WBTC Lending Rates
How does WBTC Work?
WBTC is a multi-institutional framework for wrapping tokens on Ethereum through the use of Merchants and Custodians to issue, burn, and custody the underlying assets. This proposal was initiated by BitGo, Kyber Network, and Republic Protocol with the first asset being wrapped Bitcoin (WBTC). Below is an overview of how the WBTC system works and how each entity plays a role in the system.
In short, there are four primary ecosystem actors in the WBTC ecosystem:
Custodians: A professional custodian (i.e. BitGo) or party who holds the native asset. Custodians control the keys to mint new tokens.
Merchants: An institution or party (i.e. Kyber or Republic) which issues or burns wrapped tokens. Merchants play a key role in the distribution of the wBTC to users.
Users: The holders of the wrapped token who can transfer and transact the asset like any other ERC20 token within the Ethereum ecosystem.
WBTC DAO Members: Individuals with the authority to govern custodians, merchants and users. DAO members are responsible for authorizing any contract changes along with the addition and removal of custodians.
Minting refers to the process of generating new wrapped tokens. The minting must be done by the custodian, however, it is initiated through the Merchant. With this in mind, Merchants initiate a transaction by authorizing a custodian to mint WBTC to the Merchant address on Ethereum. Once this process is initiated, the merchant sends the custodian native BTC. The custodian waits for 6 block confirmations on Bitcoin and once the transaction is finalized, the custodian generates a transaction on Ethereum to mint a 1:1 equivalent of new WBTC.
Users on Ethereum can then request wrapped tokens from a merchant. However, for the Merchant to issue the WBTC, users are required to complete KYC (know your customer) and AML (anti-money laundering) procedures. Once this occurs, the user and merchant can perform an atomic swap, or use a trusted exchange with the merchant receiving Bitcoin and the user receiving WBTC.
Burning involves the redemption of BTC for WBTC tokens which can only be done through verified merchants. Merchants create a “burn” transaction through the WBTC smart contract, specifying the amount of WBTC tokens to be burnt.
After 25 block confirmations on Ethereum, the amount of WBTC is deducted from the merchant’s WBTC balance and the custodian releases the amount of BTC to the merchants BTC address.
Similar to the minting process, users looking to redeem BTC from a merchant are required to pass KYC and AML procedures. Once completed, the user and merchant can perform an atomic swap or use a trusted exchange where the user receives their BTC and the merchant receives WBTC.
It is important to note that transfers of WBTC between users have no cost apart from network fees. However, there are three ways in which ecosystem actors can earn fees throughout the process:
Custodian fees: Taken by the custodian once merchant mints or burns wrapped tokens.
Merchant fees: Taken by the merchant when users exchange wrapped tokens for the native asset
Sidechain transaction fees: This fee is predominantly aimed at preventing spam on the sidechain and is shared equally among all entities running a sidechain node.
Where can I get WBTC?
For those of you looking to acquire WBTC, you can do so by purchasing it through any of the verified DAO merchants seen here or by simply purchasing WBTC on any of the exchanges it’s currently traded on. As of writing, WBTC is currently available on the following exchanges:
- Kyber Network
- Switcheo Network
- Radar Relay
Wrapped tokens allow assets (in this case Bitcoin) to be interchangeable and operate on a cross-chain mechanism where verified entities act as a bridge between the two networks. With this, users can now benefit from the global liquidity from Bitcoin, the programmability and reduced transaction fees on Ethereum, and have access to the growing amount of DeFi applications.
Ultimately, this WBTC framework provides a generalized mechanism in which crypto institutions can create asset-backed tokens in a transparent nature. Wrapped Bitcoin was the use of this framework and we could likely see other wrapped assets coming to Ethereum in the near future.