Bitcoin (BTC) holders have a powerful new way to access the burgeoning world of DeFi with Wrapped Bitcoin (WBTC). WBTC is an ERC-20 token backed 1:1 by BTC, enabling BTC holders to engage in Ethereum-based DeFi protocols. This can create an opportunity for BTC holders to earn interest. Although Bitcoin does not have native staking options, users can still earn interest daily or monthly. This serves as a bridge for BTC holders to engage with various DeFi protocols without having to deal directly with the Bitcoin network.
Today, WBTC enables users to lend on Aave, provide liquidity on Curve or yield farm. Unlike BTC, WBTC is held by a handful of centralized trading platforms like Binance and Nexo, creating a custodial risk. The custodian, in this case BitGo, holds the BTC, putting that value at risk on custodian insolvency, hacking, or regulatory shutdown. While these risks exist, WBTC offers Bitcoin holders a door through which they can discover yield-generating opportunities available in the DeFi ecosystem.
Understanding Wrapped Bitcoin (WBTC)
WBTC is more or less just a digital version of Bitcoin on the Ethereum blockchain. Each WBTC token is backed 1:1 by Bitcoin that’s been converted and locked into custody by BitGo, a centralized custodian. This requires that WBTC maintain a 1:1 value with Bitcoin at all times. As a result, users have an extremely easy way to move value between the Bitcoin and Ethereum networks.
Then the WBTC can be sent to a Web3 wallet such as MetaMask. In order to utilize WBTC, users must hold sufficient Ether (ETH). Once you have WBTC in a Web3 wallet, you can start to earn yield on your BTC. Utilize third-party services or layer 2s to increase your profits!
Methods of Generating Yield on BTC
These new methods of generating yield on BTC typically require using third-party platforms or some form of bridging BTC to other blockchains. WBTC provides a method for BTC holders to earn interest, typically paid out daily or monthly. Rewards on these platforms are typically paid out in tokens, like BABY tokens, which are distributed between BTC and BABY stakers.
Some platforms, like CBYF, aim for annual net returns of 4–8% in BTC. These platforms offer a new way to earn yield on Bitcoin.
WBTC gives BTC holders exposure to the booming DeFi protocols while not having to go through the hassle of interacting with the Bitcoin network. This allows BTC holders new opportunities to engage in activities like lending, borrowing, and providing liquidity on decentralized exchanges (DEXs).
Risks and Considerations
The recent collapse of companies such as Celsius and BlockFi underscores the risks of participating through third-party platforms to earn yield. Second, WBTC is held by centralized exchanges like Binance and custodial platforms like Nexo, which creates custodial risk. The custodian, BitGo, holds BTC, risking losses if they face insolvency, hacks, or regulatory shutdowns.
Users should continue to critically assess the risks of every platform. They need to look at the strategies under consideration before giving away their Bitcoin. As with any new technology, diversification, smart research and development, and a deep understanding of the underlying mechanisms at play will help protect against future losses.
Alternative Solutions for Bitcoin Yield
CBYF provides a safer way to earn yield on Bitcoin, an asset without native staking capabilities. The DeFi landscape is an ever-changing environment. New, proven developments are leading the way to address Bitcoin’s constraints and leverage its yield generation power.
Coinbase has announced plans to launch a yield-bearing bitcoin fund for institutions, aiming to:
"deliver sustainable Bitcoin-denominated returns." - Coinbase
Taken together, these moves are a clear signal of the growing demand for Bitcoin-based yield products. There is equally a tremendous acknowledgment of the need for more secure and transparent solutions.
