What is wrapped Bitcoin and how does it work?

Wrapped Bitcoin (WBTC) is an ERC-20 token on Ethereum designed to track the value of Bitcoin (BTC). By representing BTC as an ERC-20 token, WBTC allows BTC-linked value to be used in Ethereum-based applications, including decentralized finance (DeFi) protocols. In practice, WBTC enables interaction with Ethereum-based applications and may also be used on other Ethereum Virtual Machine (EVM) networks through bridging, depending on the platform.

This article explains how WBTC works, how it differs from Bitcoin, and outlines key considerations when using wrapped tokens.
 

Wrapped Bitcoin (WBTC) is an ERC-20 token designed to track the value of BTC. WBTC is designed to be backed 1:1 by BTC held in reserve under the WBTC custody and merchant model, rather than being “always locked in a smart contract.”

WBTC allows BTC-linked value to be used in Ethereum-based DeFi through ERC-20 compatibility. It allows users to trade WBTC pairs through smart contract applications. Transaction speed depends on the network being used and current network conditions. As an ERC-20 token, WBTC is natively compatible with Ethereum applications and may be usable on other Ethereum Virtual Machine networks through bridging or wrapped representations, depending on the platform..Tokenizing Bitcoin as WBTC on the Ethereum network helps bridge the gap between two of the largest blockchain ecosystems.
 

Launched in January 2019, WBTC was the effect of a collaborative effort between three major blockchain organizations, specifically:

• BitGo, a trusted cryptocurrency custody provider, ensures the secure storage of Bitcoin reserves backing WBTC.
• Kyber Network, a decentralized liquidity protocol, drives DeFi adoption by enabling seamless token swaps.
• Ren focuses on blockchain interoperability, allowing assets to move freely across networks.

These organizations contributed to enabling BTC-linked value to be used in Ethereum-based applications. Governance processes are coordinated through the WBTC DAO, which defines rules for minting and burning. Custody and operational risks depend on the entities and controls involved.
 

Wrapping BTC into WBTC involves a combination of off-chain custody and on-chain token issuance. A simplified process includes:

1. Wrapping BTC – To create WBTC, Bitcoin holders send BTC to an authorized custodian wallet. The custodian verifies the deposit and mints an equivalent amount of WBTC on the Ethereum blockchain.
2. Unwrapping WBTC – When a user wants to redeem their WBTC for Bitcoin, they submit a request to the custodian. The WBTC is burned (removed from circulation), and the corresponding BTC is released from reserves and returned to the user.
   Reserve backing can be reviewed through published reserve data and token supply information. However, custody, operational processes, and counterparty risk remain important considerations.
    

• Access to Ethereum-based applications
  WBTC allows BTC-linked value to be used in Ethereum-based applications. Depending on the platform, this may include trading, lending, or use as collateral, subject to protocol rules and risks.
  Without wrapped representations, BTC cannot be used directly in Ethereum-based smart contract environments.
• Liquidity within Ethereum ecosystems
  WBTC represents BTC-linked value within Ethereum as a tokenized form. In supported applications, it may contribute to liquidity pools or trading activity, depending on usage and platform design.
• Interoperability
  WBTC is one approach used to enable interaction between Bitcoin and Ethereum-based systems. This allows BTC-linked value to be used across different networks, subject to platform support and associated risks.
• Network differences
  Ethereum generally has shorter block times than Bitcoin, but transaction confirmation and finality depend on network conditions, fees, and usage. These factors can affect how quickly transactions are processed.
   

WBTC is an ERC20 token backed 1:1 with Bitcoin.  Their prices can differ slightly and there are critical distinctions between the two:

• BTC as an ERC-20 Token  
  WBTC is an ERC-20 compatible with the Ethereum network and any other EVM networks. BTC, on the other hand, operates natively on its blockchain and is not compatible with non-Bitcoin networks.
• Access to DeFi Protocols on Ethereum  
  BTC holders cannot directly access DeFi platforms on the Ethereum blockchain without going through a complex bridging process. WBTC simplifies this by acting as a gateway for Bitcoin holders to indirectly enter the Ethereum ecosystem and unlock opportunities in the DeFi space.
• Level of Decentralization  
  Bitcoin is famously decentralized, with thousands of nodes maintaining its network. WBTC, while decentralized to an extent, relies on custodians and centralized entities to manage the collateralization and burning process.
   

Wrapped Bitcoin is one method used to enable BTC-linked value to interact with Ethereum-based systems. It allows users to participate in certain applications that require ERC-20 compatibility, depending on platform availability and rules.

Using WBTC involves additional considerations, including custody models, redemption processes, and smart contract risks. Before using WBTC, it is important to review how the token is issued, managed, and supported by the underlying system.

If you use WBTC, review the wrapper’s custody model, redemption process, and smart contract risks before proceeding.