Bitcoin is by far and away the largest and oldest cryptocurrency. The coin, created in 2009 by pseudonymous coder Satoshi Nakamoto, still holds sway over 46% of the market, as of April 2023. However, despite its dominance, the coin is comparatively limited in its usefulness. You can’t do a whole lot with Bitcoin apart from that which Nakamoto intended: send, hold, and receive coins.
By comparison, Ethereum, the largest smart-contract network, runs rings around Bitcoin in terms of its utility. Its decentralized finance (DeFi) network, worth some $30 billion according to DeFi Llama, permits users to trade derivatives and other financial products as wild and diverse as their imaginations will allow.
Aside from a few small-time DeFi applications, Bitcoin would be almost entirely shut out from this lucrative, vibrant market—if it were not for synthetic Bitcoin derivatives like Wrapped Bitcoin. Better known as WBTC, this is a coin that represents Bitcoin on another chain. It is like a permanent IOU for Bitcoin on another blockchain.
Wrapped Bitcoin is a fungible Ethereum token that represents Bitcoin and is locked in vaults held by crypto custodian BitGo. It was launched in January 2019 through a partnership with BitGo, Kyber Network, and Ren.
To mint WBTC, a class of actors called “merchants” lock up real BTC in BitGo’s vaults, and the network’s smart contracts issue a corresponding amount of WBTC. The cryptocurrency represents Bitcoin but trades as an ERC-20 token, an Ethereum token that is fungible and relatively easy to develop.
Merchants include major institutional players like FalconX, CoinList, and Wintermute. Said merchants then send WBTC to exchanges, which in turn sell them to customers.
The whole operation is governed by a decentralized autonomous organization, or DAO, composed of such major players as DeFi lending titan Aave and betting platform Gnosis. In total, 65 entities are connected to the WBTC project, according to WBTC’s website.
The Market for Bitcoin Derivatives
There are plenty of Bitcoin derivatives on Ethereum aside from WBTC. Other coins include RenBTC, Huobi BTC, and tBTC. They differ in terms of how they are created and governed. Some tout increased decentralization, meaning that the BTC is held in a decentralized pool rather than by a centralized custodian.
However, WBTC is by far the most popular synthetic Bitcoin. It holds about 94% of the market share, according to a dashboard on data metrics site Dune Analytics, and has a market capitalization of $4.2 billion.
The number-two spot goes to hBTC, of which there are just 8,969 coins in circulation, almost 15 times less than WBTC. In total, there are almost 192,000 BTC on Ethereum. That’s 2.62% of the market cap of Ethereum and close to 1% of all Bitcoin in circulation.
How to Trade and Use WBTC
WBTC trades as an ERC-20 token, meaning that it is compliant with the Ethereum blockchain and most of the decentralized protocols that sit on top of it.
You can buy WBTC on centralized exchanges, like Binance or Kraken, by creating an account and buying WBTC with real (“fiat”) money (like dollars or pounds) or other cryptocurrencies.
You’ll probably have to submit a form of ID to do so. You can also buy WBTC on decentralized exchanges, like Uniswap, by exchanging it for other cryptocurrencies by connecting a cryptocurrency wallet (e.g., MetaMask).
Once the WBTC is in your possession, you can use it just like any other ERC-20 token. This includes pledging WBTC as collateral for a crypto loan or staking it in a decentralized finance protocol to earn returns.
To trade WBTC back for real BTC, it’s probably easiest to use a centralized cryptocurrency exchange to sell your WBTC for the genuine article. You might incur fees for doing so, but it’s the easiest way to cash out your coins.