The Bitcoin (BTC) network uses a proof-of-work (PoW) consensus protocol to secure the network, which means network participants can earn mining rewards (if they choose to mine the digital currency), but they can’t earn staking rewards natively.
Fortunately, for BTC holders who would like to earn staking rewards on their bitcoin investment, you can tokenize your coins into Wrapped Bitcoin to earn staking rewards in the Ethereum (ETH)-based DeFi ecosystem.
Read on to learn how to stake bitcoin (in tokenized form) and start earning staking rewards on your “digital gold.”
What is Wrapped BTC & how does it work?
Wrapped Bitcoin (WBTC) is a tokenized version of BTC on the Ethereum network. WBTC integrates BTC into Ethereum’s decentralized finance ecosystem by conforming to the ERC-20 standard.
WBTC was launched in 2019 by BitGo, Kyber, and Ren and is currently the largest wrapped token by total market capitalization.
WBTC allows Ethereum applications to integrate an ERC-20 token backed by real BTC reserves. In simple terms, you can wrap your BTC and lend the WBTC through DeFi lending protocols, use it as collateral for a crypto loan, or deposit it in an automated market maker (AMM) to earn liquidity mining rewards.
WBTC is collateralized 1:1 with BTC through a transparently verifiable “proof of reserve” system. In other words, WBTC is pegged to the value of BTC in a ratio of 1:1 and, therefore, mirrors BTC’s price movements.
Wrapped Bitcoin is managed by a decentralized autonomous organization (DAO) comprising several members who hold a multisig contract to add or remove WBTC merchants and custodians.
To deposit BTC and mint WBTC you must go through a process that involves merchants and custodians. Upon receiving a request from a user, the merchant initiates a transaction by sending your BTC to a custodian to mint a corresponding amount of WBTC. The WBTC is sent to the user, and the custodian locks the BTC in a digital vault.
If you want to redeem your WBTC for BTC, the merchant initiates a burn transaction and authorizes the custodians who release a corresponding amount of BTC to the merchant’s address. The WBTC is destroyed by the custodian and you will receive your BTC from the merchant.
Now, let’s take a look at two staking options for WBTC that allow you to earn staking rewards using (tokenized) bitcoin.
How to stake (wrapped) BTC to earn staking rewards
There are essentially two ways you can earn rewards by staking your tokenized bitcoin holdings. You can either stake your WBTC on a centralized exchange or in a decentralized protocol.
Strictly speaking, our two examples are not staking in the proof-of-stake (PoS) sense. Instead, they both involve depositing Wrapped Bitcoin to earn yield, thus acting as a de facto form of staking.
Stake on a centralized exchange
You can stake your WBTC on a centralized exchange (CEX) to earn staking rewards.
For example, you can access Binance Earn and provide liquidity in Binance liquidity pools. The Binance liquidity pools allow you to earn transaction fees and interest on your WBTC.
To begin, you will have to log into your Binance account and click on ‘Earn.’ Scroll down and click on ‘Liquidity Farming.’
Access the Liquidity Farming page and search WBTC.
Add liquidity by clicking on the ‘Add’ option on the operation column.
In this instance, the WBTC/ETH is a dual liquidity pool. Proceed to stake the WBTC amount and calculate the total yield. Once satisfied, submit your order by clicking “Add liquidity.”
If you are an existing Binance user, this is arguably the easiest way to earn rewards for staking your WBTC tokens. However, you do need to keep in mind that Binance is a centralized exchange, and you are trusted a third party with your funds.
Stake Wrapped BTC in a DeFi protocol
Alternatively, you can stake your WBTC in a DeFi protocol like Curve.
Curve.fi allows users and other decentralized protocols to exchange ERC-20 tokens via liquidity pools. Curve.fi offers relatively low fees and low slippage and provides rewards to liquidity providers.
You can deposit your WBTC into a Curve contract. In return, you will receive corresponding liquidity provider (LP) tokens. You can then stake your LP tokens to earn yield on your tokenized BTC holdings.
To learn more about earning crypto income on Curve.fi, check out our guide: DeFi Unlocked: How to Earn Crypto Investment Income on Curve Finance.