The so-called wrapped bitcoin are not actual bitcoin. Or rather, they are not crypto assets found on the Bitcoin blockchain, but tokens on other blockchains, in particular Ethereum, with the identical constant value of 1 BTC. A sort of “stablecoin” that is pegged to Bitcoin.
They were created to solve a problem, namely the impossibility for other blockchains to operate with real bitcoin.
In fact, the real bitcoin (BTC) are only on the Bitcoin blockchain, and they cannot be moved from there. Therefore they cannot be used directly on other blockchains either, unless they are sidechains of the same Bitcoin blockchain.
The main problem is with DEXs, and in particular, those created on the Ethereum blockchain. For example, Uniswap, Curve, Balancer, but also Aave and Maker, are not able to operate directly on the bitcoin blockchain, i.e. directly with BTC.
The solution is precisely the so-called wrapped bitcoin, i.e. tokens that run on other blockchains, but which represent 1:1 BTC.
The most famous and widely used of these tokens is WBTC, i.e. Wrapped Bitcoin, and it works trivially by emitting 1 WBTC token for each locked BTC token.
How do Wrapped Bitcoin work
WBTC is an ERC-20 token on the Ethereum blockchain, issued with a special smart contract that allows to vary the supply. Each time 1 bitcoin (BTC) is locked in the WBTC protocol, 1 Wrapped Bitcoin (WBTC) token is issued.
However, it is not possible to lock BTC directly onto the WBTC smart contract, both because this smart contract runs on the Ethereum network which means it does not have access to the BTC blockchain, and because there are no homologous smart contracts on the Bitcoin network which can be “synchronized”.
Therefore, those who manage WBTC also have the burden of making sure that they safely store the BTC they receive because they are locked as collateral for WBTC tokens, and to make sure that for every WBTC in circulation there is always 1 BTC available to be returned to any WBTC owner who requests its conversion.
To date, $780 million of funds have already been locked on the WBTC protocol, much more than, for example, the volume locked on the Lightning Network (12 million). But there are also many other similar tokens.
For example, Uniswap also uses renBTC (RENBTC), Aave uses AWBTC, Curve uses both of these as well as sBTC, Balancer also uses BTC++ from PieDAO, while Compound uses its CWBTC.
There are also pBTC from pTokens, tBTC, which are similar to WBTC, and many others. These tokens are increasing because every blockchain that wants to operate with BTC must have its own wrapped tokens representing it.
In the future, there may be dozens, if not hundreds, of wrapped tokens representing bitcoin on other chains, but they will not all be the same.
In particular, the main problem of these tokens, as already mentioned above, is the 1:1 collateralization, which requires that each wrapped bitcoin must always be reconvertible, freely and at any time, in BTC. It is possible that not all bitcoin wrapped tokens will be able to maintain this feature over time.