But what happens if, for example, you want to use Bitcoin within an Ethereum-based DEFI application, to gain interest or take out a loan? You can’t, because the two sets of rules aren’t interoperable. Bitcoin is not Turing Complete and cannot interact with Smart Contracts.
Think of it like trying to plug in a European electrical device in America, it isn’t possible without an adapter, because the underlying electrical networks work in different ways. So a wrapped token is like a plug adapter for cryptocurrencies from different blockchains.
How do Wrapped Bitcoin Tokens Work?
So now you hopefully have an idea of what a wrapped token is, you’re probably wondering how you wrap Bitcoin to use within the Ethereum ecosystem and then unwrap it back to plain old BTC?
To wrap Bitcoin you need to send it to a Custodian who will hold your BTC in a reserve, then for a fee will mint a synthetic wBTC on a 1:1 basis and send that to an Ethereum address that you provide. The actual mechanics are more complicated, but as a user, the process is that simple.
When you want to unwrap your wBTC, you send it back to the Custodian who burns it and releases the original BTC held in reserve.
BitGo are the biggest wrapped Bitcoin Custodian with over 274,000 BTC held in custody to produce an equivalent amount of wBTC with value over $12bn.
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