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What is a Wrapped Bitcoin? Quick guide!

Photo of: Nathan VDH
by Nathan VDH

Wrapped tokens” are a new class of assets that solve the interoperability problem, a major obstacle to the exponential development of the crypto ecosystem: the interoperability functionality would allow different blockchains to share their information without restrictions.

There are already solutions to overcome this obstacle: exchanges are the most common way to exchange your crypto-assets for others; a number of projects such as Polkadot are building an infrastructure focused on interoperability; wrapped tokens are another possible solution. These tokens have features that make them compatible with several types of blockchains.

The most common wrapped tokens are based on DeFi’s most significant ecosystem, Ethereum: they are usually ERC-20 tokens whose value is identical to that of an underlying asset. Wrapped tokens are practically considered as stablecoins since their operating model is the same: they are issued on the basis of a 1:1 ratio in relation to the asset pledged as collateral for their issuance. For stablecoins, the underlying assets are fiat currencies such as the Euro or the Dollar, while those of wrapped tokens are assets on other blockchains.

Wrapped Bitcoin is the best known form of wrapped tokens although it is a recent innovation of DeFi. As there is unfortunately no bridge between Ethereum and Bitcoin, a wBTC allows, in a way, to use Bitcoins on the Ethereum network and to benefit from the advantages offered by it while becoming a tool of DeFi.

Indeed, Ethereum’s ecosystem is significantly less significant in terms of value than that of Bitcoin, which limits its development and its liquidity: the introduction of Bitcoin in the ecosystem boosts liquidity (especially within the DeFi protocols). The quantity of Bitcoin present on Ethereum through wrapped tokens is constantly increasing and is currently close to 9 billion dollars.

Using Wrapped Bitcoin, you can stake your Bitcoin on many different protocols and earn yield on these Bitcoins, often significantly higher than what you would find elsewhere.