Bitcoin, Ethereum, Dogecoin are a few of the names that are popular in the crypto market. Although they all come under a common category (cryptocurrency), they are not all the way same. For instance, Bitcoin and Ethereum can only function in their respective block chains. In other words, one cannot trade Bitcoin on the Ethereum blockchain. In order to understand this, we must know’ what is wrapped bitcoin?
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Interoperability is a term used to define the capability of different blockchain technologies to interact with each other and allow the smooth transition of cryptocurrencies. As such, one cannot exchange data between two bitcoins. This poses one of the biggest challenges of the crypto world since it greatly inhibits the reach of the technology. One of the solutions for this problem is the wrapped token.
What is wrapped bitcoin and why is it necessary?
WBTC or wrapped bitcoin is a form of wrapped token that enables bitcoin to function in the Ethereum blockchain. WBTC is significant for users who intend to use bitcoin in DeFi (Decentralised Finance) apps that run on Ethereum technology. BTC wrapping works on a 1:1 concept, where one can wrap BTC in exchange for one bitcoin. This ensures that there exists the same number of WBTC as that of BTC.
But you might wonder why is there a need for bitcoin to be compatible with the Ethereum block, especially if both of them function similarly. The thing is, they do not. People traditionally use Bitcoin as a medium of transactions. It is a currency, but a decentralized one. Ethereum on the other hand also has its currency called ‘Ether’ which people use to make purchases, invest in, etc. However, Ethereum also aims to decentralise other things in the society that are mostly in the control of the central authorities such as finance, gaming, etc. So Ethereum serves a function more complex than just providing a currency.
While both Bitcoin and Ethereum use blockchain technology per se, one can mine a bitcoin by solving a mathematical problem. However, Ethereum works on the concept of smart contracts, which are immutable. Once you enter the contract into the Ethereum network, it requires money, and that is when Ether comes into play. It is necessary for the Ethereum network to continue functioning.
How can you acquire a WBTC?
One can purchase a bitcoin on platforms such as Coinbase. In order to purchase any cryptocurrency, one must have a crypto brokerage account. After purchasing it, you can exchange it for a WBTC and then transfer it to a hardware or software wallet. Once purchased, you can use the WBTC for various purchases. When you wish to return the WTBC, your merchant will enable the termination of your WBTC and return your original BTC.
Hardware and Software wallets to store wrapped tokens
In order to secure your purchase, it is advisable to transfer your cryptocurrency to either hardware or software wallets. Hardware wallets are similar to a USB drive which one can insert into one’s computer when you want to access your assets. Hardware wallets offer higher protection and prevent hacking. However, you can also use software wallets to store your assets, as they are easier to access. Ethereum wallet is one of the famous software wallets available to store wrapped tokens. When you want to sell your token, you need to transfer them back to an exchange platform.
Are wrapped bitcoin truly decentralized?
We all know that the main purpose of using cryptocurrencies is to be free of the control of any central authorities. This maintains more transparency in various sectors such as finance, administration, etc.
Blockchain technology promotes this notion, however, when you decide to wrap your token, you are in a way bringing the concept of centralization into it. This is because, when you are acquiring a wrapped bitcoin, you are essentially depositing your bitcoin to a merchant, who wraps a token for you. In a way, you are giving authority to the merchant to hold your BTC while you use the wrapped token on DeFi apps.
Although WBTC is not completely decentralized, they are a great asset to the crypto community. They have been trying to fight the challenge of incompatibility between various blockchain communities and wrapped tokens could be a great solution. By introducing wrapped tokens, crypto will only become more accessible, faster and more feasible for people to use.