In a sea of over 19,000 cryptocurrencies, there's one that continues to reign supreme: Bitcoin. Love it or hate it, Bitcoin is here to stay. There's just one tiny problem: Bitcoin can't jump to other blockchains like Ethereum without a little help. In 2019, a joint project between Kyber, Bitgo, and Ren led to wrapped Bitcoin, otherwise known as wBTC. wBTC is designed to solve the ultimate problem of interoperability between Bitcoin and other Ethereum-based blockchains. Bitcoin in its original format cannot be used on the Ethereum blockchain. By converting Bitcoin to wBTC, this roadblock is handled smoothly and you always know what to expect in terms of value.
Bitcoin’s popularity isn’t going away, and neither is the need to convert Bitcoin into something more ERC-20 friendly.
- 1 wBTC is always 1 BTC, pegged to the value of BTC at the time of the exchange.
- wBTC is an ERC-20 token issued only by merchants.
- Ethereum gas fees apply when exchanging wBTC to BTC.
What is wBTC lending?
Lending Bitcoin directly is great, but what if you want to explore other options? That’s where lending wBTC comes in: you can allow your wBTC tokens to be used on DeFi platforms as collateral for loans. This lending investment can earn you passive interest without work. It also can help boost liquidity pools in the DeFi space, something that helps the ecosystem at large.
ERC-20 stands for Ethereum Request for Comments 20, and is a standard for all tokens operable on the Ethereum network. It acts as a rule for developers to follow to create tokens that work on the Ethereum blockchain.
Not only can you earn interest by lending out wBTC, you can borrow other assets while supplying wBTC. It’s like getting the best of all worlds.
How does wBTC lending work?
While things in the DeFi realm can certainly get squirrely in terms of complexity (ahem, liquidity pool calculations, anyone?), wBTC lending is pretty simple to break down. If you have amassed a collection of wBTC tokens, you can lock them in place in return for interest.
For example, if you use Aave lending protocol, connect your wallet with wBTC to the platform, set the amount you wish to lend, and select "Supply" to lend your wBTC. While your wBTC is in the protocol, you are contributing to the total supply of the platform, which borrowers can pull from for their own purposes. When borrowers pay back their wBTC loan, plus interest, you get some of that interest paid out and sent to your wallet.
How often that interest is paid depends on the platform, and the APYs themselves fluctuate based on supply and demand. The lower the supply and higher the demand, the higher the APY. Higher supplies and lower demands result in lower APYs for wBTC lending.
How to wrap Bitcoin for lending
You can't lend BTC on any Ethereum-operated protocol or platform. The two tokens are separate native currencies of their respective networks, so you have to "wrap" your Bitcoin into an ERC-20 token for compatibility with the Ethereum blockchain. You can convert your Bitcoin to wBTC by selling Bitcoin and then buying wrapped Bitcoin, but you might experience slippage.
Let's say you sell $2,000 worth of BTC at $22,988 with the intention of buying the equivalent in wBTC. When your transaction is complete and you have $2,000 in fiat to buy wBTC, the price may fluctuate, and wBTC increases to $23,090. The difference in those prices and your loss in currency is known as slippage.
Another, potentially more efficient way to wrap Bitcoin is within compatible wallets. Some wallets, such as Poloniex, allow you to swap BTC for wBTC at a 1:1 ratio within its web-based application.
You can also use a bridge that will hold your BTC and give you the equivalent in wBTC for lending. When you want your BTC back, you'll pull your wBTC from the lending protocol and swap it back for BTC.
If you don't already own Bitcoin that you want to lend out, the easiest way to get wBTC is to simply buy it from a crypto exchange and withdraw it to a lending protocol-compatible wallet like MetaMask.
DeFi wBTC lending
Since wBTC is a wrapped token, it’s already set up to interact with decentralized exchanges. This need was the entire reason for wBTC’s creation. So with DeFi wBTC lending, the focus is still on earning APY on lending the tokens out. Everything in the DeFi space is based on smart contracts, which makes it operate without a central authority.
While DeFi is still seen as a sort of Wild West in the crypto world, this is fast changing as more community support and documentation are gaining momentum. Simply put, DeFi is about you and the community, rather than any specific crypto exchange platform. Decentralized exchanges are built around the audience, not the other way around. This keeps the real power in the hands of the people.
Smart contracts are pieces of complex code created within DeFi protocols and stored on the blockchain that execute specific actions when certain conditions are met.
Pros and cons of DeFi wBTC lending
- Always in control of your tokens
- Can use multiple DeFi exchanges based on liquidity, interest, incentives, and more
- High transparency through smart contracts
- No help in tax reporting
- Some smart contracts are more error-prone than others
- Less regulation/safety net
Pros of DeFi wBTC lending
With non-custodial lending, you still keep control of your wBTC, so even if the platform fails, your tokens are safe in your control. This adds a layer of security to your investment.
With decentralized wBTC lending platforms, users don’t have to undergo a strict KYC process for identity verification. Simply connect your wallet of choice to the DeFi lending protocol of your choice, and lend wBTC.
While they may have their flaws, smart contracts form the heart of DeFi lending and represent its flexibility, scalability, and fluidity.
Cons of DeFi wBTC lending
No safety net
If you don’t understand how DeFi lending works and err in lending out your wBTC, you’re on your own. There’s no safety net or customer support to help you retrieve your tokens. This is why it’s always important to not trust, but verify your transactions and always disconnect your wallet from the browser when you’re done trading.
Smart contract vulnerabilities
Smart contracts are not perfect, and are known to have bugs and issues, as like any other code. Furthermore, there is no surefire way to ensure the security of a certain smart contract.
If you know that you need certain documentation for your crypto trading come tax season, it can be hard to get it from a DeFi exchange. This requires more legwork on the user’s end to submit the proper tax reporting data in April.
wBTC lending taxes
Generally, if a platform deposits wBTC into your wallet as part of your wBTC lending return, then the price of wBTC at that time is considered a gain that you must pay taxes on as income. And once you withdraw wBTC into a bank account for a profit, you must pay taxes on that gain as well. It is possible to offset crypto gains with losses; a person’s personal tax situation is multifaceted and should be handled by a tax professional.
wBTC lending, like many income-generating activities in the crypto world, isn’t free from tax monitoring. In fact, many tax authorities are beginning to look closer into the crypto space. South Korea is pushing tax plans to 2025, but things could change quickly. The United States is also pausing the crypto crackdown, but it is still best to err on the side of caution and report all taxable income.
Final thoughts on lending wBTC
Wrapped Bitcoin is the best way to take Bitcoin to the Ethereum network, and lending it out is a great way to earn passive interest without having to do much work. It’s always in your control whether you lend out your wBTC or not, so do your research to find the DeFi or CeFi lending platform that interests you the most and that you trust to deposit your wBTC. However, wBTC is one of the only ways to use your BTC on Ethereum-powered networks.
Frequently asked questions
Is wBTC lending safe?
Should I lend my wBTC?
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Will I owe taxes on wBTC lending?