The Wrapped Bitcoin (WBTC) network has gone live, and at time of writing 65 bitcoin have been “wrapped” into Ethereum ERC-20 tokens.

WBTC is simply a method of representing bitcoin as an ERC-20 token, so that it may be more easily manipulated within the Ethereum ecosystem. Each WBTC is backed one-to-one with an equivalent amount of bitcoin.

One of the main selling points of WBTC is that it incorporates tradeable bitcoin into Ethereum decentralized exchanges (DEXs) such as IDEX.

How Does It Work?

In practice, the function of WBTC will be perhaps less laissez faire than it initially sounds. Rather than being a free function that users can employ to wrap their own bitcoin, a complicated supply chain has been set up by some big crypto entities to deliver the tokens – complete with Know-Your-Customer and Anti-Money-Laundering checks (KYC/AML).

Users wanting to wrap their bitcoin will have to approach “Merchants,” offering the bitcoin asset and completing KYC/AML through them. The whitepaper states that “Merchants are required to hold the identity information of the user securely.”

wbtc1.png(source: WBTC whitepaper)

But the Merchants themselves do not mint tokens. Only “Custodians” can actually mint WBTC coins, and only when requested to do so by designated Merchants – and at this point the sole Custodian is BitGo.

The whitepaper states that “[i]n some sense custodians are trusted in the wrapped framework, as assets could be stolen or they might not honour the one-to-one backing.” Custodians posses the private release keys for WBTC tokens which they issue, and only they can disburse bitcoin back to Merchants upon request.

wbtc2.png(source: WBTC whitepaper)

“Third parties” will conduct quarterly audits of all WBTC to ensure the corresponding bitcoin asset are stored by the Custodians, according to the whitepaper. All Custodians and Merchants are holders of multisignature keys, which are required to manipulate WBTC contracts on sidechains.

All of this is to say that: Not just anybody can wrap their bitcoin into WBTC. Rather, the function within WBTC’s process is highly curated. While BitGo is currently the only Custodian, there are currently eight Merchant members of the network.