What Is wBTC (Wrapped Bitcoin)?

wBTC is a tokenized version of Bitcoin, created as a solution to enable Bitcoin to be used in decentralized finance (DeFi) applications. 

Key Takeaways

• Wrapped Bitcoin (wBTC) is the first popularized version of tokenized Bitcoin, launched as an ERC-20 token on the Ethereum network in 2019.

• “Wrapping” is a solution that allows Bitcoin to be bridged out of its’ network and be used in DeFi applications in smart contract enabled blockchains like Ethereum.

• Alternatives to wBTC such as cbBTC and tBTC began to emerge in August 2024, due to rising mistrust against wBTC due to a controversial custodian change.

Why We Need wBTC

Wrapped Bitcoin (wBTC) was created to enable the use of Bitcoin in DeFi applications. Bitcoin’s original design, while secure, is non-Turing complete, meaning that Bitcoin cannot be used in smart contracts in blockchains such as Ethereum and Solana without modifications. Launched in 2019, wBTC is the first widely accepted tokenized version of Bitcoin, before other alternatives such as cbBTC and tBTC emerged.

How Does Wrapped Bitcoin (wBTC) Work?

Wrapped Bitcoin (wBTC) is a crypto token that’s backed by Bitcoin (BTC) on a 1:1 basis. wBTC is the first token that makes Bitcoin compatible on the Ethereum network, and was jointly launched by Kyber, Ren and BitGo in January 2019. This allows Bitcoin holders to participate in activities such as lending, borrowing, margin trading and yield farming on decentralized finance (DeFi) applications.

Wrapped Bitcoin (wBTC) is an ERC-20 token on the Ethereum blockchain, designed to be a 1:1 derivative of Bitcoin. It acts as a bridge, allowing Bitcoin’s value to be used within Ethereum’s vast ecosystem of decentralized applications (dApps), from lending protocols to decentralized exchanges (DEXs).

The process of creating and redeeming wBTC involves three key players:

• The Custodian (The Vault): A secure, regulated entity that holds the actual BTC in reserve. For most of wBTC’s history, this has been BitGo. The custodian is responsible for minting new wBTC when BTC is deposited and ensuring all circulating wBTC is fully backed. Since August 2024, wBTC has transitioned to a shared custody model with BiT Global. This shared model allows wBTC to diversify custody operations for greater security and decentralization.

• The Merchant (The Broker): An authorized institution that handles the swap for users. A user sends their BTC to a merchant, who then works with the custodian to mint the equivalent wBTC. Merchants are also responsible for performing necessary Know Your Customer (KYC) and Anti-Money Laundering (AML) checks.

• The wBTC DAO (The Board of Directors): A Decentralized Autonomous Organization (DAO) made up of key DeFi projects like Kyber Network and Compound. The DAO governs the protocol, with the power to add or remove merchants and custodians through a multi-signature wallet, preventing any single entity from having total control.

How wBTC is Minted

To get wBTC, a merchant sends BTC to the custodian, who then mints the corresponding wBTC on the Ethereum blockchain. To get BTC back, the process is reversed: a merchant sends WBTC to be “burned” (destroyed), and the custodian releases the equivalent BTC from its reserves.

The minting and redemption of wBTC is usually only done by institutional investors. Retail investors do not need to mint wBTC to use it; they can simply buy and sell wBTC which is readily available in the market through DEXs.

The Emergence of wBTC Alternatives

For years, wBTC’s centralized but functional model made it the industry standard. However, a series of events in 2024 exposed the risks of this model and opened the door for new competitors.

Increasing Distrust of wBTC

In August 2024, wBTC’s custodian, BitGo, announced a new partnership to diversify its custody operations, which included the controversial TRON founder, Justin Sun. Sun’s reputation, including an active lawsuit from the U.S. SEC at that time,  was a cause for concern for many users.

In the following weeks, wBTC redemptions increased, suggesting that institutions viewed the news negatively and reclaimed their BTC. Major DeFi protocols that relied on wBTC, like MakerDAO (now Sky), began to reduce their exposure, signaling feelings of distrust towards wBTC’s new custodian.

The Arrival of Institutions: Coinbase’s cbBTC

Seizing the opportunity, U.S. crypto exchange Coinbase launched its own wrapped token, Coinbase Wrapped BTC (cbBTC), in September 2024. Backed 1:1 by Bitcoin held in Coinbase’s regulated custody, cbBTC offered an alternative built on the trust of a publicly traded, U.S. based company.

Its launch was a huge success, attracting immediate support from major DeFi protocols and reaching a market capitalization of over $1.4 billion within months. Coinbase notably also delisted wBTC from their exchange in favor of their own cbBTC, a move that drew accusations of anti-competitive behavior. For many institutional and risk-averse users, the regulatory safety of Coinbase was a compelling alternative to the uncertainty surrounding wBTC.

The Decentralized Option: tBTC’s Rise

The wBTC controversy also highlighted a decentralized alternative: tBTC from the Threshold Network. Unlike wBTC and cbBTC, tBTC is a trust-minimized protocol that doesn’t rely on a single custodian. Instead, it uses a decentralized network of independent, bonded node operators to secure the underlying Bitcoin. This design is highly resistant to censorship or failure from a single party.

While its market share is smaller, tBTC saw significant growth as users sought a decentralized option free from single-party counterparty risk. The launch of its upgraded tBTC v2 made it more scalable and cost-effective, positioning it as a viable competitor for users who prioritize decentralization above all else.

A Cautionary Tale: The Collapse of renBTC

The risks of centralized wrappers were starkly illustrated by the collapse of Ren Protocol. Its token, renBTC, was a popular alternative until its parent company, Alameda Research, imploded along with the FTX exchange in late 2022. With its funding gone, the Ren network was forced to shut down, warning users to redeem their renBTC before the tokens became worthless. This event served as a powerful, real-world lesson on what can happen when the entity backing a wrapped asset fails.

WBTC vs. cbBTC vs. tBTC: Which Should You Use?

The tokenized Bitcoin market is now fragmented, offering distinct choices for different user needs. The best option for you depends on your priorities, whether that’s legacy liquidity, regulatory compliance, or cryptographic decentralization.

Which Version of Wrapped Bitcoin Should You Use?

You might prefer wBTC if… you need access to the deepest liquidity pools on the widest variety of older DeFi protocols where it remains the most integrated asset.

You might prefer cbBTC if… you are a Coinbase user who values ease-of-use and the perceived security that comes from a large, U.S.-regulated public company.

You might prefer tBTC if… your top priority is decentralization. If you want to avoid trusting a single company and prefer a system secured by cryptography and economic incentives, tBTC is the clear choice.

What Are the Risks of Using Wrapped Bitcoins?

While the market has focused on custodian risk, users face other significant threats. A complete risk assessment should include:

1. Custodian Risk: This is the risk that the central party holding the Bitcoin fails, as seen with the collapse of renBTC. The controversy surrounding wBTC’s custody change also falls into this category.

2. Smart Contract Risk: While not a risk on wBTC per say, the DeFi protocol you use wBTC in could have a bug or be exploited. In March 2023, a flash loan attack on Euler Finance resulted in the loss of $197 million, including a large amount of wBTC.

3. Bridging Risk: Wrapped Bitcoins allow you to use Bitcoin outside of the native Bitcoin blockchain. Naturally, you are exposed to the risk that the bridge you used to bridge the Bitcoin over is exploited and the locked assets stolen, resulting in the wrapped Bitcoin you are currently holding to become useless.
   Note that this is different from Custodian Risk, because while BitGo is the custodian of wBTC, you can bridge wBTC from Ethereum onto other Ethereum Layer 2s such as Arbitrum via bridges, which introduces the crypto bridge you used as another layer of risk. One example of this was the MultiChain exploit in July 2023 that resulted in over $125 million of bridged assets in losses, including that of wBTC. 

Conclusion: The Future of Tokenized Bitcoin

The era of wBTC’s monopoly is over. The market has matured into a multi-polar landscape where users can choose between legacy trust (wBTC), corporate trust with a seamless user experience(cbBTC), and cryptographic trust that focuses on decentralization at the cost of higher technical complexity(tBTC). This competition has made the ecosystem more resilient by reducing its dependence on a single point of failure, while possibly incentivizing projects to find a sustainable balance between robust security guarantees, frictionless ease of use, and regulatory acceptance

For now, the great unwrapping of wBTC’s dominance has led to a more diverse, competitive, and ultimately more robust ecosystem for bringing Bitcoin’s liquidity to the world of decentralized finance.

This article is only for informational and educational purposes and should not be taken as investment advice.