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What is Wrapped Bitcoin (WBTC) and how does it work?

by Financial Economy

Wrapped Bitcoin is Bitcoin created on the Ethereum network at a ratio of 1: 1. In other words, it is an imitation crypto currency representing Bitcoin in the Ethereum network. More information about what Wrapped Bitcoin (WBTC) and how does it work is in rest of the article. Information about Ethereum, you can browse here.

What is Wrapped Bitcoin (WBTC) and how does it work?

WBTC is simply a method of representing Bitcoin with ERC-20 tokens, so that Bitcoin can be more easily managed in the Ethereum ecosystem. Each WBTC is 1: 1 backed with the same amount of Bitcoin. It is generally not possible to transfer coins on a particular blockchain to other blockchains. Wrapped tokens offer a way to circumvent this limitation. It achieves this by allowing assets that have not been issued on a particular blockchain to be used on that chain.

Wrapped token is a tokenized version of another crypto currency. It is indexed to the value of the asset it represents and can be exchanged at any time over this value. Moreover, these tokens often represent an asset located outside of the local blockchain on which it is mined. WBTC is an ERC-20 token and is indexed one-to-one to Bitcoin’s value, allowing you to use BTC on the Ethereum network.

Wrapped tokens usually require the presence of a custodian. A custodian is a unit that keeps the amount indexed from the asset. This can be a custodian, multi-signature wallet, DAO, or smart contract. The wrapping process works as follows: The vendor sends BTC to the custodian to create the wrapped token. The custodian then issues WBTC on Ethereum for the amount of BTC sent. When WBTC needs to be converted back to BTC, the seller requests a burn from the custodian and the BTCs in reserve are released. You can think of the depository as the unit that performs the wrapping and takes it back.

For information about crypto currency: https://en.wikipedia.org/wiki/Cryptocurrency

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