Wrapped Bitcoin vs. Bitcoin: How They are Different and Why It Matters

Wrapped Bitcoin is one option to consider if you want to use Bitcoin on the Ethereum Blockchain. If this is something you are interested in doing, read on. 

Bitcoin is still the most widely used cryptocurrency on the planet, but it doesn't have all of the features of other tokens, like those on the Ethereum blockchain.

What would happen, though, if you were able to access Bitcoin on the Ethereum blockchain? This is the idea behind Wrapped Bitcoin, which is a Bitcoin-based asset that can be used on the Ethereum network.

What follows is an explanation of the differences between Bitcoin and Wrapped Bitcoin.

What is Wrapped Bitcoin?

Wrapped Bitcoin (WBTC) is an alternative to using Bitcoin (BTC) that was introduced in 2019 as a means to utilize the Ethereum network. BitGo, Kyber Network, and Ren were the three individuals responsible for its development. It was not established by a single person but rather by a collective of three programmers. These companies are leaders in the field of decentralized finance (DeFi), and they want to find a way for Bitcoin tokens to be used on the Ethereum network.

The Ethereum blockchain is well-known for its function in decentralized exchange transactions and for the popularity it enjoys in the development of decentralized applications (dapps). On the other hand, if you have a significant number of Bitcoin tokens, you won't be able to utilize them on Ethereum. In addition to this, the time it takes to complete a transaction on the Bitcoin blockchain is much higher than the time it takes on the Ethereum blockchain. 

Wrapped Bitcoin is an ERC-20 token, also known as an Ethereum standard token, that was developed by the consortium to make it feasible for individuals with Bitcoin reserves to participate in transactions on the Ethereum blockchain. In the same vein as stablecoins like Tether (USDT) and USD Coin (USDC), which are pegged to the value of a certain national currency, one WBTC is always equivalent to one BTC. Also, Bitcoins are kept in proven reserves, so BTC will always back WBTC.

Wrapped Bitcoin vs. Bitcoin: What’s the difference?

It is essential to understand that Wrapped Bitcoin is a tokenized form of Bitcoin that may be used in the environment that Ethereum has built for DeFi transactions. To mint WBTC, you will need to work with reputable merchants who will essentially store your Bitcoin and then give you WBTC tokens that are compatible with Ethereum. Minting is a process that takes place on Ethereum. 

Consider the following scenario: You have a significant quantity of bitcoin tokens in your possession. You want to make a transaction using Ethereum, or maybe you want to build some decentralized applications (dapps) on the Ethereum network. You are eager to put your Bitcoin tokens to use, but you are unable to do so. You should, then, go to a reliable business that takes the time to verify your identification and ensure that everything is operating as it should. 

The next step is for the merchant to visit a custodian, which at the moment is BitGo, which is a reliable third party. Wrapped BTC tokens are Ethereum ERC-20 tokens that the custodian issues. The quantity of WBTC tokens you get is proportional to the quantity of Bitcoin tokens you commit to delivering. You have preserved your bitcoins up to this point. 

Now, the WBTC may be transferred from the custodian's account to the Ethereum-compatible cryptocurrency wallet maintained by the retailer. The exchange will take place at this point. You may use a peer-to-peer transaction or an exchange to transfer the merchant your BTC, and they will then send you your Western Bitcoin in return. 

After you have obtained the WBTC, you will be able to utilize it on the Ethereum blockchain for transactions using DeFi or for dapps. The BTC will continue to function as a reserve and will also provide support for the WBTC. Everything is checked and double checked on the public ledgers that are used for the Bitcoin and Ethereum blockchains. Users may see both the transactions and the proof of reserves on the blockchain. 

After some time has passed, and you are prepared to receive your BTC once again, you may go back to the merchant and exchange your WBTC for BTC. As soon as there is no reserve left, the merchant burns the WBTC, which is the procedure by which the WBTC is destroyed. 

The process of exchanging Bitcoin for wrapped Bitcoin may seem lengthy, but in reality, it may be finished in a rather short amount of time. The primary advantage is that you won't have to deal with utilizing exchanges, which means you won't have to pay the higher fees that come along with using exchanges when you want to trade Bitcoin for Ethereum (ETH) or another token. Instead, you will get your wrapped bitcoin, which may then be used on a variety of Ethereum-based services that are compatible with it.

How can Wrapped Bitcoin be used?

This project aims to enable Bitcoin holders to utilize tokens from one network on another platform by making this functionality available to them. Wrapped cryptocurrencies provide a potential saving in both time and money, even though the most reputable cryptocurrency exchanges make it simple to purchase and sell tokens or even trade certain token pairings. 

WBTC and other wrapped currencies can be used in a number of ways, such as the ones below:

• Acceleration of the transactions overall. The Ethereum blockchain offers faster transaction times than the Bitcoin network, making it the better option for those that prioritize transaction times. With WBTC, you'll be able to use your Bitcoin reserves on the Ethereum network, which will make business transactions go more smoothly.

• Increased availability of funds. Bitcoin is often used as the primary medium of exchange on centralized cryptocurrency exchanges such as Coinbase. (To learn more about Coinbase, see our whole review.) On the other hand, decentralized exchanges, which are also known as DEXs, often employ Ethereum. WBTC can be used instead of exchanging Bitcoin for Ethereum and then going to a decentralized exchange to buy other digital assets.

• Bitcoin-based smart contracts are used. At this time, BTC is not utilized in conjunction with smart contracts. However, WBTC enables the potential of utilizing Bitcoin as the backing for transactions, including smart contracts. 

• Prepare the ground for tokens denominated in fiat money. In the event that WBTC is successful, it may open the door for the tokenization of fiat currencies by using the ERC-20 standard. It would provide a mechanism for minting price-stable tokens that could be utilized on the blockchain without the need for currency conversion and keeping reserves of either U.S. dollars (USD) or euros (EUR).

How to invest in Wrapped Bitcoin and Bitcoin

On the largest centralized exchanges, it is possible to purchase both BTC and WBTC. For instance, on eToro and with Coinbase Pro, you can purchase WBTC coins. Kraken gives you the option to hold WBTC, whereas Gemini gives you the option to buy or sell the cryptocurrency. In addition to this, you will need a cryptocurrency wallet that can store a variety of tokens. 

In addition, it is possible to buy WBTC via decentralized exchanges like Uniswap. However, in order to buy WBTC directly, you will often need to have a stockpile of ETH. 

If you decide to have your very own WBTC created, you will need to ensure that you have sufficient BTC on hand to carry out the transaction. In this scenario, you would look for a merchant on the WBTC DAO platform and then submit your request there. There are further methods for wrapping Bitcoin, such as making use of smart contracts that tokenize the Bitcoin you already own. 

Focusing on WBTC, on the other hand, increases the likelihood of finding liquid markets since it is the form of a wrapped bitcoin token that is the most widely used. If you are already familiar with how to get bitcoin, it is likely that you will also be able to acquire WBTC.

Which is better? Wrapped Bitcoin or Bitcoin?

The answer that is best for you will be unique to your circumstances and objectives. Wrapped Bitcoin is a tokenized form of Bitcoin that is compatible with the Ethereum network. Wrapped Bitcoin may be used on the Ethereum blockchain. Bitcoin could be an excellent option for you if all you want to do is retain a store of wealth for the future. Wrapped Bitcoin, on the other hand, could be a better fit for your requirements if you wish to be able to utilize your tokens for transactions, including DeFi, or if you are interested in developing decentralized applications (dapps).

Is Wrapped Bitcoin a good investment?

Your goals and the way you allocate your assets will determine whether or not WBTC is a suitable investment for you. It is essential to remember that the value of WBTC is pegged to that of Bitcoin; hence, its price is the same as that of BTC. If you believe that it will continue to be the primary form of tokenized Bitcoin and you anticipate that the price of BTC will continue to climb, purchasing some WBTC might be a profitable investment for you. When making financial investments, it is essential that you keep your individual requirements and objectives in mind.

What’s the purpose of Wrapped Bitcoin?

Wrapped Bitcoin was developed to enable users of the Ethereum blockchain to make use of Bitcoin reserves. To put it simply, people with a significant amount of Bitcoin may utilize their tokens on the Ethereum blockchain without having to go through the process of converting BTC to ETH. This allows for more flexibility and convenience.

Bottom line

Wrapped cryptocurrencies are tokenized versions of crypto assets backed by the coin they were originally based on. A tokenized version of bitcoin that is being kept in reserve is called "wrapped bitcoin. Because WBTC was made to work on Ethereum-based platforms, it makes it possible for Bitcoin to work within the Ethereum ecosystem.

When considering the several ways in which you may acquire cryptocurrency, it is essential to remember that even if you can acquire WBTC on the secondary market, the tokens are rendered useless after they have been redeemed with reputable retailers. It is essential to understand that since the value of a WBTC is directly proportional to that of a BTC, the WBTC can never be more valuable than Bitcoin.

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.