Wrapped Bitcoin
Wrapped Ethereum
Wrapped DAI
wrapped Christmas presents
What are they?
Today,
we’re gonna discuss what Wrapped Bitcoin and other wrapped coins are
and why you should be paying attention to them in DEFI.
And, no,
I’m not talking about your Christmas presents because
ho ho ho
I might shove those down your chimney.
Let's get it.
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It comes with a rash and ointment.
In this video, we're going to be discussing wrapped coins and what the heck they are.
But let's start out by discussing WBTC, Wrapped Bitcoin,
and then we'll go through the different types of wrapped tokens.
Because Bitcoin and the Ethereum blockchain don't play nice together,
and DeFi is largely powered by the Ethereum blockchain,
there's been a major divide between DeFi and Bitcoin investors.
This wouldn't be a problem if it weren't for the fact that BTC represents the vast majority of cryptocurrency’s market cap.
Wrapped Bitcoin is a sledgehammer trying to bust down that wall like the juggernaut.
If investors continue stepping through the gaps and developing creative solutions,
a flood of liquidity could flow into the DeFi space.
So, what exactly is Wrapped Bitcoin or WBTC?
It is an ERC20 token that represents Bitcoin as an extended ERC20 token on the Ethereum blockchain,
where 1 BTC = 1 WBTC token.
This involves entities there are at least one custodian and multiple merchants.
The whole system has in general two main tasks.
First, minting WBTC.
If a matching amount of BTC is locked at a custodian's account on the Bitcoin blockchain,
the corresponding amount of WBTC tokens is minted or released to the merchant
on the Ethereum blockchain.
The second primary task is burning WBTC.
When a merchant wants to convert his WBTC tokens back into BTC,
he places a burn request.
The specified amount of WBTC tokens are burned.
If successful,
the custodian,
and this is not your school janitor,
sends the merchant the requested amount of BTC on the Bitcoin blockchain.
So to accomplish a Bitcoin to WBTC swap and back, a merchant sends BTC to a custodian.
The custodian confirms that this merchant has deposited a certain amount of BTC on the Bitcoin blockchain.
A matching amount of WBTC is then minted by a custodian and can be used by the merchant.
Accordingly,
if a merchant wants to swap back the WBTC to BTC, the merchant files a request to burn the WBTC.
Now, Wrapped Bitcoin isn't the only wrapped version of a cryptocurrency.
There's also Wrapped DAI and Wrapped ETH.
A wrapped token can be any asset hosted on the Ethereum blockchain, typically, with a price that is the same as another underlying asset,
even if it's not on the Ethereum blockchain.
Wrapped tokens are each backed by an equal amount of the underlying asset or currency,
as well as a variety of organizational roles and algorithmic checks and balances.
One reason for using wrapped coins is that dApps can process wrapped token transactions much faster because they aren't done across multiple blockchains.
And we all know speed on the blockchain is pivotal at this point.
Users can transact confidently because wrapped tokens' trustless nature is preserved by a framework that backs each one-to-one with the underlying assets.
The complex model is enough to provide dApp users native access to other cryptocurrencies without burdening both blockchains in the process of any dApp transaction.
A single minimal gas fee on Ethereum is all it takes for tokens wrapped on Ethereum.
If it's another blockchain, then the fee will be paid in the native blockchain of the wrapped token.
Because Ethereum is the biggest, by far, DeFi ecosystem,
wrapped tokens are often hosted on other blockchains
but are also stablecoins that are pegged to the dollar built with contracts on ETH.
It's important to note that many of the first wrapped assets were, in fact, fiat-backed stablecoins,
such as tokens with prices pegged to the dollar,
Tether coin-based USDC or TrueUSD.
There are also euro, yen, won and countless other fiat stablecoins
that are mostly backed on the Ethereum blockchain.
These are supposed to be backed accordingly via the reserves
with coins fed in according to the demand of online crypto exchanges
and larger institutional investors who want to quickly exchange fiat money into crypto
and manage their money with a given platform.
However,
Tether has for years been accused of not having the proper reserves.
Wrapped coins make it easy to deposit dollars into DeFi applications and blockchain wallets
as well as a reliable counter currency,
providing traders less crypto asset volatility.
Other cryptocurrencies are beginning to launch wrapped versions of their tokens on Ethereum in larger numbers, with interoperability being one of the main reasons.
The other big thing that wrapped tokens provide is a mass of liquidity to DEXs.
The supply of BitGo’s wrapped Bitcoin topped 76,000 in September, according to Dune Analytics.
Now, that might not sound like a lot given Bitcoin’s circulating supply is 80M+,
but WBTC is just getting started,
and we are all still early to this technology in its infancy.
There's another major factor, and that's there are multiple wrapped Bitcoin tokens.
There are over 100,000 BTC worth a massive $1.1B+ minted from at least seven issuers,
mostly due to promising high rates of return on lending or yield farming services.
Surprise!
They're trying to make money.
Who would have thought?
For tokenized assets, security relies on the type of custodianship and if the investment is collateralized.
Three major models exist:
a centralized firm like BitGo;
a smart contract system with collateral, such as tBTC;
or a complete, synthetic-asset backing, like sBTC.
Zcash also just recently launched its own wrapped asset on Ethereum.
ZEC’s wrapped coin serves as a decentralized exchange ecosystem allowing traders to trade WZEC even if exchanges are forced to delist Zcash due to privacy concerns.
WZEC is the first asset to be launched by “Wrapped,”
a partnership between Ethereum tokenizers Tokensoft and qualified custodian Anchorage,
with over-the-counter liquidity provided by CMS Holdings.
WZEC was launched under the new ERC-1404 standard,
it was a great year,
a protocol to be used for SEC-registered assets on Ethereum which has compliance functions.
Wrapped Zcash is a one-to-one representation of Zcash on Ethereum held in custody by Anchorage.
They say the opportunity is as big as Alaska.
However, WZEC is more of a Zcash light as it does require KYC,
which kind of defeats the purpose of privacy coins in the first place.
CoinDesk reported that Mason Borda, CEO of Tokensoft, had some comments on the situation.
Wrapping Zcash on the Tokensoft platform for use on Ethereum also makes the shielded version of the coins more palatable to regulators, Borda believes.
That’s because it involves a know-your-customer process performed upstream, he said,
plus the ZEC holder also has to meet with Anchorage’s compliance as a qualified custodian.
He also said, “Obviously, Zcash enables shielded transactions, so now holders of Zcash can have assets in a shielded pool and wrap a portion of these assets to use on Ethereum, maintaining their privacy.”
Borda went on to say, “They would love to use their Zcash,
but they didn’t want to disclose how much they have.
They just want the information private.”
Isn't that what we're all after?
However, the comments made by the president of Anchorage, Diogo Monica, are even more shocking.
“The goal with Zcash was never to shield from authorities, regulators or your financial providers.”
“The shielding of Zcash came as a response to the fact that Bitcoin is pseudonymous.
So who you’re shielding from is the public at large and the internet at large.
And so, the fact that we’re using ERC-1404 standard allows us to guarantee on-chain
that we have the advantages of regulation with the advantages of Zcash on-chain anonymity.”
Typically, it’s not just Zcash merchants who are centralized custodians of wrapped tokens that require KYC processes to obtain wrapped assets.
For WBTC, initial merchants will include AirSwap,
Dharma,
ETHfinex,
GOPAX,
Kyber Network,
Prycto,
Ren,
and Set Protocol.
The developers also say that WBTC will be integral to the development of decentralized exchanges.
Wrapped Bitcoin may be exactly what DeFi needs
because it's pegged to BTC, and users can obtain it via a fairly simple process.
Its rise may continue.
It could also further cement Bitcoin’s primary use case as a store of value.
If Bitcoin players, big or small, increasingly turn to WBTC,
the liquidity boost could help DeFi soar to new heights.
And for investors, WBTC provides a new avenue to earn interest on Bitcoin holdings by depositing the token and yield-generating DeFi protocols.
What do you guys think?
Are you a fan of wrapped coins?
If so, drop me a comment below.
That's all I got.
Be blessed.
BitBoy out.