Wrapped Bitcoin (WBTC) is aiming to tokenize Bitcoin (BTC). This ‘token’, named ERC-20, will eventually ease Bitcoin transactions and increase the security of owning it. The concept of Wrapped Bitcoin was taken into action from January 31st, 2019.
To put it in simple terms, Wrapped Bitcoin is a product of the merging of the two leading cryptocurrencies in the market, Bitcoin and Ethereum. This simply means that Bitcoin can enter the world of the Ethereum network and both can benefit from it.
How does Wrapped Bitcoin Represent Bitcoin?
We mentioned above that Wrapped Bitcoin is a Bitcoin token. It also acts as a ticket representing the fact that you own a certain amount of Bitcoin. So, think of it as if you own gold. Now, you can’t carry gold around in your bag and make your daily transactions. Gold is simply heavy and very complex to make accurate payments.
In the above example, the gold refers to Bitcoin and the cash you have in your wallet instead of the gold is your Wrapped Bitcoin. Wrapped Bitcoin simply eases your Bitcoin transactions. It is better to own a token than actually carry around Bitcoins in your wallet.
The biggest advantage of owning Bitcoins is to enjoy the decentralized system of transactions. But what if you want to keep track of your Bitcoin transactions? Owning Wrapped Bitcoin can help you keep track of your activities. These transactions are recorded and listed to provide owners with transparency in Bitcoin activities.
How does Wrapped Bitcoin Work?
The amount mentioned on your Wrapped Bitcoin is the exact amount of Bitcoin currency you own. Both the currencies are based on a 1:1 rate factor. This means, there is no difference between the rates of Bitcoin and its wrapped version. Below is the detailed process of conversion of Bitcoin to its wrapped version.
- Merchant: A merchant is a person or an organization who acts as a mediator between the Bitcoin owner who wishes to get its equivalent wrapped version and the custodian. So, the merchant initiates the minting process and gives away the Bitcoins to a custodian. Before doing so, the merchant has to fill up the KYC and AMC documents for verification purposes.
- Custodian: A custodian is an organization that is responsible for minting the exact amount of Wrapped Bitcoin received from the merchant. They are in charge of maintaining the 1:1 rate ratio between Bitcoin and Wrapped Bitcoin. At this point of the process of conversion, the actual holder of the Bitcoin is not the merchant but the custodian. There are numerous companies that work as a team to fulfil the custodian’s goal. The custodian has to wait until the merchant has completed thirty five different confirmation procedures of the Bitcoin transaction. Companies like BitGo, Republic Protocol and many more that have been working together for more than a decade to make WBTC come to life. After producing the Wrapped Bitcoin, the token is successfully given to the merchant. The functions and responsibilities of some of the companies are given below.
- BitGo: The main function of BitGo is to maintain the 1:1 ratio of rates between Bitcoin and Wrapped Bitcoin.
- Republic Protocol and Kyber Network: These companies serve as initial merchants to enable the exchange of Bitcoins for its wrapped version. They essentially provide trading liquidity. Outside the world of Ethereum, the second most popular cryptocurrency, there is only decentralized liquidity taking place. By bringing Bitcoin into the network of Ethereum, the liquidity will drastically increase making it more secure and transparent.
- Blockfolio: Just like the CDSL in India, this company enables you to monitor your current crypto portfolio. It tells you about the current prices and rates of cryptocurrencies as well.
- Organizations like Index, Maker and Gnosis play a pivotal role in the process of conversion of Bitcoin.
The reverse process can also take place. The merchant can give the custodian a specific amount of Wrapped Bitcoin tokens in exchange for the same amount of actual Bitcoin currency.
Roles of the Companies under Bitcoin Custody
These companies work together to complete the process of converting Bitcoin into Wrapped Bitcoins. Below are some of the key roles that the above mentioned companies play in order to do so.
- These companies form a decentralized, government-independent organization which will allow on chain auditing for WBTC. This ensures fast transactions and increased transparency.
- One of the main responsibilities is to ensure the rates of BTC and WBTC never differ (1:1 ratio).
- Another vital role of the companies under Bitcoin custody is, making sure everyone, whoever owns Bitcoins, can participate in this process and gain access to all the benefits it provides.
Some Key Points to Consider when Dealing with WBTC
- There are two kinds of fees involved in this entire process of exchanging Bitcoins for Wrapped Bitcoins. To one’s surprise, it does not include transfer charges.
- Custodian fee: A custody fee is an amount charged by the organization under Bitcoin custody for the initiation of the conversion process.
- Merchant fee: A merchant fee is an amount charged by the merchant to the Bitcoin holder to initiate the process of conversion.
- There is definitely more liquidity and transparency involved as converting Bitcoin to Wrapped Bitcoins makes it enter the network of Ethereum. Ethereum is known for maintaining decentralized liquidity in the crypto market.
- Bitcoin can now be featured in Ethereum domination applications. This entire concept of Wrapped Bitcoins has made grass greener on both sides.
Even if the difference in the stock price of Bitcoin and Ethereum is huge, through Wrapped Bitcoin, both have the opportunity to stand out in the swamp of cryptocurrencies. It is our duty to provide you with a drawback, that we still feel, has the ability to demotivate potential Bitcoin owners. When the Bitcoin owner gives away his Bitcoins to the custodian, the actual owner is now the custodian. This does feel and sound a bit risky.
The ball lies in your court. Think and choose what’s best for you. It is unfair to just look at the positive or only negative side of cryptocurrency. We hope this article has helped you provide enough knowledge about Wrapped Bitcoin and the roles various companies play to manufacture them. To start investing in Bitcoins, you can also check out bitcoin equaliser login.