Bitcoin Gets Wrapped: ERC20 Token Backed with BTC for Traders, Institutions, dApps

Bitcoin Gets Wrapped: ERC20 Token Backed with BTC for Traders, Institutions, dApps

It seems like there is no end to tokenization: tokenized dollars as stablecoins, the token of the LGBT community, tokens for being pretty, and even tokens for nothing at all. Maybe the only thing that cannot still be tokenized is bitcoin core (BTC) itself. Oh, wait! But it can be, and it is. Wrapped Bitcoin is an Ethereum Bitcoin Token that claims to have interesting functions. 

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Evaluating Wrapped Bitcoin Token

Wrapped Bitcoin wants to be a representation of a bitcoin in the ethereum blockchain, and claims that doing this could yield excellent results and several use cases. It would act as a 1:1 asset backed by bitcoin, a Bitcoin Tether of sorts. So, right from the start, there is a trust issue. Who would certify that the issuer and the smart contracts are indeed backing these currencies in the right way?

Bitcoin Gets Wrapped: ERC20 Token Backed with BTC for Traders, Institutions, dApps

Another use case mentioned is the increase in the speed of transactions. This is also arguably false: Ethereum is a highly congested network that suffers from the same problems as BTC, and is arguably worse. Ethereum is not to transact money between parties, but to be a decentralized dApp repository, causing congestion with even the most useless things like Cryptokitties.

The most interesting use for this token is also the most un-useful, “Liquidity in decentralized exchanges.” In a nutshell, an objective of this project is to let exchanges based on dAapps trade BTC because decentralized exchanges, according to their characteristics, only trade Ethereum-to-token pairs. But as everyone knows, no one uses dApps.

Token Problems

Surprisingly enough, most of the issues about BTC this “wrapper bitcoin” token supposedly resolves with its existence could be addressed in the same chain, and some “features” raise other problems.

Bitcoin Gets Wrapped: ERC20 Token Backed with BTC for Traders, Institutions, dApps

The minting of the token (the process that takes BTC and returns a wrapped bitcoin) has two major problems: it includes the concept of a custodian. Custody is always a difficult activity in the world of cryptocurrencies, and also a risky one. Hacks occur commonly, and the process of managing them is not a standardized one, so in the case of a theft you may not recover your bitcoin.

The other security problem is that all the processes are run by smart contracts. Erroneously called smart, these contracts have proven to be easily hacked and highly unreliable in the past if not well audited.

Tokenize it and Then Think

The trouble is that these institutions are bringing up solutions to find problems later. There is nothing bad about BTC per se, and scaling issues must be solved in the same blockchain, not exporting problems to avoid them. Tokens must serve a purpose on a platform, and this one just raises more questions than answers.

These solutions are smoke and mirrors to introduce people to a token and try to show that a token is better than a cryptocurrency, touting mumbo-jumbo like “flexibility and power.” BTC is being developed by lots of people at a worldwide scale, and this wrapped bitcoin is only developed by the token’s parent company. Which one will be more secure and robust?

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