What Is Wrapped Bitcoin?
A Step-by-Step Guide to Using Bitcoin on the Ethereum Network
By: Rahul Nambiampurath • Loading...Beginners
Incompatibility is inevitable when you have dozens of blockchain networks with their own smart contract formatting. This is why Bitcoin cannot simply be transferred to Ethereum in its original state. Bitcoins can be wrapped as Ethereum-compatible ERC-20 tokens, making that into Wrapped Bitcoin (WBTC).
Wrapped Bitcoins are to Bitcoin what the USDT stablecoin is to the dollar. Both circumvent incompatibility via a new, compatible digital asset anchored into the original one. But, is there more to wrapping than it meets the eye?
Why Do We Need Wrapped Tokens?
The simplest way to convert tokens is through a centralized exchange. For instance, Binance Convert allows for cryptocurrencies to be exchanged for no fee. If one were to convert Bitcoin into Avalanche, those coins could then be sent to a non-custodial wallet that links into the Avalanche ecosystem of dApps.
Binance Convert. Source: Binance
Likewise, the same could be done for BTC-ETH conversion. The question then is, why do we need wrapped tokens? The answer is related to cryptocurrency volatility. Case in point, what if one wants to use Bitcoin as a collateral on Ethereum’s lending dApp like Aave? As the dominant cryptocurrency with the largest market cap, Bitcoin is the least volatile cryptocurrency.
This means that Bitcoin would be a better collateral for a loan than a more volatile cryptocurrency. Otherwise, more volatile collaterals could trigger loan liquidation. On smart contract platforms that have an even lower market cap than Ethereum, this is even more important to consider.
This is where wrapped tokens come in. A wrapped token represents cryptocurrency on another blockchain, so it can be used as such, with its price pegged to the original. Similarly, USD Coin stablecoin represents paper USD banknotes on a blockchain so that dollars can be used on blockchain networks as stable digital assets.
Resolving Blockchain Interoperability
Each blockchain network has its own set of validators, governance rules, native tokens, and even smart contract formatting. For example, while Ethereum has ERC-20 smart contract standard, TRON (TRX) has TRC-20 tokens. Likewise, Binance Smart Chain (BSC) uses BEP-20 standard to deploy its tokens.
There are two main ways to deal with this incompatibility mess and interface different blockchain networks, i.e., transfer digital assets:
- Layer 0 networks: Cross-chain networks like Polkadot or Cosmos that create an ecosystem of interoperable blockchains, serving as the internet of blockchains.
- Blockchain bridges: Cross-chain network protocols that convert tokens using smart contracts. When a user deposits their tokens into a conversion smart contract, they are locked. The user can then withdraw them as tokens compatible with the blockchain network.
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It is the second interoperability method that generates wrapped tokens. In the case of WBTC, the bridge would typically convert deposited Bitcoin into ERC-20 tokens. This gives Bitcoin all the functionality and compatibility of any other ERC-20 based altcoin.
Depending on the target network, Bitcoin could be wrapped into other token standards as well. With that said, not all blockchain bridges are the same.
Blockchain Bridge Types
Whenever we are dealing with digital assets, we must consider how they are managed. This is the difference between custody and non-custody. For example, depositing cryptocurrencies into a Binance account is equivalent to depositing them into a custodial wallet.
One would relinquish control of them because Binance would hold user’s private keys. The exchange would then be the custodian, able to freeze crypto funds or the funds could be pilfered by hackers. Moreover, the crypto exchange itself could go bankrupt, as happened to Voyager digital.
In contrast, using a non-custodial wallet means that users hold their private keys and control over their crypto assets. Likewise, users would be responsible for safeguarding them. The same custodial dynamic is present in blockchain bridges:
- Trusted or custodial bridges: These centralized bridges are typically faster, making it convenient to convert a large sum of tokens.
- Trustless bridges: Acting as decentralized networks, their security is equal to the underlying blockchain network. For example, xDai bridge converts Dai stablecoin from Ethereum into xDai stablecoin on Gnosis blockchain.
Naturally, when using decentralized services, there is no customer support to call for help if something goes wrong. This is why one should always research the bridge’s track record.
What Are the Most Popular Blockchain Bridges?
Because Bitcoin and Ethereum are the two largest cryptocurrencies, they are the most targeted for wrapping conversion. Likewise, because Binance is the world’s largest cryptocurrency exchange, it is most used for wrapping tokens.
To convert BTC into WBTC, visit Binance Bridge and connect your Binance account. Originally contained to Binance Smart Chain (rebranded to BNB Chain), it has expanded to support Tron, Ethereum, and Solana.
Therefore, one must first select the supported target chain for bitcoins to be wrapped. After Bitcoins are deposited into Binance Bridge address for that chain, the bridge sends an equivalent amount of WBTC to the provided wallet.
You can use Binance Bridge to connect two other most popular cross-chain bridges, both of which are trustless.
- Celer cBridge: supports 13 blockchain networks and their Layer 2 scalability solutions.
- AnySwap: rebranded to Multichain, this decentralized cross-chain swap protocol can convert all digital assets that use EdDSA or ECDSA signature algorithms, which includes BTC and ETH, among many others.
Low Gas Fees
To take full advantage of both wrapped Bitcoin and low gas fees, a conversion from WBTC to Ethereum’s Polygon sidechain is also very popular. After the completed conversion using one of these bridges, an extra step would be needed — connecting the wallet filled with WBTC to Polygon Bridge.
Wrapped Bitcoin (WBTC) is not the only compatible version of Bitcoin. There are also Binance Wrapped BTC (BBTC), Huobi BTC (HBTC), renBTC (RENBTC), and Interest Bearing Bitcoin (ibBTC). To move them around across nine blockchain networks, Zapper Bridge should also be considered as the most convenient option.
Is It Safe To Use Blockchain Bridges?
In the first half of 2022, hackers stole over $1.3B from blockchain bridges. This accounted for 69% of crypto-related hacks, according to the Chainalysis report. Cybersecurity expert from Elliptic, Tom Robinson, described this hacking spree in unflattering words.
“Blockchain bridges have become the low-hanging fruit for cyber-criminals, with billions of dollars worth of crypto assets locked within them,”
Robinson further noted that, due to the variety of successful hacks, blockchain bridges have lower security than it is typically found on blockchain networks. Moreover, hackers see blockchain bridges as easy pickings because they store assets. Therefore, they represent a centralized point of failure.
From this trend, it is safe to say that the development of less known bridges is still in its infancy. Consequently, most users stick to Binance to simply convert BTC to WBTC, using the aforementioned Binance Convert. It is then easy to send WBTC to a MetaMask wallet that can connect to Ethereum/Polygon.
This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.
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