DeFi Tip: What is Wrapped Bitcoin?
First, a 'wrapped' Bitcoin is not 'Bitcoin' per se.
Second, wrapped Bitcoin is common in DeFi circles, especially in Ethereum.
The short form of wrapped Bitcoin is WBTC. We shall stick with that in this explainer.
WBTC is an ERC-20 token that represents Bitcoin on the Ethereum blockchain.
By now, you should know that Bitcoin has no smart contracting capability, acting purely as a transactional layer. Therefore, it means BTC holders—commanding over $800 billion worth of value—are mostly watching from afar how DeFi is blossoming.
WBTC is one attempt to link the vibrant DeFi scene with the multi-billion dollar BTC ecosystem via a custodian.
Any BTC converted to WBTC is done via a trusted intermediary called the WBTC DAO composed of over 30 members. At any point in time, BTC that backs WBTC is visible through the agent's proof-of-reserve.
Since BTC conversion to WBTC ERC-20 tokens is custodial, there is a danger of BTC in reserve being released, leaving WBTC holders with fake bags.
To counter this, there are other options where the conversion from BTC to ERC-20 versions is non-custodial.