Wrapped Bitcoin explained: WBTC is an ERC-20 token on Ethereum backed 1:1 by real Bitcoin held in custody. You lock BTC with a custodian, receive equivalent WBTC, and use it across DeFi protocols. The core risk is trusting a centralised custodian to hold your Bitcoin securely.
- 1:1 peg: One WBTC always represents one BTC held in custody.
- ERC-20 standard: WBTC works on Ethereum and EVM-compatible chains, giving BTC holders access to DeFi lending, borrowing and liquidity pools.
- Centralised custody: BitGo holds the underlying BTC, which is the single biggest risk factor.
- 2024 controversy: BitGo’s plan to transfer custody to a joint venture linked to Justin Sun triggered community concern and protocol-level collateral removals.
- Tax in India: Swapping BTC for WBTC is treated as a VDA transfer, attracting 30% flat tax on gains and 1% TDS on Indian platforms.
How BTC Becomes WBTC: The Mint and Redeem Process
Understanding how wrapped Bitcoin works requires knowing two roles: merchants and custodians. Merchants are KYC-verified entities (typically DeFi firms or market makers) who interact directly with the custodian. Regular users go through merchants to mint or redeem WBTC.
Minting WBTC (BTC to WBTC)
- A user sends BTC to an authorised merchant.
- The merchant submits a mint request to the custodian (BitGo).
- BitGo locks the BTC in a multi-signature wallet and mints equivalent WBTC on Ethereum.
- The user receives WBTC in their Ethereum wallet, usually within minutes.
Redeeming WBTC (WBTC Back to BTC)
- The user sends WBTC to the merchant.
- The merchant initiates a burn transaction, destroying the WBTC on-chain.
- BitGo releases the equivalent BTC from the reserve wallet.
- The user receives BTC on the Bitcoin network.
Every mint and burn is recorded on the Ethereum blockchain and verifiable on-chain. The WBTC DAO publishes a public dashboard showing total supply versus BTC reserves. According to the WBTC.network dashboard (retrieved July 2025), WBTC’s circulating supply stood at approximately 153,000 BTC, making it the largest wrapped Bitcoin product by supply. According to DeFiLlama (July 2025), WBTC accounts for over $13 billion in total value locked across DeFi protocols, representing the dominant share of wrapped BTC liquidity on Ethereum. According to Threshold Network’s official dashboard (July 2025), tBTC’s circulating supply was approximately 4,200 BTC, reflecting its earlier stage of adoption compared to WBTC.
Why DeFi Needs Wrapped Bitcoin
Bitcoin runs on its own blockchain and does not support Ethereum smart contracts natively. That created a problem: billions of dollars in BTC value sat idle while Ethereum’s DeFi ecosystem grew rapidly. WBTC solved this by bringing Bitcoin’s liquidity into Ethereum. Protocols like Aave and Compound accepted WBTC as collateral from their early days, letting BTC holders borrow stablecoins without selling their position.
What Can You Actually Do With WBTC?
- Collateralise loans: Deposit WBTC on Aave or Compound to borrow USDC or DAI.
- Provide liquidity: Add WBTC to DEX pools and earn a share of swap fees.
- Yield farming: Some protocols offer incentive rewards for WBTC depositors.
- Cross-chain activity: WBTC can bridge to Polygon or Arbitrum, expanding its DeFi reach.
For Indian investors curious about how Bitcoin exposure works across different products, read our piece on whether Indians can invest in Bitcoin ETFs, since the custody and counterparty logic overlaps significantly.
WBTC Custody Risk and the 2024 Controversy
Is WBTC as safe as Bitcoin? The honest answer is no. Holding BTC on the Bitcoin network means only you control the private keys. Holding WBTC means trusting that the custodian holding the underlying BTC will not be hacked, go insolvent or act dishonestly.
The BitGo and Justin Sun Situation
In August 2024, BitGo announced it would move WBTC custody to a new joint venture that included entities linked to Justin Sun, the founder of Tron. Multiple DeFi protocols, including Sky (formerly MakerDAO), voted to reduce or remove WBTC as accepted collateral. BitGo later revised its plans following community pushback, but the episode exposed a fundamental truth: WBTC’s security depends entirely on who controls the keys. A single decision by a centralised entity can shake confidence across the entire ecosystem.
Smart Contract Risk Adds Another Layer
Beyond custody, WBTC holders face smart contract risk. A bug in the WBTC contract or any DeFi protocol you use it in could result in total loss. The broader crypto market’s volatility also means WBTC’s USD value swings with Bitcoin, not independently of it.
Indian Tax Angle on WBTC
Indian users should know that wrapping and unwrapping Bitcoin is not tax-neutral. The Income Tax Department treats VDA-to-VDA swaps as taxable transfer events. You pay 30% flat tax on any gain at each conversion step, plus 1% TDS deducted by the exchange if the transaction happens on an Indian platform such as WazirX, CoinDCX or ZebPay. No loss offset is allowed against other VDA gains. Read our full guide on how much tax you pay on crypto in India before you start wrapping.
WBTC vs Alternatives: tBTC, cbBTC and Native Options
The 2024 controversy pushed many users to look for alternatives to wrapped Bitcoin. Here is how the main options compare.
| Product | Issuer/Custodian | Custody Model | Chain | Key Risk |
|---|---|---|---|---|
| WBTC | BitGo | Centralised | Ethereum / EVM | Custodian control change |
| tBTC | Threshold Network | Decentralised (threshold signatures) | Ethereum | Smart contract risk, lower liquidity |
| cbBTC | Coinbase | Centralised (regulated US exchange) | Ethereum / Base | Coinbase counterparty risk |
| Native BTC (Lightning) | Self-custody | Non-custodial | Bitcoin | Limited DeFi access, channel liquidity |
tBTC uses a decentralised network of signers and threshold cryptography so no single party controls the locked BTC. The trade-off is lower liquidity and a more complex redemption process. cbBTC, launched by Coinbase in late 2024, offers a centralised but regulated alternative backed by a publicly listed US company subject to SEC oversight.
For Indian users, none of these wrapped products are directly available on domestic exchanges like WazirX, CoinDCX, ZebPay or Mudrex. You would need to use an international DEX via a self-custody wallet like MetaMask, which adds complexity and gas costs. If you are curious about how AI is shaping new DeFi tools, our piece on AI agents in crypto covers relevant developments.
The practical takeaway: if you want Bitcoin exposure in India without DeFi complexity, holding BTC directly on a regulated Indian exchange is simpler and carries fewer custody layers. Wrapped Bitcoin makes most sense for active DeFi participants who specifically need BTC-denominated collateral or liquidity positions on Ethereum.
Frequently Asked Questions
What is Wrapped Bitcoin (WBTC)?
Wrapped Bitcoin is an ERC-20 token on Ethereum backed 1:1 by real Bitcoin held in custody. It lets Bitcoin holders participate in Ethereum-based DeFi protocols without selling their BTC. Each WBTC token is redeemable for one BTC through an authorised merchant, and all reserves are publicly verifiable on-chain via the WBTC.network dashboard.
How is WBTC created and redeemed?
A user sends BTC to an authorised merchant, who requests the custodian (BitGo) to mint WBTC on Ethereum. To redeem, the user sends WBTC back to the merchant, who burns the tokens on-chain and triggers the release of BTC from the reserve wallet. The entire process is transparent and auditable on the Ethereum blockchain.
Is WBTC as safe as holding BTC?
No. Holding BTC in a self-custody wallet means only you control the keys. WBTC adds custodian risk, smart contract risk and DeFi protocol risk. The 2024 BitGo custody controversy showed how quickly that risk can become real. WBTC is a tool for DeFi use, not a safer way to hold Bitcoin.
Why would anyone wrap Bitcoin?
Bitcoin’s blockchain does not support smart contracts natively. Wrapping BTC into WBTC lets holders use their Bitcoin value as collateral for DeFi loans, earn yield in liquidity pools, or participate in Ethereum-based protocols without selling BTC. For active DeFi users, yield opportunities can outweigh the added custody risk, though that is a personal risk calculation.
What are the tax implications of WBTC for Indian investors?
Under India’s VDA tax rules, swapping BTC for WBTC is treated as a taxable transfer. Any gain is taxed at a flat 30% with no deductions allowed beyond the cost of acquisition. A 1% TDS applies if the transaction goes through an Indian exchange. Consult a tax professional before you transact, since every conversion event is a potential tax trigger.
This is not financial advice. Data as of July 2025. Last updated: July 2025. Reviewed by the CryptoWire editorial team.
