What is wrapped bitcoin (WBTC)?

Wrapped bitcoin, or WBTC, is a token on the Ethereum blockchain that represents bitcoin. Each WBTC is meant to be backed by one real bitcoin held in reserve by a custodian, so its value tracks bitcoin's. Wrapping gives bitcoin holders a way to use the value of their coins in Ethereum applications.

What is wrapped bitcoin vs bitcoin?

Bitcoin runs on its own blockchain. WBTC is an ERC-20 token, a standard token that lives inside a smart contract on Ethereum. The two are linked only by the reserve.

The process works like a coat check. A participant called a merchant hands real bitcoin to the custodian on the Bitcoin network. Once the custodian confirms the deposit, the same amount of WBTC is minted, or created, on Ethereum and sent to the merchant. To go back, the merchant asks for WBTC to be burned, or destroyed, and the custodian releases the matching bitcoin. WBTC was set to launch on Ethereum in January 2019, according to a security audit by ChainSecurity, with early backing from projects including MakerDAO and Compound.

What is wrapped bitcoin used for?

WBTC is mainly used in decentralized finance, or DeFi, the lending, borrowing and trading apps that run on Ethereum. A holder can deposit WBTC as collateral for a loan, add it to a trading pool or swap it for other tokens, all without selling the underlying bitcoin. BitGo, its long-time custodian, has described WBTC as the largest store of value used in DeFi apps.

What is the custody risk with WBTC?

A wrapped token is only as good as the reserve behind it. If the custodian lost the bitcoin, froze redemptions or failed, WBTC could stop tracking bitcoin. Holding bitcoin directly in your own wallet does not carry that layer of risk. BitGo says real-time proof of reserves, a public check that the backing exists, has been available on the WBTC website since 2019.

That risk came into focus in 2024. On August 9, 2024, BitGo announced it would move WBTC custody to a joint venture with BiT Global, a regulated trust company in Hong Kong, spreading control of the keys across Hong Kong, Singapore and the United States. BitGo said it would become a minority shareholder in the venture. CoinDesk reported that Tron founder Justin Sun was linked to BiT Global, and that MakerDAO voted on August 14 to cut its exposure to WBTC over concerns about concentrated control. Sun said publicly that he did not control the reserve keys.

What is cbBTC?

The episode helped rival products gain attention. Coinbase launched cbBTC on September 12, 2024, first on Ethereum and the Base network. Lending apps Aave, Compound and Morpho were among its launch partners. It is an ERC-20 token backed one for one by bitcoin held at Coinbase. It works on the same basic model as WBTC, so it also depends on a single company holding the reserve. Other designs, such as Threshold's tBTC, aim to spread that trust more widely.

Crypto prices are volatile, and a wrapped token depends on its custodian as well as on the price of bitcoin.