Exploring the Interoperable World of Wrapped Tokens: An In-Depth Look at Wrapped Bitcoin (wBTC)
Blockchain Technology has evolved over time and has welcomed many new innovations from the Ethereum migration to the proof of stake consensus to Wrapped tokens, so what are wrapped tokens? Due to the interoperable tendencies of many blockchains network, it became salient for some tokens to be wrapped for them to be used on other blockchain networks, Consequently Wrapped Bitcoin (wBTC) is a token that mirrors the value of Bitcoin (BTC) and is interoperable with decentralized applications built on the Ethereum network. Released in 2019, wrapped Bitcoin tracks the value of real Bitcoin, which means each wBTC token’s value has a one-to-one relationship with Bitcoin.
Bitcoin and Ethereum have varying protocols, hence the blockchains on which they run are unable to communicate with each other. Wrapped Bitcoin is one of many wrapped cryptocurrencies created as a solution to this issue: It lets BTC holders “wrap” their Bitcoin and generates a token compatible with Ethereum’s protocol so it can communicate and transact with a different blockchain.
HOW DOES IT WORK
For a token to be successfully wrapped it takes three parties,
- The Investor
The custodian is a set of codes that acts as a bridge between the investor, the original token, and the wrapped token, similarly the custodian makes sure the value of the original token is equivalent to that of the wrapped token, therefore when a wrapped token is created the original token is stored in a vault and its equivalent is minted out to the blockchain network, this process can also be reversed as wrapped tokens can be unwrapped through a process called burning, and the tokens that were originally locked are released. “Wrapping” Bitcoin or any other cryptocurrency basically means you are making it compatible with other ERC-20 tokens that run on the Ethereum blockchain network.
- Interoperability, Unlike in the past you can now use your tokens on other networks easily.
- Wrapped Tokens also enjoy the perks that come with their wrapped network, which might range from increased transaction speed and lower transaction fees
- Availability of Liquidity, due to bitcoin's high rate of liquidity when wrapped, it would be transferred into the Ethereum network giving more liquidity to the network to enable lending, borrowing, and trading, thereby shifting trading volumes from centralized exchanges to decentralized exchanges,
What Can You Do With Wrapped Bitcoin?
Staking: Generally, proof-of-work cryptocurrencies like Bitcoin do not support staking, which is a way for investors to earn rewards by aiding to secure a proof-of-stake network. In September 2022, Ethereum migrated from a proof-of-work protocol to proof of stake in an event called "the merge." Investors who hold BTC and are looking for ways to earn passive income in the cryptocurrency market can now stake their wBTC on the Ethereum network.
Using decentralized finance, or DeFi, products. You can also borrow, lend and swap your wBTC for other ERC-20 compatible tokens using DeFi platforms on the Ethereum network such as Uniswap or MakerDAO.
Wrapped tokens have created a unique way for tokens to interact on other networks notwithstanding its flaw of having a custodian violates the core standing of the cryptocurrency space which was built on a decentralized system because the custodian runs on a centralized code, nevertheless, its advantage still outweighs this minor setback which may be corrected soon, if you wish to swap your tokens quickly and competently click on the link below.