Wrapped Bitcoin (wBTC): The Bridge Between Bitcoin and DeFi

July 12, 2025

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Table of Contents

Introduction

Bitcoin is the original cryptocurrency the “digital gold” that launched a financial revolution. Yet, while its value and security are unmatched, its utility in decentralized finance (DeFi) has historically been limited. Why? Because Bitcoin’s blockchain is intentionally simple and not designed for complex smart contracts. This limitation has prevented BTC from participating in the booming world of DeFi on networks like Ethereum and Solana.

To solve this, a new innovation was born: Wrapped Bitcoin (wBTC). As the first and most prominent tokenized version of BTC, wBTC was designed to unlock Bitcoin’s liquidity for DeFi use cases. But in recent years, concerns over centralization and custodianship have sparked the rise of new alternatives like cbBTC(from Coinbase) and tBTC (from the Threshold Network). Let’s explore what wrapped Bitcoin is, how it works, and why it matters in today’s evolving crypto landscape.

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What Is Wrapped Bitcoin (wBTC)?

Wrapped Bitcoin (wBTC) is a tokenized version of Bitcoin that operates as an ERC-20 token on the Ethereum blockchain. Launched in January 2019, wBTC allows BTC holders to use their assets in Ethereum’s DeFi ecosystem enabling lending, borrowing, trading, yield farming, and more.

Every wBTC token is backed 1:1 by actual BTC, held in custody by a centralized entity. In its early years, BitGo served as the sole custodian, but in 2024, a shared custody model was introduced with BiT Global to reduce risk.

This process of “wrapping” Bitcoin allows users to participate in Ethereum’s DeFi world without giving up their BTC exposure. It’s not a synthetic token—it’s backed by real Bitcoin locked in reserve.

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Why Do We Need Wrapped Bitcoin?

Bitcoin is non-Turing complete, meaning it doesn’t support programmable smart contracts. Ethereum, on the other hand, is Turing-complete and ideal for building decentralized applications (dApps). By wrapping Bitcoin, users get the best of both worlds:

• BTC’s value and stability

• Ethereum’s DeFi capabilities

Before wBTC, Bitcoin couldn’t participate in DeFi protocols like Uniswap, Aave, or Compound. Now, with wrapped versions, BTC can be staked, lent, traded, or used as collateral—creating a much more vibrant and liquid DeFi ecosystem.

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How Does Wrapped Bitcoin (wBTC) Work?

The wBTC system involves three main players:

1. Custodian (Vault)

This is the entity that holds the real BTC. For most of wBTC’s history, this was BitGo. The custodian mints new wBTC tokens when BTC is deposited and burns wBTC when BTC is redeemed. In 2024, the system transitioned to shared custody between BitGo and BiT Global, to reduce single-point-of-failure risk.

2. Merchant (Broker)

Merchants are responsible for facilitating user access to wBTC. They receive BTC from users, then instruct the custodian to mint the equivalent amount of wBTC. They also perform KYC/AML checks. Only authorized institutions can act as merchants.

3. wBTC DAO (Governance)

A DAO made up of leading DeFi projects like Kyber Network and Compound governs the protocol. The DAO decides which custodians and merchants can participate and maintains protocol integrity via multi-sig governance.

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How wBTC Is Minted and Redeemed

To mint wBTC:

• A user sends BTC to a merchant.

• The merchant initiates the minting process with the custodian.

• The custodian mints and sends wBTC to the merchant (who delivers it to the user).

To redeem wBTC:

• The process is reversed.

• The wBTC is burned and the BTC is released from the custodian.

Note: Retail users usually do not interact with the minting process directly. They can simply buy or sell wBTC on DEXs like Uniswap or centralized exchanges.

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The Rise of wBTC Alternatives

For years, wBTC dominated the tokenized BTC market. But in August 2024, things changed.

The Custodian Controversy

BitGo’s decision to partner with Justin Sun, the controversial founder of TRON (who was facing legal scrutiny from the U.S. SEC), sparked a crisis of confidence. DeFi platforms like MakerDAO (Sky) reduced their wBTC exposure. Redemptions surged as institutions began to pull out, fearing reputational and regulatory risks.

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New Contenders Emerge

cbBTC (Coinbase Wrapped BTC)

Launched in September 2024, cbBTC is Coinbase’s response to the wBTC controversy. Like wBTC, it’s backed 1:1 by real BTC—but held in Coinbase’s regulated, U.S.-based custody.

cbBTC quickly gained traction:

• Over $1.4 billion in market cap within months.

• Delisted wBTC from Coinbase in favor of cbBTC.

• Offered seamless integration into Coinbase’s user platform.

Despite accusations of anti-competitive behavior, cbBTC is now the top choice for risk-averse, institutional users.

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tBTC (Threshold BTC)

tBTC is a decentralized, trust-minimized alternative. It avoids centralized custodians entirely by using a network of bonded node operators to secure the underlying BTC.

tBTC’s advantages:

• No single point of failure.

• Permissionless minting for retail users.

• Built-in censorship resistance.

In 2024, tBTC launched v2, improving scalability and cost-efficiency—making it a serious competitor for those prioritizing decentralization.

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A Cautionary Tale: renBTC Collapse

renBTC, once a promising alternative, collapsed following the Alameda Research and FTX scandal in late 2022. With Alameda gone, Ren’s funding dried up. The protocol shut down, and users were warned to redeem their renBTC before it became worthless. It was a brutal reminder of what can go wrong when a centralized entity fails.

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Comparing wBTC, cbBTC, and tBTC

Feature	wBTC	cbBTC	tBTC
Custody	Centralized (BitGo + BiT Global)	Centralized (Coinbase)	Decentralized (Bonded Operators)
Decentralization	Low	Low	High
Minting Access	Permissioned	Integrated with Coinbase	Permissionless
Governance	wBTC DAO	Centralized	Threshold DAO
Main Risk	Custodian, DAO capture	Custodian, regulatory control	Smart contract, technical
Best For	Legacy liquidity	Regulated ease-of-use	Censorship resistance

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Risks of Using Wrapped Bitcoin

Using wrapped BTC involves several layers of risk:

1. Custodian Risk

Centralized custodians can fail. As seen with renBTC, if the custodian goes down, your wrapped token becomes worthless.

2. Smart Contract Risk

Even if the custodian is secure, the DeFi protocol using the wrapped asset may not be. In March 2023, Euler Finance suffered a $197 million exploit involving wBTC.

3. Bridge Risk

If you bridge wBTC to another chain (like Arbitrum), the bridge itself becomes a vulnerability. The MultiChain exploit in July 2023 resulted in $125 million lost—including a large amount of wBTC.

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Which Version Should You Use?

• Choose wBTC if you want access to the deepest liquidity pools and maximum compatibility with legacy DeFi protocols.

• Choose cbBTC if you value compliance, trust Coinbase, and prefer a simple user experience.

• Choose tBTC if you prioritize decentralization and want to avoid centralized custodians.

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Conclusion: The Future of Wrapped Bitcoin

The days of wBTC’s dominance are over. In its place, we now have a multi-option landscape where users can select based on their risk tolerance, ideology, and technical preferences.

• wBTC represents the legacy model: trusted, liquid, and deeply integrated.

• cbBTC reflects the future of regulated crypto finance, with convenience and corporate security.

• tBTC champions decentralization, censorship resistance, and permissionless access.

This fragmentation isn’t a weakness—it’s a strength. The evolution of tokenized Bitcoin mirrors the broader maturation of the DeFi ecosystem. As competition drives innovation, we move toward a more resilient, secure, and inclusive future for BTC in DeFi.

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Disclaimer: This article is for educational purposes only and does not constitute investment advice. Please do your own research before making financial decisions.

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