Bitcoin. This makes it easier to write smart contracts that integrate Bitcoin transfers… Maintaining various nodes and managing transaction types in order to support multiple currencies can be onerous. Now exchanges, wallets, and payment apps only need to handle an Ethereum node.”.
Developers explain also that WBTC tokens, since they are backed by real Bitcoins, can be either minted or burned. If one injects new Bitcoins into the system, one can obtain new WBTC. If one takes Bitcoins out of the system, then WBTCs will be burnt. The whole mechanism is capable of working perfectly well in a decentralized fashion thanks to two major types of users: Merchants and Custodians.
“Merchants perform key roles for the WBTC community and are sources of token distribution. They interact with custodians in order to mint and burn WBTC and provide KYC/AML for users… The custodian provides reliable, institutional-grade security for your WBTC. All WBTC issued will be fully backed and verified through on-chain proof of reserves.”
“To receive WBTC, a user requests tokens from a merchant. The merchant then performs the required KYC / AML procedures and verifies the user’s identity. Once this is completed, the user and merchant execute their swap, with Bitcoin from the user transferring to the merchant, and WBTC from the merchant transferring to the user.”
In a few words, one can say that in 2019 a new era of full interoperability begins for Bitcoin and Ethereum. One can have Bitcoins or fractions of real Bitcoin inside one’s Ethereum Wallet. This represents a new universe that can offer plenty of infinite possibilities for the development of new applications, of new services propelled by Smart Contracts and for any organization or individual that demands the requirement to leverage interoperability. With WBTC, any type of development involving BTC coins can be made within the Ethereum Blockchain. The sky is the limit.
