Wrapped Bitcoin isn’t something you put under the Christmas tree; it’s a way to explore different blockchain ecosystems.
But how does it all work?
More importantly, how safe is the wrapping process, and what are the benefits? That’s what we’ll be exploring in this article. Read on to learn more about wrapped Bitcoin and uncover whether wrapping is right for you.
Let’s start with the basics. What is wrapped Bitcoin?
Wrapped Bitcoin takes Bitcoin, the native token of the Bitcoin blockchain, and wraps it in another token-type native to another blockchain. This opens up new possibilities for interoperability, meaning you can use wrapped Bitcoin across different crypto ecosystems.
Think of wrapped Bitcoin as the ultimate digital diplomat.
You see, the crypto world is filled with many different languages. Bitcoiners speak one way, Ethereans (from the Ethereum ecosystem) speak another, Solanians (from the Solana ecosystem) speak in their own native tongue, and so on.
The problem is that to go from one ecosystem to another, you need a way to bridge this language barrier.
That’s exactly the goal of wrapped Bitcoin. It speaks each ecosystem’s language fluently.
When wrapped, Bitcoin can travel to these new lands, speaking the same language and interacting with applications on each respective blockchain.
So, what is wrapped Bitcoin for?
Essentially, you use wrapped Bitcoin to interact with applications and protocols on other chains. Due to Bitcoin’s technological constraints, these kinds of activities are close to impossible on the Bitcoin blockchain.
However, recent developments are opening up new opportunities in an emerging space called Bitcoin decentralized finance (BTCFi), which exists on the Bitcoin blockchain (or, on-top in some cases).
Here’s a list of some use cases for wrapped Bitcoin:
From decentralized finance (DeFi) to onchain gaming, there’s a wealth of use cases that wrapped Bitcoin opens up across other blockchain ecosystems. Ethereum alone hosts over 1,200 protocols* (information from defillama.com). In the past, Bitcoin holders did not have access to these decentralized applications (dApps).
That’s why wrapped Bitcoin and the technology that supports it is so consequential. Instead of being simply digital gold, Bitcoin can now act as a means to interact with DeFi or other applications.
How does it all work? Let’s break it down.
To explore the process of Bitcoin wrapping, we’ll focus on the first wrapped Bitcoin: wBTC. It’s worth noting that while wBTC is known as wrapped Bitcoin, there are plenty of other wrapped Bitcoin alternatives such as tBTC, dlcBTC, and more* (learn more about wrapped Bitcoin alternatives at unchainedcrypto.com).
It’s a bit confusing, we know. But, for our purposes, we’ll focus on wBTC, the first and most popular wrapped crypto. wBTC is designed to interact with the Ethereum blockchain (as well as others, depending on the type of wBTC).
It works across four main steps:
It’s kind of like a coat check. You give your coat (Bitcoin) to the coat check (custodian), and they give you your ticket (wBTC) that you can use to get your coat back later. While you have your ticket, you can use it in ways you couldn’t use the coat.
But why don’t you just use the native token on each respective chain? If you want to explore DeFi opportunities on the Ethereum blockchain, wouldn't it make sense to just use Ether (ETH)?
There are two main reasons why you might use wrapped Bitcoin: security and liquidity.
When it comes to security, Bitcoin is number one. For many in the crypto space, the competition isn’t even close* (as mentioned on blockworks.io). Not only does the Bitcoin network have an impressive amount of miners, which is important for decentralization, but it also has a proven track record of security.
When you wrap your Bitcoin, you take this security to other chains. Although, there are new risks that come with this process, which we’ll get to later.
There’s also the liquidity component.
Liquidity means how easily you can buy or sell something without affecting its price significantly. Think of it like a busy market versus an empty one. In a busy market (high liquidity), you can quickly buy or sell at fair prices because there are lots of traders.
Bitcoin has tons of liquidity on regular exchanges, but that liquidity can’t be used on other blockchains.
Wrapped Bitcoin solves this problem. It’s kind of like connecting two separate pools of water with a pipe. This pipe, wrapped Bitcoin, allows BTC’s liquidity to flow into the Ethereum, or another blockchain, ecosystem and back.
This high liquidity is especially important for users managing large amounts of coins.
Of course, we need to mention the risks around wrapped Bitcoin. To begin, let’s start with custodial risks.
In the case of wBTC, BitGo* partners with the project and holds all the actual Bitcoin. Since they’re in charge of storage, you can see why you’d need to trust them completely. As you might imagine, this has the potential for trouble. Recent changes propose splitting control between BitGo US, BitGo Singapore, and BitGo Global* (as mentioned on nydig.com).
While some see this as a benefit, it shares the custodial risk across more organizations — which has the potential to increase the chances of something going wrong.
Moreover, while wBTC is popular, it’s not the only wrapped crypto in the game anymore. Growing competition from other platforms (like Coinbase’s cbBTC) could lead to fragmented liquidity across different wrapped tokens. Which, in turn, could affect wBTC’s value or usability.
There are also mismanagement concerns.
Improper minting processes could lead to a non-one-to-one backing, especially with more custodians. There’s also the involvement of controversial figures in the project that only adds to the uncertainty. It's like storing gold in a bank that's changing ownership — the service might still work, but you need to trust new parties.
Ultimately, this trust is the most glaring downside to wBTC and other wrapped Bitcoin alternatives.
After all, Bitcoin is a peer-to-peer decentralized cryptocurrency with no centralized authority in control. For many people in the Bitcoin community, this feature is not worth sacrificing, even for access to new opportunities on other blockchains.
The easiest way to get a hold of wrapped Bitcoin like wBTC is through a centralized exchange. Many popular exchanges offer wBTC as well as other forms of wrapped cryptocurrencies.
But, if you want to cut out the exchanges, you could always send your BTC to a merchant for wrapping. For this method, you’ll go over to an approved merchant (check out the wBTC* website for more information). Doing it this way may take more time, but it’s considered the official process as it goes through only approved merchants.
To get started, you need to have Bitcoin.
That’s where we can help. Bitcoin Depot operates the largest network of Bitcoin ATMs in the U.S., Canada, and Puerto Rico. That means you’re never too far away from a seamless cash purchase of BTC.
Once your BTC lands in your wallet, you can then interact with an approved wBTC merchant to wrap your coins.
While wrapped Bitcoin opens up new opportunities across a variety of blockchain ecosystems, it's not without potential risks.
The main downside is trusting a custodian to care for your coins.
For the most die-hard Bitcoiners, this goes right up against the decentralized philosophy of Bitcoin in the first place. So, before you take the leap into the world of wrapped Bitcoin, make sure you fully understand these risks.
Here at Bitcoin Depot, our mission is simple: bring Bitcoin to the masses.
Whether you want to wrap your coins to get involved in DeFi activities on Ethereum or just want to hold your BTC for the long term, it all starts at one of our Bitcoin ATMs.
To get started on your own journey, find your nearest Bitcoin ATM today.
*The information provided above is for informational purposes only. The inclusion of any particular 3rd party site does not imply an endorsement, sponsorship, or partnership between Bitcoin Depot and the sites listed above. While Bitcoin Depot endeavors to ensure the accuracy and relevance of the information provided, we do not guarantee the reliability of any 3rd party’s information.