Wrapped Bitcoin (WBTC) is a bitcoin derivative used to trade bitcoin on the Ethereum Blockchain.
In this article, we will delve into the fundamental differences between Bitcoin and Wrapped Bitcoin, highlighting their unique characteristics, use cases, and the potential benefits and drawbacks of each.
|Blockchain||Bitcoin Blockchain||Ethereum Blockchain (ERC-20 Token)|
|Use Cases||Store of value, Digital currency, Cross-border transactions||Ethereum-based dApps, DeFi platforms|
|Decentralization||Decentralized, PoW consensus mechanism||Centralized consortium (WBTC DAO)|
|Network Fees||Market dependent||Market dependent|
|Transaction Speeds (in block times)||10 minutes per block||12 seconds per block|
If you are reading this, I assume you’re already well aware of what Bitcoin is.
Obviously you are really here to understand what wrapped Bitcoin is and how its different from the regular Bitcoin you’ve come to know and love.
So what is Wrapped Bitcoin (WBTC)?
Wrapped Bitcoin is an ERC-20 token that represents Bitcoin on the Ethereum blockchain.
Launched in October of 2018, WBTC was designed to allow Bitcoin holders to participate in Ethereum-based “decentralized” applications (dApps) and “decentralized” finance (DeFi) platforms.
I use scare quotes because these platforms and apps are not actually very decentralized - they just use blockchains and many people believe 'blockchain' = 'decentralized.
It's a marketing trick, and we will talk more about that in the section below covering key differences between BTC and WTBC.
Anyway, each WBTC token is issued by the WBTC DAO (‘Decentralized Autonomous Organization) when a bitcoin holders trades it for 1 Bitcoin.
Once the user is finished doing any trades that they wanted to do with the wrapped Bitcoin, they can return the WBTC to the DAO and get back their original Bitcoin.
If you are familiar with U.S. dollar stablecoins, such as USDC or Tether, then understanding wrapped Bitcoin should be easy. WBTC is like a bitcoin stablecoin (where the underlying asset is Bitcoin instead of a U.S. dollar).
The process of converting Bitcoin into Wrapped Bitcoin is managed by a consortium of organizations called the WBTC DAO, which includes custodians, merchants, and users.
Bitcoin operates on its native blockchain, which is separate from the Ethereum blockchain.
Wrapped Bitcoin, on the other hand, exists as an ERC-20 token on the Ethereum network.
This difference in blockchain technology is the primary reason why WBTC was created in the first place, as it enables Bitcoin to interact with Ethereum-based applications.
Bitcoin is primarily used as a store of value, a digital currency, and a means of transferring funds across borders without the need for intermediaries.
Wrapped Bitcoin, while still retaining its value as a cryptocurrency, is primarily designed to facilitate the use of Bitcoin in Ethereum-based dApps and DeFi platforms.
WBTC users can participate in Ethereum app-based lending, borrowing, and trading.
Bitcoin’s decentralized nature is one of its core features, with no single entity having control over the network.
Wrapped Bitcoin, however, relies on a consortium of organizations, including custodians who hold the underlying BTC backing WBTC tokens.
Although these custodians so far have no history of running off with the deposited Bitcoin, the centralized nature of WBTC may be considered less secure compared to Bitcoin’s decentralized network.
One key giveaway that you are dealing with a centralized entity is on the DAO’s actual website.
In the section where they explain how a user gets WBTC, they state (emphasis mine):
…(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.
If anyone ever forces you to dox yourself by going through a KYC process, they are doing so to comply with some regulation.
There’s nothing wrong with that necessarily, but it does mean that someone on the other side of your transaction has centralized authority to back out of the deal at any moment (sometimes by choice and sometimes by outside authority).
To be fair to the WBTC DAO, they never claim not to be decentralized. Instead, they admit to being centralized, and that the asset is just meant to be used ‘on decentralized apps’. Unfortunately, nearly all of these apps are also centralized, but for other reasons outside the scope of this article.
All of that is to say - if you are using the Bitcoin network to send or receive funds, you are not required to perform any KYC because there is no one to enforce the KYC in the first place.
It is hard to compare network fees between Bitcoin and wrapped Bitcoin because they are both variable to the market. Sometimes one is higher than the other.
It just depends.
Bitcoin transactions require longer confirmation times compared to Ethereum transactions.
This is due to the limited block size and the proof-of-work consensus algorithm used by Bitcoin.
Because wrapped Bitcoin is an ERC-20 token, it benefits from faster transaction times on Ethereum’s Proof-of-Stake consensus algorithm.
There are many problems with Proof-of-Stake that may cause long-term issues for it in the future.
But in the narrow sense of speed, it tends to be faster.
However, it is essential to consider the gas fees associated with using Ethereum-based dApps and DeFi platforms, which can fluctuate significantly depending on network congestion.
While Bitcoin remains the dominant digital currency and store of value, Wrapped Bitcoin brings Bitcoin to the Ethereum ecosystem, enabling participation on that network.
Ultimately, the choice between Bitcoin and Wrapped Bitcoin will depend on an individual’s desire to use Bitcoin on the Ethereum blockchain or not.