Bitcoin has been the largest value pool in the encryption market for a long time, but the original BTC has no direct access to the ETA smart contract system. Around this restriction, Wrapped Bitcoin (WBTC) was designed as an ERC-20 token to anchor the price of bitcoin, allowing the holder to bring the relevant value into DeFi, without selling BTC.
How does WBTC work?
The basic structure of WBTC is 1:1 reserve support. For each issue, 1 WBTC corresponds to 1 true bitcoin in the custody of the trustee. According to the article, the aim of this model is to introduce the mobility of bitcoin into the Ethers so that it can be used in situations such as lending, mortgages, trading and the mobility pool.
This type of encapsulation is required because of the different design of the two chains. The bitcoin network is not in itself suitable for the operation of complex smart contracts, and most of the DeFi applications in the Taifung rely on the ERC-20 standard. WBTC solves the problem of compatibility between the two by mapping the BTC into a Taifong token.
foundry and destruction mechanisms
According to the article, WBTC operates mainly through the foundry-destruction model, involving three categories of participants: trustee, merchant and user.
- The custodian is in charge of the real bitcoin reserve.
- Businesses responsible for user validation, distribution and foreclosure processes
- User completes conversion between BTC and WBTC
When a user wishes to acquire a WBTC, it usually initiates an application with a business. Upon completion of the identification and compliance check, the merchants deposit the corresponding amount of bitcoin in the custody of the custodians, and the system casts the equivalent of WBTC on the Taifung. Upon the inverse foreclosure, the user submits WBTC, and the custodian releases the corresponding BTC after the token has been destroyed.
The article mentions that these casting and destruction records can be viewed on the chain and that the stock situation is subject to a stock certificate check to verify whether there is a matching bitcoin support for WBTC in circulation.
What can be done and what risks?
On the use level, WBTC allows bitcoin price openings to enter directly into the Etherwood DeFi. The holder may use it for loans, mortgages, converts or provides liquidity without having to sell BTC before converting it into other assets.
However, the article emphasizes that the possession of WBTC is not equivalent to the possession of original bitcoin. The greatest difference between the two is that WBTC adds additional confidence links and technical risks, including:
- Host risk, the bottom BTC is in third-party custody
- Smart contract risk, i.e., there may be a leak in the contract itself Hole
- Bridging or containment risk, i.e., possible failure of the cross-chain mapping structure
This means that while WBTC has increased its availability in DeFi, the cost is to introduce more middle links. It was also mentioned that other alternatives existed in the market, such as the cbBTC introduced by Coinbase, and tBTC, which placed more emphasis on decentralised hosting structures. The main difference between different products is the kind of hosting and trust assumption that users are willing to accept.