BTC is poised to make its Ethereum debut. An initiative involving several decentralized exchanges (DEXs) as well as crypto-custodians Bitgo will introduce ”BTC-backed” WBTC, with the W standing for “wrapped.” When WBTC launches in January 2019, it will enable ethereum-based ”bitcoin” to be traded on DEXs, boosting liquidity and opening the Ethereum ecosystem to a wider audience.
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Bitcoin Represented as an ERC20 Token
Blockchains such as Bitcoin and Ethereum have always operated independently. While interoperability protocols have been under development for some time, achieving full compatibility between networks whose code is alien to one another is a complex task. The development of wrapped bitcoin does not mean that full synergy between bitcoin and ethereum has been attained. What it does mean is that BTC users can transact on ERC20 platforms using a native token that represents the bitcoin they’re accustomed to.
As wbtc.network explains: “WBTC standardizes bitcoin to the ERC20 format, creating smart contracts for Bitcoin. This makes it easier to write smart contracts that integrate bitcoin transfers … The Ethereum network processes transactions faster than the Bitcoin network, but bitcoin holders don’t have to wait anymore. With WBTC, moving bitcoin between exchanges is much faster.”
The initiative has attracted a host of major players from the worlds of Bitcoin and Ethereum. Led by Kyber, Republic Protocol and Bitgo, WBTC will launch with the aid of partners that include Airswap, Ddex, Hydrogen, Set Protocol, Compound, Maker, Dharma, Prycto, IDEX, Gnosis, Radar Relay and Blockfolio. The concept of wrapping a cryptocurrency to create an asset that is to all intents and purposes identical has already been trialled by the likes of 0x and Maker. The former’s Radar Relay and the latter’s DAI stablecoin both make use of WETH – wrapped ETH.
More Convenience, Less Privacy
Within the cryptoconomy, the only decentralized exchanges with any sort of meaningful volume all operate on the Ethereum network. IDEX, which is supporting WBTC, is the largest DEX by a wide margin. Should wrapped bitcoin prove successful, the exchange and others like it can expect a significant influx of liquidity as bitcoin-holders enjoy the convenience of WBTC over the laboriousness of needing to trade BTC for ETH before they can participate. That convenience comes at a price however. As wbtc.network explains:
To receive WBTC, a user requests tokens from a merchant. The merchant then performs the required KYC/AML procedures and verifies the user’s identity. Once this is completed, the user and merchant execute their swap, with bitcoin from the user transferring to the merchant, and WBTC from the merchant transferring to the user.
The prospect of requiring KYC to obtain an ERC20 token to trade on a decentralized exchange will be anathema to the many individuals inclined to use such a platform. It is unclear whether there will be any other means to obtain WBTC without being forced to undergo KYC. The potential use cases for wrapped bitcoin are include enabling dapps to accept bitcoin payments “for lending protocols, funds, prediction markets and token sales.” The benefits offered by ethereum-compatible bitcoin are manifold. The drawbacks, however, may be too much for the privacy-conscious to countenance.
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