What are “Wrapped” Crypto Tokens & Why are They so Important?
In step with the meteoric rise of DeFi platforms, today’s “wrapped” tokens, especially wrapped BTC (“WBTC”), is an intriguing phenomenon. A “wrapped token” is an asset on the Ethereum blockchain matched 1:1 with an underlying asset, which need not share the same blockchain, or as a physical asset like gold, be on a blockchain at all. A wrapped token is an ERC-20 token with a value identical to the asset it represents, either through smart contract or by being backed 1:1 with the underlying asset, in the same way, US dollars back stablecoins like USDT and USDC.
The concept of tokenizing a token - or any other type of asset - using an ERC20 token to represent the asset is not actually new. The first WBTC was issued on January 31st, 2019, to enable Ethereum-based BTC trading on decentralized exchanges (DEXs) to facilitate speed and liquidity. This development has not only opened the possibilities of DeFi to more investors, but it has expanded the Ethereum ecosystem itself to a wider audience bringing Vitalik Buterin’s Ethereum Virtual Machine front row and center to DeFi.
The WBTC project itself is governed by the WBTC DAO (Decentralized Autonomous Organization).
With WBTC, the value of one BTC is accurately matched at any time, as its smart contract algorithm gives its price in real-time, regulating the underlying fund with supply/demand information gained via user transactions. Wrapped token users hold asset value “wrapped up” to be easily mobilized by decentralized applications (DApps), most notably borrowing/lending platforms like Uniswap, Sushiswap, Aave, Compound, and Balancer. No new utility token is needed to use WBTC on a platform. No transfer fees are incurred, besides the gas consumed like any other ERC20 token.
As explained on wbtc.network: “WBTC standardizes bitcoin to the ERC20 format, creating smart contracts for Bitcoin. This makes it easier to write smart contracts that integrate bitcoin transfers… The Ethereum network processes transactions faster than the Bitcoin network, but bitcoin holders don’t have to wait anymore. With WBTC, moving bitcoin between exchanges is much faster.”
Users of popular lending/trading dApps through wrapped tokens enjoy greater convenience with increased liquidity—no need to trade BTC for ETH with WBTC.
The process is not without KYC/AML compliance, however. The first step is for a user to request tokens from a merchant. The merchant performs KYC/AM procedures, verifying each user’s identity. Once completed, the swap is executed with BTC from the user to the merchant and WBTC from the merchant to the user. Custodians hold actual BTC being wrapped and mint or burn tokens on the Ethereum blockchain corresponding with requests for WBTC and redemption for BTC. Overall, this makes for smoother transactions.
From its inception, January 31st, 2019, until the end of June that same year, the supply of wrapped BTC grew over 300%. And August 2020 saw the supply double. According to Dune Analytics, over 31,000 bitcoins are now tokenized on Ethereum, with 75% minted by WBTC.
WBTC is traded on 31 exchanges worldwide. The top exchanges include Uniswap ($15.46M), Bkex ($10.95M), and OKEx ($5.32M).
As a bridge between major blockchains, wrapped tokens like WBTC prove to be an integral part of the fast-growing field of DeFi. And today, DeFi is proving to be the strongest application in blockchain technology. Will it provide hope for financial security in these financially unstable times? Time will tell. Stay tuned for more vital info and views from the frontlines here at Beyond Enterprizes.
