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Key Differences Between Bitcoin and Wrapped Bitcoin

Key Takeaways
  • Unlike Bitcoin, Wrapped Bitcoin utilizes smart contracts for tokenization, unlocking diverse decentralized applications on Ethereum.
  • Bitcoin serves as a currency store of value, while Wrapped Bitcoin's ERC-20 format allows for DeFi applications on Ethereum.
  • Centralization risk arises from BitGo as the sole custodian, despite robust security measures and insurance.
10-Jan-2024 By: Gunjan Sahu
Key Differences Betw

Bitcoin vs Wrapped Bitcoin in the World of Decentralized Finance

Wrapped Bitcoin (WBTC) is a tokenized form of Bitcoin that exists on a different blockchain, typically the Ethereum blockchain. The process of wrapping Bitcoin involves depositing Bitcoin into a smart contract on the native Bitcoin blockchain, and in return, an equivalent amount of WBTC is minted on the Ethereum blockchain. This allows Bitcoin to be represented and traded on other blockchain networks, bringing its liquidity and functionality to decentralized applications (DApps) and smart contracts beyond the Bitcoin network. This WBTC is giving hope for the future of decentralized trading

Some Key Differences Between Bitcoin and Wrapped Bitcoin

Blockchain Platform: Bitcoin operates on its own blockchain, while Wrapped Bitcoin operates on a different blockchain, such as Ethereum. WBTC is an ERC-20 token, making it compatible with Ethereum's ecosystem.

Smart Contracts: Wrapped Bitcoin involves the use of smart contracts to lock up real Bitcoin on the Bitcoin blockchain, which then issues equivalent WBTC on the Ethereum blockchain. Bitcoin, on the other hand, does not support smart contracts in the same way.

Use Cases: Bitcoin primarily serves as a decentralized digital currency and a store of value. Wrapped Bitcoin, being an ERC-20 token, can be used within the Ethereum ecosystem for various decentralized finance (DeFi) applications, such as lending, borrowing, and trading on decentralized exchanges.

Interoperability: Wrapped Bitcoin provides interoperability between the Bitcoin and Ethereum networks, allowing users to leverage the benefits of both blockchains. This interoperability is achieved by representing Bitcoin on the Ethereum blockchain.

Custodianship: The process of wrapping Bitcoin involves entrusting a custodian with the custody of the actual Bitcoin that backs the Wrapped Bitcoin. This introduces a level of centralization and counterparty risk, as users rely on the custodian to properly manage the underlying assets.

Major Issues with Wrapped Bitcoin Usage 

The price of Wrapped Bitcoin (WBTC) is $45,901.61 when this news is written. The highest price paid for Wrapped Bitcoin (WBTC) is $70,643.40, which was recorded on Nov 10, 2021. The major concern with WBTC is centralization and trust in BitGo as the sole custodian. Despite BitGo's reputation, it remains a single point of failure for storing BTC backing WBTC. BitGo employs advanced security measures and $100 million in digital asset insurance, but reliance on a single entity persists.

It's important to note that while Wrapped Bitcoin expands the utility of Bitcoin by allowing it to be used on other blockchains, it also introduces some centralized elements due to the custodial process. Users should be aware of these trade-offs when deciding to use Wrapped Bitcoin or traditional Bitcoin. WBTC is adding solutions for trading on various blockchain which was not possible with Bitcoin. 

Also Read : 2024 Marks a New Era for Crypto Innovation and Regulation

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