Bitcoin Collateral Loans: Utilizing Wrapped Tokens

Borrowing cash without selling Bitcoin (BTC) involves converting BTC into wrapped tokens to use as collateral for decentralized finance (DeFi) loans. This method maintains exposure to BTC prices, but it also requires taking on the risks associated with custodians, repayment procedures, and loan protocols. Ethereum-based lending applications highlight structural differences due to the difficulty of directly accepting BTC from the Bitcoin network as collateral. Wrapped tokens bridge this gap; when users deposit BTC with a custodian, the corresponding tokens are issued, which can then be used as collateral in lending protocols to borrow stablecoins. After loan repayment, the wrapped tokens are burned, and the BTC held by the custodian is returned. WBTC, cbBTC, and cirBTC are representative wrapped tokens. cirBTC was launched on Ethereum with a 1:1 collateral ratio, and Circle has disclosed the reserve addresses and provided related information. The key to maintaining the price of wrapped tokens similar to BTC is their redeemability. However, price discrepancies may persist due to eligibility for redemption, processing delays, and regional restrictions. There is also a risk of BTC price decline after borrowing, which could lead to liquidation if the collateral value drops. Therefore, the expression "raising cash without selling BTC" is only partially accurate, as users must bear various risks while transferring Bitcoin to other blockchain financial markets.

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