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HomeBlogThe Tale of Two Tokens: A Comparison Between WBTC and LBTC

The Tale of Two Tokens: A Comparison Between WBTC and LBTC

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  • LBTC is issued by the Liquid Network, which runs parallel to the Bitcoin network.
  • WBTC is an ERC-20 standard token, developed for using Bitcoin over the Ethereum network.

Bitcoin, the ancestor of all cryptocurrencies and blockchain networks, is wise but suffers from old age. It is highly popular, trusted, and decentralized but experiences the pain of scalability and high transaction fees. Due to its early years of activity, it was a cherished pioneer, inviting developers and users, creating value, and achieving success. However, the same popularity and traditional consensus method gave rise to network congestion, leading to higher network fees.

Learning from this and seeking to aid their older counterpart, later networks focused on providing scalability solutions with higher transaction speeds and low gas fees. Additionally, there was a need to utilize the potential of a coin of such value on other platforms, like Ethereum, which hosted many DeFi-centred applications. These needs gave rise to the development of two prominent tokens, namely Liquid Bitcoin (LBTC) and Wrapped Bitcoin (WBTC).

Utilising Value through WBTC

Ethereum hosts several DeFi apps, which have become a crucial part of modern cryptocurrency-centered transactions and trading. However, since Bitcoin does not support smart contracts, the use of Bitcoin was limited to its own blockchain. Users had to depend on centralized exchanges like Coinbase or Kraken, which restricted them from fully utilizing Bitcoin’s potential.

The solution came in the form of WBTC, an ERC-20 standard token on the Ethereum mainnet. It was launched in January 2019 and is pegged to Bitcoin in a 1:1 ratio. Any user wishing to mint WBTC can do so by sending Bitcoins to a recognized WBTC merchant. The merchant performs Anti-Money Laundering (AML) and Know Your Customer (KYC) checks.

After completing these checks, the BTC is sent to a custodian who holds it in the reserve address and issues the equivalent amount of WBTC to the merchant, which is then sent to the user. WBTC tokens are always backed by Bitcoin tokens and can be used in decentralized exchanges (DEXs) on Ethereum. Currently, there is more than $4.8 Billion in value locked up in WBTC, according to Coinbase.

Quicker and Cheaper Transactions through LBTC

Liquid Network is an independent sidechain that runs parallel to the original Bitcoin chain and is a layer-2 solution to provide scalability and improve performance. It was launched in 2018 by Blockstream to offer fast and confidential transactions. Although it uses the same base code as Bitcoin, it has its separate ledger and unique consensus method, giving rise to LBTC, a tokenized form of Bitcoin.

While Bitcoin relies on Proof of Work (PoW) consensus, the Liquid Network depends on its Liquid Federation for block creation and transaction validation. This federation is made up of several crypto-based companies serving as exchanges, game developers, trading desks, and more. The list includes Coincheck, Coinone, aquanow, and several others.

A subset of this federation with 15 members performs all functions in the Liquid protocol. These include proposing new blocks and managing the two-way Bitcoin peg. The LBTC is pegged in a 1:1 ratio with Bitcoin and is burned or created in an equal ratio as locked in the network.

Conclusion

Both tokens were designed to serve different purposes, and users may choose between them based on their needs. LBTC was mainly designed to offer faster and more private transactions than possible over the Bitcoin mainnet. As it follows a more rapid consensus mechanism, transactions can be completed in just 2 minutes compared to the current 10-minute block time in Bitcoin.

WBTC was primarily designed to bridge the gap between Ethereum and Bitcoin and is widely used by investors who wish to harness the power of Ethereum through the value of their Bitcoin holdings. Both tokens, nevertheless, broaden the perspective of Bitcoin and are powerful tools for users and investors.”

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