Wrapped Bitcoin, often written WBTC, is a token that represents Bitcoin on a different blockchain, most commonly Ethereum. Because Bitcoin cannot natively run on Ethereum, wrapping creates a stand-in token that is meant to be backed one-to-one by real Bitcoin held in reserve.
The purpose is to let Bitcoin be used within another ecosystem DeFi applications, such as lending or trading on Ethereum, which it otherwise could not access. Each wrapped token aims to always be redeemable for the underlying Bitcoin that backs it.
Wrapping adds a layer of trust and risk. You are relying on whoever holds the reserves and runs the system to keep the backing genuine and redeemable. This entry explains the concept; understanding the added dependency is part of understanding the risk involved.
Frequently Asked Questions
Why wrap Bitcoin?
Because Bitcoin cannot natively run on blockchains like Ethereum. Wrapping creates a token that represents Bitcoin there, letting it be used in that ecosystem DeFi applications.
What risk does wrapping add?
You rely on whoever holds the Bitcoin reserves and runs the system to keep the backing genuine and redeemable, which adds a layer of trust not present with plain Bitcoin.
