Updated: Feb 25, 2021
As you should know by now, decentralized finance (DeFi) has gained a lot of traction among investors in 2020. In fact, the ecosystem now has over 1 million unique Ethereum addresses, which is more than a tenfold increase from a year ago. With savings accounts and loans at its center, DeFi is similar to the traditional financial system, but without intermediaries such as banks and exchanges. Instead, the whole system is programmable through smart contracts, making custody and trading transparent, and intermediaries not necessary. For the longest time, Bitcoin couldn't fit within DeFi. Its blockchain just wasn't compatible with Ethereum's platform. That is until innovators came up with Wrapped Bitcoin (WBTC).
What is Wrapped Bitcoin?
In late 2018, a group of investors, exchanges, and wallets decided to create a bridge between the two ecosystems of Ethereum and Bitcoin. They created WBTC, a new asset that can be held in smart contracts as well as decentralized exchanges, so that it can be used like any other ERC20 token. WBTC is a good example of DeFi's need for a bridge between blockchains.
WBTC is a native ERC20 token that has been modified to represent a unit of Bitcoin. You can buy WBTC during its Initial Supply Auction, or you can buy it on reputable exchanges, such as Coinbase. The most important feature of WBTC is that it's highly liquid. WBTC is a bridge between Ethereum and Bitcoin with the ability to move BTC between the Ethereum blockchain and Bitcoin blockchain, which improves liquidity and creates opportunities to make money.
What Does WBTC Mean for Investors?
First, WBTC is a great way to invest in Bitcoin without having to own Bitcoin directly because of its high liquidity. Investors have long been confined to only holding bitcoin in a wallet in hopes of appreciation. However, now they can also let it accrue interest in a DeFi savings account or take out a loan by using WBTC as collateral, while being on a decentralized platform using a trusted protocol.
Traditionally, a centralized exchange needs to be trusted to safely hold an investor's Bitcoin. However, the BTC Relay never actually controls the BTC it holds. Instead, BTC Relays are more like messengers.
Furthermore, Wrapped bitcoin is often the asset of choice for traders seeking arbitrage. Bitcoin is a powerful crypto asset in terms of price value. More funds on DeFi platforms makes the markets themselves that much stronger, enabling an optimal level of buying and selling that might someday compete with traditional markets.
What Does WBTC Mean for Financial Institutions?
WBTC is another building block to eventually push the entire financial sector into DeFi platforms. Lenders may like WBTC because it lets them hedge against crypto volatility and even create virtual credit lines to borrowers. WBTC can be underwritten by insurance companies, improve liquidity, create streamlined financial processes and even new financial instruments.
For example, we could replicate higher interest coupon payments or typical microfinance instruments. We could even create new lending instruments for the world's most promising startups in the blockchain ecosystem. We could also issue tradable shares or debt instruments that pay dividends or interest, which is difficult to do on existing Internet protocols. However, it becomes much easier with WBTC.
Watch the video below for more use cases enabled by moving BTC into Ethereum? What are the risks? And what exactly is under the hood that make all of this possible?
A Better Financial System
Bitcoin holds the key to a whole new and far better financial system. Decentralized finance invests your money directly in protocol level financial instruments. It's a super low-fee and the risk is negligible. All of this means DeFi is the best way for money to grow.
Furthermore, if Ethereum users can use WBTC for DeFi, then the potential use cases of WBTC are virtually endless. Re-creating the infrastructure of finance is the first goal, and thanks to WBTC, Ethereum could easily do just that.