Should Bitcoin support smart contracts?
Some visionaries on the left say yes—smart contracts would bring new levels of functionality and take away Ethereum’s presumed competitive advantage. But on the right, there are hardcore fundamentalists such as Craig Wright, who argue that Bitcoin is and always has been about one thing only: moving digital money.
But here’s a solution that allows us to have our Bitcoin and eat our smart contracts too: Since October, a coalition of of 26 companies have been working on a way to use smart-contract platform Ethereum to create a token that’s pegged to the price of Bitcoin. This means it represents Bitcoin in the same way a U.S. dollar-backed stablecoin represents the underlying U.S. dollar. But it can also be used in smart contracts—opening up a world of opportunity, from dapps to new banking solutions.
And it just went live today.
Wrapped Bitcoin (WBTC) is the name of the new initiative. It’s spearheaded by Kyber Network, which offers a protocol for swapping different cryptocurrency tokens, Republic Protocol, a privacy-focused decentralized exchange, and BitGo, a blockchain financial services company that provides custodial solutions. Other members include Airswap, Blockfolio and MakerDAO. The hope here is to bring liquidity from the Bitcoin network onto Ethereum and its thousands of tokens.
How does it work? Like any stablecoin, the underlying asset has to be placed under lock and key, in order for the tokenized version to hold value. So when Wrapped Bitcoin is formed, an amount of Bitcoin gets “wrapped up” and an equivalent amount is released on the Ethereum network. This can then be used in smart contracts, within dapps or other applications. But having more flexibility isn’t the only benefit.
Wrapped Bitcoin is likely to increase liquidity on the Ethereum network. By moving value from the Bitcoin blockchain, it increases the money flowing on the system. This helps to lubricate dapps, particularly decentralized exchanges, which suffer from a lack of users. On such platforms, having low liquidity is an issue, and can cause traders to leave for other platforms. It partly explains why DEXs have so few users. But with more money on the network, this could start to change.
It also benefits Bitcoin too. Some proponents have argued that it should support smart contracts. While the consensus is that smart contracts should only be a second-layer solution—that they should be built on top of Bitcoin, not at the base layer—this may not suffice for everyone. Wrapped Bitcoin is an alternative since it uses Bitcoin as the underlying currency, but it can also be used in smart contracts. So, it’s a win-win.
There are more than 1,000 Ethereum-based tokens and at least 100 stablecoins so the idea of created another Ethereum-based stablecoin seems like overkill. But, instead of trying to be the next Tether, this stablecoin has a more crafty aim: to bring Bitcoin’s liquidity onto Ethereum. And if it succeeds, it may well prove its worth.