Wrapped Bitcoin, or WBTC, officially launched this week to a mixed reception and a slight sense of confusion. The brainchild of blockchain projects Kyber Network, BitGo, and Republic Protocol, the WBTC token is essentially Bitcoin wrapped in an Ethereum cloak, allowing it to be used on the Ethereum network, whilst being redeemable back into Bitcoin at any time. Many have questioned the point of this, but digging a little deeper actually reveals a pretty clever idea with a potentially good use case or two.
The Banknote to Bitcoin’s Gold Reserves
The premise of WBTC can be explained by thinking back to the days of the gold standard, where banknotes were backed by a country’s gold reserves. If you consider Bitcoin as heavy, cumbersome blocks of gold then WBTC is the equivalent of a banknote backed by that gold, representative of the Bitcoin you own – you can leave your Bitcoin in the vault and just spend the banknotes.
As an ERC20 token, WBTC can be transferred quicker and cheaper than Bitcoin and converted back to the original Bitcoin at any time by the holder. WBTC is backed 1:1 by Bitcoin, which is publicly verifiable on the blockchain, meaning that for every WBTC in circulation, one Bitcoin is being held in custody.
Interesting Use Cases
So, why is wrapping Bitcoin up as Ethereum worthwhile? Firstly, the faster transaction times and lower costs of the Ethereum network compared to Bitcoin increases the transactional potential of Bitcoin, getting around the argument that it is too slow to be used as a means of currency. Secondly, treating is as an ERC20 token allows Ethereum-based decentralized exchanges to list Bitcoin pairings, something they cannot currently do. A number of such exchanges have agreed to accept WBTC on launch, including DDEX, IDEX, and Switcheo, ensuring great liquidity right off the bat. Thirdly, decentralized applications on the Ethereum network will now be able to begin using Bitcoin in their operations, opening them up to a new dimension of users and opportunities.
Not Your Keys…
No project is perfect of course, and WBTC is no different, with the main argument focusing around ownership. When you swap your Bitcoin for WBTC, the collateral is held in custody by Bitcoin wallet service BitGo. This echoes the narrative that if you don’t own your private keys then you down own the coins, which is a trade-off every crypto user has to make – security for convenience. A second argument is that the Ethereum network can become just as clogged and expensive to use as Bitcoin during peak times, but the developers effectively had their hands tied due to Ethereum’s prevalence within the crypto ecosystem. Choosing a faster but less popular blockchain may have increased the transaction speed, but it would have limited the use cases immediately and vastly reduced the project’s scope.
Better Than Just Exchanging?
The Wrapped Bitcoin project is a technologically impressive achievement, and it certainly has the potential to alleviate some of the issues inherent within Bitcoin. But, whether there will be enough use cases for it, or if people will be bothered to wrap their Bitcoin rather than just exchanging it for Ethereum in the first place, remains to be seen.