What is a Wrapped Cryptocurrency?
A wrapped cryptocurrency is an ERC-20 token representing one cryptocurrency. The value of a cryptocurrency is pegged to 1-to-1 with the underlying asset. The original asset is kept in a wrapper called a digital vault helping the wrapped version to run on another blockchain. Thus, users can use cryptocurrency in the Ethereum ecosystem due to the interoperability between Bitcoin and Ethereum. There is a need for a small gas (ETH) defined as the unit that measures the amount of computational effort which is essential for carrying out transactions on the Ethereum network. Gas prices are represented as small fractions of ether which is known as gwei (also called nanoeth). The gas facilitates the distribution of resources of the Ethereum virtual machine (EVM) to enable smart contracts to self-execute securely in a decentralized way. If someone chooses WBTC over BTC because they can use Bitcoin in a much better way in the Ethereum ecosystem.
What is an ERC-20 token?
An ERC20 token is a set of basic guidelines and functions for an Ethereum token or smart contract on the Ethereum blockchain. It comes with various advantages that include quick and uniform transactions, efficient confirmation for transactions, and reduced contract breaking risk along with efficient & fast interaction with tokens and blockchain.
The Background of Wrapped Bitcoin
Wrapped Bitcoin (WBTC) is an Ethereum token or ERC token that came into existence in 2019. The wrapped Bitcoin protocol allows Bitcoin holders to leverage the liquidity of Bitcoin is the decentralized finance (Defi) app on Ethereum. It is based on a decentralized autonomous organization (DAO) that has 17 stakeholders. There are more than 40 participants that include DAO members, exchanges, merchants, and wallets. You can exchange 1 Wrapped Bitcoin for 1 Bitcoin and vice versa. Although WBTC is backed by BTC, it is verified by the system “proof of reserve”.
Benefits of Wrapped Cryptocurrency
- You can take advantage of the greater market liquidity of cryptocurrency in the Ethereum network
- Lock up funds for a certain time and get block rewards.
- Lend your wrapped cryptocurrency in other network users and earn passive income
- Trade cryptocurrency on margin for greater returns.
- With the deployment of decentralized applications (DApps), users can transact wrapped tokens faster.