Wrapped Bitcoin (WBTC) is a token on the Ethereum blockchain backed 1:1 by real Bitcoin, ensuring both always have the same value.

To create WBTC, Bitcoin is securely stored by a custodian who issues an equal amount of tokens on Ethereum (the process is reversed when “unwrapping”).

WBTC allows Bitcoin to be used in DeFi applications like lending, staking, and liquidity pools not available on the Bitcoin network.

The token improves liquidity and interoperability between blockchains but also introduces risks such as reliance on custodians and potential smart contract vulnerabilities.

Since its 2019 launch, WBTC has played a key role in DeFi’s growth, showing how blockchains are becoming increasingly interconnected.

📍How Does Wrapped Bitcoin Work?

To create Wrapped Bitcoin (WBTC), real Bitcoin (BTC) is temporarily locked, and in return, an equal number of tokens is minted on the Ethereum blockchain.

This process isn’t done directly by an exchange, but through a network of merchants and custodians who maintain the system’s security.

Think of it like a train station connecting two separate railways (blockchains) that aren’t directly linked:

The Bitcoin “train” (track A) can’t run on the Ethereum “tracks” (track B).

So, the Bitcoin is parked in a secure vault (the custodian).

At the same time, a “wrapped version” of that same cargo — WBTC — is issued on Ethereum.

The number of WBTC tokens created is always exactly equal to the amount of BTC locked.

📍In practice:

A user requests to wrap their BTC through an authorized merchant.

The merchant verifies the user’s identity (KYC/AML process).

The custodian receives the real Bitcoin and stores it securely.

The custodian then mints an equivalent amount of WBTC tokens on Ethereum and sends them to the user’s address.

If the user later wants to convert their WBTC back to Bitcoin, the process is reversed: the WBTC tokens are burned (permanently destroyed) on Ethereum, and the custodian releases the same amount of real Bitcoin back to the user. This system ensures the total WBTC supply always matches the amount of Bitcoin held, maintaining the 1:1 peg and trust in the token.