Why Do We Need to Wrap Bitcoin?

Why Do We Need to Wrap Bitcoin?

BitGo, Kyber Network, MakerDAO, IDEX and many other crypto companies partnered to create a Bitcoin-backed Ethereum token, Wrapped Bitcoin. This token will represent BTC, 1 token equal to 1 BTC stored in the custody of BitGo. It could be used to trade BTC on DEXes, the whole administration will be via DAO, similar to Maker system

The idea of issuing a Bitcoin-pegged token is a genius idea. If there are dollar-pegged cryptocurrencies, stablecoins, and there are gold-backed tokens, such as DigixDAO, why there shouldn’t exist a token, pegged to a digital gold, Bitcoin?

It might seem strange at first, but the more you think about it, the more it makes sense:

  • Bitcoin is a main financial instrument on crypto markets and is considered a commodity in regular markets, such as CME or CBOE exchanges. Any mature market for any commodity has derivative instruments, for example, future contracts. We see that the institutional players create derivatives for Bitcoin. These instruments are from the old world, but the crypto market can create its own, new forms of derivatives. All of them, both old and new ones, can coexist without any problem.
  • This WBTC token is totally legit. Each token is backed by one BTC, you have to place it in the vault to create a token. That doesn't mean creating Bitcoins out of thin air.
  • Its usefulness can't be underestimated. Traditionally, Bitcoin is traded against all altcoins on centralized exchanges. However, it can't be traded on DEXes, since most of decentralized exchanges work on Ethereum, being a set of smart contracts for trading, and Bitcoin has its own chain, being unable to interact with Ethereum. Now with a redeemable WBTC token every single ERC20 token can be traded on any DEX in a BTC pair, and the profit exchanged for BTC, if necessary. Isn't it glorious? Traders will have an opportunity and more reasons to move to decentralized exchanges without that KYC and AML stuff, and still have the same spectrum of trading instruments that they're used to on centralized exchanges.

Of course, Bitcoin maximalists would always be unhappy with anything that isn't Bitcoin. They would love to see altcoins dying in flames. Everyone else has a reason to welcome this initiative because it adds more diversity to the market.

The list of companies, that participate in the development, includes BitGo, that will provide a vault for storing BTC, Kyber Network and IDEX, two decentralized (well, semi-decentralized in case of IDEX) exchanges, and MakerDAO. Here it gets interesting. If this whole Wrapped BTC system works similarly to the already working projects of Maker, then it won't require any maintenance for years, because MakerDAO works flawlessly without any centralized authority. Given that it was mentioned that WBTC will be a DAO, there's a high chance that it will be built on Maker tech.

Does everyone have to complain every time when they get an important update to the ecosystem? This token is a great addition that will allow using new trading and hedging tactics, and maybe even provide decentralized Bitcoin loans, based on Ethereum smart contracts. It’s hard to tell now how many ways to use it people will come with, but one thing is clear: it will create more opportunities on the market, not take them away.

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