Cryptocurrencies Bitcoin and Ethereum
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Crypto/ICO

New Token To Combine The Best Of BTC And Ethereum

Joseph Argiro
07 November, 2018
3 min read
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WBTC (Wrapped Bitcoin) is an exciting new Bitcoin-backed ERC20 token, set to launch in early 2019. It is a community initiative between three prominent entities in the crypto ecosystem: BitGo is set to handle custody, Kyber Network to facilitate on-chain value transfer via atomic swaps, and Republic Protocol to enable large asset transfers with minimal market impact.

Governance & Decentralization

Governance is a huge issue plaguing the top two cryptocurrencies by market cap, Bitcoin and Ethereum. While Ethereum and Bitcoin are both arguably the most decentralized projects in existence, the decentralized nature of the protocol directly affects governance in a negative way. There is no on-chain governance, or a clear way for decisions to be made regarding changes or upgrades to the protocol.

However, with the introduction of WBTC, governance can potentially become a layer 2 solution.

The WBTC launch will be community driven, and a DAO has been created to publicly audit the WBTC tokens and make sure that WBTC wallet balances match BitGo’s custodial holdings of Bitcoin itself. This is a step in the right direction for governance of open decentralized blockchains. However, it remains to be seen whether a layer 2 governance system is feasible in the real crypto economy. Skeptics may insist that governance needs to be built into the protocol itself, but is this even possible without compromising the decentralized nature of Bitcoin/Ethereum?

How WBTC Helps Scale Bitcoin

Contrary to popular opinion, the lightning network is not a feasible solution to solve the Bitcoin scaling problem.  In fact, I don’t believe Bitcoin even has a scaling problem; it wasn’t meant to scale in the way people think (an increase in TPS). The lightning network creates a hub and spoke system via each payment channel, which is by definition centralized, and undermines the protocol at its core.

Scaling Bitcoin instead revolves around the idea of off-loading transactions to other blockchains. WBTC helps scale the Bitcoin network by allowing a Bitcoin-pegged token to be traded in the ERC20 environment. Participants only need to utilize on-chain Bitcoin transactions when they are redeeming WBTC for Bitcoin itself. The WBTC is then burned, which can be verified on both chains.

Competition

While WBTC brings Bitcoin to Ethereum, Rootstock brings smart contract functionality to the Bitcoin blockchain. This is, in a sense, another proposed way to scale Bitcoin and allow for additional use cases. 

WBTC and VeriBlock: What’s the Connection?

WBTC is being created to bring the superior liquidity of Bitcoin to the ERC20 exchange environment. VeriBlock, on the other hand, was created to allow nascent blockchains to inherit the proof-of-work network security of a superior blockchain such as Bitcoin. Specifically, Veriblock uses proof-of-proof technology to enable cross-chain anchoring. Both of these technologies together are aiming to help solve huge fundamental problems in crypto; liquidity (WBTC), security (VeriBlock), and interoperability (WBTC and VeriBlock).  Interestingly enough, they are both using the Bitcoin blockchain to solve these problems.

Liquidity & Volatility: Bitcoin as an ERC20 “stablecoin”

WBTC helps ERC20 tokens inherent Bitcoin’s deep liquidity pool. For context, Bitcoin accounts for approximately 30 percent of all cryptotrading volume. This allows Bitcoin to function as a “stablecoin" in the ERC20 token economy, allowing ERC20 decentralized exchanges to take advantage of Bitcoin’s liquidity. It also allows for participants to mitigate the price risk of ETH and tokens, without introducing fiat-backed stablecoins. This is important and useful, given the proven fact that Bitcoin is less volatile than Ether, ERC20 tokens, and even some stocks.  Furthermore, many believe that Bitcoin’s volatility will continue to decrease as the technology matures. The introduction of futures contracts increases price discovery by allowing traders to play both sides, which in turn, will decrease volatility in the long run. We may already be witnesses to this, as Bitcoin seems to have traded consistently between the $6k-7k mark in Q3 of 2018.

Why Republic’s Involvement Matters for Institutional Adoption

In traditional finance, dark pools are needed to facilitate large trades without crashing markets. Given that crypto markets are still small and immature, the ecosystem desperately needs a solution like Republic Protocol in order to scale the ecosystem and allow for institutional players. Republic Protocol helps solve this issue in the crypto space, which can only aid in helping traditional financiers take crypto markets seriously.

WBTC moves the industry forward by allowing for inter-blockchain communication between Ethereum and Bitcoin. With prominent exchanges such Airswap and IDEX set to support WBTC at launch, the future looks bright in terms of adoption. Additionally, the idea of Bitcoin as a stablecoin can now be implemented in practice. While fiat on-ramps are certainly needed in the short term, WBTC helps give the digital economy a tool for its own independence from centralized authority.

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