Incompatibility is inevitable when you have dozens of blockchain networks with their own smart contract formatting. This is why Bitcoin cannot simply be transferred to Ethereum in its original state. Bitcoins can be packaged as ERC-20 tokens compatible with Ethereum, making it Wrapped Bitcoin (WBTC).
Wrapped bitcoins are to bitcoin what USDT stablecoin is to dollars. Both circumvent the incompatibility via a new compatible digital asset rooted in the original. But is there more to pack than meets the eye?
Why do we need wrapped tokens?
The easiest way to convert tokens is through a centralized exchange. For instance, Convert Binance allows you to exchange cryptocurrencies without fees. If one were to convert Bitcoin to Avalanche, these coins could then be sent to a noncustodial wallet that connects to the Avalanche ecosystem of dApps.
Similarly, the same could be done for the BTC-ETH conversion. The question then becomes, why do we need wrapped tokens? The answer has to do with the volatility of cryptocurrencies. For example, what if one wants to use Bitcoin as collateral on Ethereum’s lending dApp like Aave? As the dominant cryptocurrency with the largest market capitalization, Bitcoin is the least volatile cryptocurrency.
This means Bitcoin would be a better collateral for a loan than a more volatile cryptocurrency. Otherwise, more volatile collateral could trigger loan liquidation. On smart contract platforms that have an even lower market capitalization than Ethereum, this is even more important to consider.
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This is where wrapped tokens come in. A wrapped token represents cryptocurrency on another blockchain, so it can be used as such, with its price pegged to the original. Similarly, USD Coin stablecoin represents USD paper banknotes on a blockchain so that dollars can be used on blockchain networks as stable digital assets.
Solve blockchain interoperability
Each blockchain network has its own set of validators, governance rules, native tokens, and even smart contract formatting. For example, while Ethereum has the ERC-20 smart contract standard, TRON (TRX) has TRC-20 tokens. Similarly, Binance Smart Chain (BSC) uses the BEP-20 standard to deploy its tokens.
There are two main ways to deal with this mess of incompatibility and interface different blockchain networks, i.e. transfer digital assets:
- Layer 0 networks: Cross-chain networks like Polkadot or Cosmos that create an ecosystem of interoperable blockchains, serving as the internet of blockchains.
- Blockchain bridges: Cross-chain network protocols that convert tokens using smart contracts. When a user deposits their tokens into a conversion smart contract, they are locked. The user can then withdraw them in the form of tokens compatible with the blockchain network.
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This is the second interoperability method that generates wrapped tokens. In the case of WBTC, the bridge would typically convert deposited Bitcoins into ERC-20 tokens. This gives Bitcoin all the functionality and compatibility of any other ERC-20 based altcoin.
Depending on the target network, Bitcoin could also be integrated with other token standards. That said, not all blockchain bridges are the same.
Types of Blockchain Bridges
Whenever we deal with digital assets, we have to consider how they are managed. This is the difference between custody and non-custody. For example, depositing cryptocurrencies in a Binance account is equivalent to depositing them in a custodial wallet.
Control would be relinquished because Binance would hold the user’s private keys. The exchange would then be the custodian, able to freeze the crypto funds or the funds could be stolen by hackers. Moreover, the crypto exchange itself could go bankrupt, as Voyager digital did.
In contrast, using a noncustodial wallet means that users hold their private keys and control their crypto assets. Similarly, users would be responsible for backing them up. The same guard dynamics are present in blockchain bridges:
- Bridges of trust or custodians: These centralized bridges are generally faster, making it easier to convert a large amount of tokens.
- Bridges without trust: Acting like decentralized networks, their security is equal to the underlying blockchain network. For example, the xDai bridge converts the Ethereum stablecoin Dai into the stablecoin xDai on the Gnosis blockchain.
Naturally, when using decentralized services, there is no customer support to call for help if something goes wrong. This is why you should always research the history of the bridge.
What Are the Most Popular Blockchain Bridges?
Since Bitcoin and Ethereum are the two largest cryptocurrencies, they are the most targeted for packaging conversion. Likewise, since Binance is the largest cryptocurrency exchange in the world, it is the most used to wrap tokens.
To convert BTC to WBTC visit Binance Bridge and connect your Binance account. Originally contained in Binance Smart Chain (renamed BNB Chain), it has expanded to support Tron, Ethereum, and Solana.
Therefore, one must first select the supported target chain for the bitcoins to be wrapped. Once Bitcoins are deposited to the Binance Bridge address for this chain, the bridge sends an equivalent amount of WBTC to the provided wallet.
You can use Binance Bridge to connect two other popular cross-chain bridges, both trustless.
- Celer cBridge: Supports 13 blockchain networks and their Layer 2 scalability solutions.
- AnySwap: Rebranded as Multichain, this decentralized cross-chain exchange protocol can convert any digital assets that use the EdDSA or ECDSA signature algorithms, which include BTC and ETH, among others.
Low gas costs
To take full advantage of both wrapped Bitcoin and low gas fees, a conversion from WBTC to Ethereum’s Polygon sidechain is also very popular. After the conversion is complete using one of these bridges, an additional step would be required – connecting the wallet filled with WBTC to Polygon Bridge.
Wrapped Bitcoin (WBTC) is not the only compatible version of Bitcoin. There is also Binance Wrapped BTC (BBTC), Huobi BTC (HBTC), renBTC (RENBTC) and Interest Bearing Bitcoin (ibBTC). To move them across nine blockchain networks, Zapper Bridge should also be considered the most practical option.
Is It Safe To Use Blockchain Bridges?
In the first half of 2022, hackers stole over $1.3 billion from blockchain bridges. This accounted for 69% of crypto-related hacks, according to the On-chain analysis report. Elliptic cybersecurity expert Tom Robinson described this hacking spree in unflattering terms.
“Blockchain bridges have become the low-hanging fruit for cybercriminals, with billions of dollars of crypto assets locked within them,”
Robinson further noted that due to the variety of successful hacks, blockchain bridges have lower security than typically found on blockchain networks. Additionally, hackers see blockchain bridges as easy choices because they store assets. Therefore, they represent a centralized point of failure.
From this trend, it is safe to say that the development of lesser-known bridges is still in its infancy. Therefore, most users stick with Binance to simply convert BTC to WBTC, using the aforementioned. Convert Binance. It is then easy to send WBTC to a MetaMask wallet that can connect to Ethereum/Polygon.
This article in the series is intended for general guidance and informational purposes only for beginners participating in cryptocurrencies and DeFi. The content of this article should not be construed as legal, business, investment or tax advice. You should consult your advisers for all legal, business, investment and tax implications and advice. The Defiant is not responsible for lost funds. Please use your best judgment and exercise due diligence before interacting with smart contracts.