Home Business Liquid Bitcoin Vs. Wrapped Bitcoin: How Are They Different?

Liquid Bitcoin Vs. Wrapped Bitcoin: How Are They Different?

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Last modified on April 6th, 2024 at 9:00 pm

Liquid Bitcoin Vs. Wrapped Bitcoin

Due to the congestion caused by the surge in Bitcoin Ordinals, transaction fees surmount miners’ rewards, which has happened only a few times in Bitcoin’s history. The BRC-20 token standard allows minting and transferring fungible tokens via the Ordinals protocol on the blockchain. More exactly, users can permanently inscribe data on Satoshis. It’s not uncommon to see one block upload more than 3,000 inscriptions. 

Bitcoin holders worldwide are searching for alternative solutions to overcome the increasing transaction fees linked to Bitcoin’s time chain. Layer 2 options, such as the Lightning Network, reduce the time considerably, so you can use your funds for trading, staking, transactions, etc. Still, it’s not practical to move your crypto holdings to the Lightning Network, as many wallets are custodial. 

Maybe you’ve been thinking about accepting cryptocurrency in your life, but you don’t know where to buy Bitcoin. Platforms/venues for purchasing Bitcoin include but aren’t limited to digital wallet providers, centralized exchanges, peer-to-peer marketplaces, and payment apps. If you want to avoid paying high transaction fees, you must be willing to go to great lengths as far as your funds are concerned. 

Alternative low-fee options have emerged, such as Liquid Bitcoin and Wrapped Bitcoin, which enhance liquidity and functionality. If you’re curious to find out more, please continue reading. 

Bitcoin On the Liquid Network Is Referred to as L-BTC 

Liquid Bitcoin, or L-BTC, operated on the Liquid Network, a Layer 2 solution that allows for fast, confidential settlement, not to mention the issuance of new digital assets (stablecoins, security tokens, and so on). Its supply is backed 1:1 with Bitcoin, meaning that you can easily transfer coins to and from the main chain. Liquid Bitcoin relies on a federated consensus model where a group of trusted administrators validates transactions. Holders of Liquid Bitcoin can vote for blockchain improvement proposals, solving the problem of centralization in the ecosystem. 

L-BTC is created when Bitcoin is moved to the Liquid Network. You must lock up your Bitcoin in a transaction referred to as a peg-in – in other words, you deposit Bitcoin to an address generated by the Liquid Network. Once the deposit is confirmed, you’re issued a corresponding sum of Liquid Bitcoin. You can generate L-BTC through the process of mining as well. Liquid Bitcoin is destroyed when it’s moved out of the network. 

You can use your Bitcoins in whatever way you want on the Liquid Network. For example, you can use the tokens to trade on a Liquid-compatible exchange or acquire collectibles issued on the blockchain. Suppose you’d like to withdraw your crypto holdings. In that case, you initiate a peg-out, which involves sending L-BTC to an irretrievable address for burning. Provided the transaction receives two separate confirmations, the original Bitcoin is sent to your wallet address on the blockchain. 

The Liquid Network implements Confidential Transactions to keep sensitive information secret from prying eyes. If you decide to use a different asset, such as USD, it won’t be known to third parties. A cryptographic protocol conceals both the type of assets and the amounts that are transacted to third parties monitoring the Liquid Network. Still, other Liquid users are able to verify the accuracy of the transaction amount, the wallet balances, and the overall supply of assets involved in the transaction. 

Wrapped Bitcoin Is Bitcoin Converted for Use on The Ethereum Blockchain 

Wrapped BTC, or wBTC, is an ERC-20 token, meaning that it’s built on the Ethereum blockchain. Therefore, it can be used on the DeFi market to interact with various decentralized apps. Before the emergence of wBTC, the only way to use Bitcoin within a financial transaction was through centralized exchanges. Wrapped Bitcoin is always equal to Bitcoin. In some ways, it can be compared to a stablecoin, even if Bitcoin isn’t always stable. A standard use for wBTC is as collateral in decentralized lending, leveraged to borrow other cryptocurrencies or stablecoins. 

Wrapped Bitcoin was created to bridge the gap between Bitcoin and Ethereum, allowing Bitcoin holders to start using DeFi apps. Since DeFi projects offer an opportunity to profit from the larger market capitalization, the wBTC initiative was developed so that Bitcoin could be integrated into the Ethereum-based DeFi ecosystem. Numerous DeFi protocols now allow borrowers to use Wrapped Bitcoin as collateral, so they can be wrapped up into a contract. 

The utility of the Bitcoin network has expanded even further owing to the arrival of the Ordinals protocol. Developers and artists are able to create and store digital artifacts – the end result can be considered an NFT. Bitcoin Ordinals can be used in DeFi to make financial transactions more secure and trustworthy. By converting your Bitcoin to wBTC, you can seamlessly interact with wallets, decentralized applications, decentralized apps, games, and smart contracts. Transactions conducted with wrapped Bitcoin are faster and more cost-effective. 

Wrapped Bitcoin is created when you request ERC-20 tokens from a merchant in exchange for your Bitcoin. The merchant will verify your identity and initiate a transaction with a custodian, which will then mint a certain number of coins and send them to the merchant’s Ethereum address. You can carry out the trade via a centralized exchange or a peer-to-peer platform. The merchant will end up with Bitcoin and you with wBTC. 

Concluding Thoughts 

If you’re worried about possible failures or potential risks, know that both Liquid Bitcoin and wrapped Bitcoin rely on trusted intermediaries and custodians for their operations. Additionally, if you exercise due diligence when engaging with cryptocurrency and are cautious, there’s no reason to be concerned. L-BTC and wBTC are alternatives that allow Bitcoin holders like you to make the most of the advantages of other blockchains, such as faster transactions, interoperability with dApps, and other financial instruments. 

All things considered, it can be concluded that Liquid Bitcoin is superior to wrapped Bitcoin on account of its distinct characteristics over transaction fees. The market will find an equilibrium at a lower cost if it’s a question of supply and demand. Self-custody of Liquid assets is simple with digital wallets.  

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