- WBTC is Bitcoin equivilant ERC-20 token
- WBTC can be used in most all Defi apps
- WBTC is designed to bring liquidity cross-chain to Ethereum
I'm a liquidity maximalist. I don't really care which blockchain or crypto survives the next 50 years. Bitcoin could go to $0 and it wouldn't make a difference to me.
As a liquidity maxi, I only care about deep, liquid markets for trustless assets.
Bitcoin is over 10 years old now and all it has to show is a multi-billion dollar market cap and lots of different wallets and exchanges to buy and sell it. But it couldn't do much else.
Up until recently, pretty much all blockchains were walled gardens with no way to transfer value cross chain with trustless transactions. Bitcoin existed only on the Bitcoin network and Ethereum only existed on the Ethereum network. Cross-chain transfers of value simply did not occur.
Billions of dollars of value was stuck with no way to enter new financial products and infrastructure like Defi. The chad Ethereum kids were able to access all of the cool, bleeding edge yield farming while the virgin Bitcoin maxi's were stuck with using CEX's or regulated lending platforms.
But this all changed with wBTC or wrapped Bitcoin.
How Does wBTC work?
wBTC is Bitcoin "wrapped" in an ERC-20 token and issued on the Ethereum blockchain. One wBTC equals one BTC. BTC can be converted to wBTC through minting on Coinlist or Grapefruit Trading. It can also be bought on exchanges.
wBTC brings liquidity to the Ethereum network and the myriad of decentralized apps that run on the protocol. wBTC can be used in smart contracts as an ERC-20 token.
Bitcoin is "wrapped" by depositing Bitcoin with a trusted custodian, such as Bitgo. They preform KYC/AML checks on the user and verify their identity. After this is completed, wBTC is issued to the user.
Individuals do not mint their own wBTC, rather they can only purchase it or do a 1:1 swap with an authorized merchant like Coinlist. Merchants initiate minting of wBTC from the smart contract and then send an equal amount of Bitcoin to the custodian. The Bitcoin deposit is audited and confirmed, then the custodian approves the wBTC smart contract to send newly minted tokens back to the merchant.
In the opposite direction, when wBTC is "unwrapped" and sent back to the merchant to return the equivalent amount of BTC, the whole process runs in reverse. The merchant requests a "burn", Bitcoin is sent from the custodian to the merchant and the smart contract supply is updated to reflect the new amount of circulating supply.
It's an extremely novel attempt at bringing liquidity to Ethereum.
Who invented wBTC?
Wrapped Bitcoin was a joint project between several different Ethereum based projects and BitGo. Some of the largest Defi projects such as Ren, Dharma, Kyber, Compound, MakerDAO, and Set Protocol took part in wBTC's development, implementation and rollout.
I recommend that you listen to my interview with Loong Wong, CTO of Ren. We spoke at length about wBTC and how Ren is developing the technology to remove the need for trusted custodians.
How can you swap Bitcoin for wBTC?
The easiest way to swap your Bitcoin for wBTC is through Coinlist, a US regulated and compliant exchange developed by AngelList, one of the largest funding platforms for startups and early stage investors.
When you first sign up with Coinlist, you must KYC to access their full suite of services.
Once completed, deposit your Bitcoin into your Coinlist wallet. Coinlist also offers the option to buy Bitcoin on their exchange with USDC, DAI, or US Dollars.
After 3 confirmations, your deposit will be verified. You can now "Wrap" your Bitcoin to get wBTC.
Coinlist charges a flat .25% fee to wrap your Bitcoin.
Where can you Trade wBTC?
Where can you Yield Farm wBTC?
Yield farming is the future of Defi. At this point, most people have gotten burned margin trading and lost a portion or all of their portfolio to bad trade decisions. Defi introduced yield farming, where hodlers can put their portfolio of crypto to good use in lending and trading protocols.
In return for providing capital, a reward is paid out in governance tokens or simply more of the same asset as fees.
Here are a few of the strategies that you can yield farm wBTC:
Compound is the largest Defi application and more assets are deposited in these smart contracts than any other Dapp. As of writing this article, more than $694 million dollars are locked. Only a month ago, the total locked in Compound's smart contract was only $90 million.
The reason for the massive explosion in liquidity is the launch of the COMP governance token. This token is given to suppliers and borrows of the protocol as a reward. You can read more about Compound and COMP in our review.
COMP rewards increased the yield gained over supplying by such a significant amount that it drove speculative prices for the token up 600% in just a few days.
The basics for yield farming are simple. Just supply some wBTC into Compound to start earning COMP.
The real fun begins when you start to maximize your COMP returns and leverage your collateral. To do this, supply wBTC, borrow ETH, swap ETH for wBTC and supply the newly acquired wBTC to Compound. I would recommend using a service like Instadapp or Defisaver that lets you do all of these steps in one transaction, saving you loads of gas.
Another option is to supply liquidity to Curve, a swap platform that is still in its experimental phase and is newly released. This strategy is pretty complex, but Curve lets you setup the trade in a few clicks.
This yield farming strategy requires you to deposit wBTC, but you in turn receive the following tokens back:
- Synthetix (SNX)
- REN Project (REN)
- Curve (CRV - To Be Launched)
- Balancer (BAL)
The first step is to deposit your sBTC, renBTC or wBTC into the Curve contract. In return, Curve gives LP tokens. Synthetix and Ren have created a Balancer pool that takes these LP tokens and places them in a pool with SNX and REN.
The previous steps are all automated on the Curve website and you only have to follow the transaction prompts.
Conclusion and My Thoughts
Ethereum has always been more attractive to me in terms of its Dapp options and new ways to interact. I love Bitcoin, but hodling is boring after a while. Assets need to be used to create any economic production and prosperity.
Centralized exchanges currently offer greater yield for BTC than what's offered in Defi, which is strange because the risk/demand should be higher or has been higher this past month.I think long term the yields between Defi and Cefi should find some competitive balance, but in this immature ecosystem, many opportunities abound for the experimental protocols and their governance tokens.
Swaping my BTC to wBTC was easy and I'll probably do it again as I acquire more BTC. I understand that there are safety concerns with the wBTC smart contract and fundamentally wBTC is less secure than the underlying Bitcoin network, however I want to experience what's on the bleeding edge of Defi and try for myself these new ways of generating yield.
Liquidity is always a good thing. Trustless cross-chain swaps should be one of the biggest areas of growth in the next 5 years. There is no reason for any blockchain to remain siloed and have it's liquidity flounder. wBTC is the first step in the right direction towards fully trustless BTC, which is the exact mission Ren and Loong are trying to achieve.