Bitcoin is the king of cryptocurrency. It is also considered as the store value and digital gold. But it does't mean that it will be the best digital asset with more liquidity in the market. With the increase in the transaction fees using bitcoin as a medium of exchange and payment has become very difficult now a days.There will even be a time when it will charge 50$ in transaction fee in order to pay a 100$ worth of bill. This will be quite a nightmare and a meaningless strategy for all the bitcoin owners.
In order to solved this problem and make the use of Bitcoin more practical and userfriendly a new type of tokenised cryptocurrency called Wrapped bitcoin(WBTC) is introduced. It is the first ERC token backed by Bitcoin .
The aim of WBTC is to bring Bitcoin liquidity to the Ethereum ecosystem and allows traders to facilitate token trades based on Bitcoin’s value, on decentralized exchanges(DEX) and DAPPs envioronment.
Introduction to WBTC
Wrapped Bitcoin is an alternative to bitcoin where the original Bitcoin is converted in an ERC20 token under Ethereum blockchain. It aims to bring Bitcoin within the Ethereum ecosystem making it completely decentralised.The conversion of Bitcoin to WBTC takes place with the involvement of participant such as Bitgo,Ren, kyber network and many other participents.
How BTC is converted into WBTC
The conversion of BTC to WBTC requires following participents
- A Custodian like Bitgo
- Merchant who mint the WBTC
- Users
- DAO which is both the custodia and merchant
The minting/ conversion of BTC to WBTC requires a chainlink between all its participent and takes place under the following process
Sending of BTC to the merchant
The first steps involves the sending of BTC to the merchant through an Atomic swap. Atomic swap is required because BTC is required to change to ethereum blockchain and this process can be done through Atomic swap. The BTC is then excchange to ERC20 token.
Minting of WBTC
The exchange BTC will then be send to the custodian such as BITGO inorder to intiate the minting of WBTC. After the mint process is completed the it is then send to the merchant Ethereum address either by atomic swap or directly.
Burning of WBTC
In order to burn the WBTC the custodian should hold them in the Ethereum account.Burning WBTC is then done by giving WBTC to the wrapped contract and submitting a burn request. The custodian then perform number of Ethereum confirm transaction and send it back to the merchant. Finaly the merchant will perform a seperat ethereum transaction and confirm the burn.
Benefit of WBTC over BTC
WBTC allows BTC to perform smart contract under Ethereum blockchain.With the conversion of BTC to WBTC it can now be used as a medium of exchange in the Ethereum ecosystem. With this method BTC holder can mint some WBTC and take part in the DeFi ecosystem instead of converting BTC in ERC20 token.
With WBTC uses can also trade BTC in a completely decentralised manner through Defi network like kyber network, uniswap etc and can also earn interest on a Defi landing protocol like compound, dydx etc. Maker DAO has also colleterate with WBTC in their Maker protocol. With this WBTC becomes the second most valuable collateral assets in DAO family.
Conclusion
WBTC act as a connecting bridge between BTC and Ethereum ecosystem.With the collateralisation of WBTC with Maker DAO the market has began recognising WBTC and this could be a game changer in both the BTC and Defi ecosystem. Above all with the coming of WBTC the problem of charging high fees in transaction process can be cut down making BTC more practical and user friendly.
