I’m assuming you all are aware of cryptocurrencies and the stratospheric growth in their price that the civilized globe has seen in the last few years. Even though Bitcoin was the initial cryptocurrency ever established, many other cryptocurrencies emerged.
The issue that arises here is that various currencies, such as Bitcoin and Ethereum, follow distinct rules and features, and thus cannot communicate with one another owing to fundamental differences in their protocols.
This freedom provides each blockchain privacy, integrity, and security but also brings into question the feasibility of an interconnected environment in which information and content may be efficiently traded.
Wrapped tokens, for example, have a practical use in decentralized finance (DeFi), wherein fast, seamless, and rapid cash transfer is critical. Similarly, Polkadot, another blockchain system, was built to address the interoperability challenge.
As a solution, wrapped tokens were designed to allow interconnectivity among blockchain networks like Bitcoin and Ethereum. It also symbolizes that the blockchain standard is maintained as the original one. These wrapped blockchains can also be utilized on a non-native blockchain network which can then be reclaimed for the actual coin.
Introduction to Wrapped Tokens
Wrapped tokens are cryptocurrencies anchored to an original cryptocurrency’s market, assets such as gold, equities, commodities, or estate development, which are used on DeFi platforms.
Wrapped tokens are analogous to stablecoins, drawing their worth from another asset. In the case of a stablecoin, this is often fiat cash. A wrapped token is often a commodity that lives on another network.
The original cryptocurrency is wrapped in wrapped tokens, and a new token is issued, which can be used on other networks. The wrapped token enables interoperability among different currencies, which can also be utilized on non-native blockchain platforms.
They may symbolize everything from artworks and antiques to commodities, cryptocurrency, equities shares, and fiat currency. Because wrapped tokens are interconnected, they must be considered and controlled by a guardian capable of wrapping and unwrapping the asset.
This can lead to the formation of novel possibilities for investment and the capacity to exchange these assets more efficiently and securely.
Wrapped tokens may be formed on several blockchain systems, including Ethereum, by adhering to a list of guidelines and employing smart contracts. The Ethereum token, known as the ERC-20 token, produced on the Ethereum platform and adheres to a series of norms and regulations, is the more prevalent sort of wrapped token.
Moreover, wrapped tokens have one advantage of being supported by the asset it is based on. This implies that the value of a wrapped coming depends on the crypto asset’s market value. Let’s suppose that a wrapped token symbolizes one bitcoin.
Its price will be determined by its market value. This offers investors assurance and safety because the wrapped token value is not reliant on the performance or collapse of a specific initiative or firm.
Working Mechanism of Wrapped Tokens
Now that we have a basic knowledge of wrapped tokens let’s learn how it works.
Firstly, a custodian must initiate the wrapping process and ensure that the wrapped token and original crypto asset have the same worth. Now, what is a custodian? A custodian might be a collection of codes, a retailer, or a multi-signature wallet.
Let us suppose a merchant wants a wrapped token, so he will send his original token to the custodian to wrap his token. This process is called minting. Once minted, the wrapped token it can be delivered to the blockchain network it wishes to function on. His reserve is also documented on the blockchain as proof.
Whenever the merchant wants to swap the token back, he sends an instruction of removal of the token from the network to the custodian, which then removes it and returns your original asset to you. This process is known as burning.
As a result, the custodian is both wrapping and unwrapping. Throughout the minting and burning procedures, the token’s value remains constant.
Types of Wrapped Tokens
Cash-settled and redeemable are two types of wrapped tokens. In a cash settlement, the wrapped token cannot be exchanged for the original token. On the contrary, enable holders to swap the wrapped token for the actual asset.
What are the Elements of a Wrapped Token?
There are several components that makeup wrapped tokens:
A Fundamental Asset
Wrapped tokens represent an asset they are based on, which might be a cryptocurrency, NFTs, or a conventional asset. The underlying value of the asset provides the wrapped token’s worth and support.
Wrapped tokens could be generated on various blockchain systems, including Ethereum and Binance Smart Chain. The blockchain network used might influence the characteristics and functionalities of a wrapped token.
Digital Exchange Platforms
Digital assets exchanges platform may be used to purchase and trade wrapped tokens which serve as a selling and trading venue. The exchange platform you choose might affect the availability and stability of the wrapped token.
Smart contracts are self-operating sets of instructions on a blockchain to control anything that occurs, such as operations and trades. Smart contracts are used to generate wrapped tokens. The smart contract defines the regulations and requirements of a wrapped token, particularly how it may be generated, exchanged, and discarded.
Wrapped tokens frequently adhere to certain token standards, for example, ERC-20 on the Ethereum blockchain. The token standard defines the principles and criteria that must be followed by the wrapped token, including its generation, exchange, and destruction.
The first wrapped bitcoin (WBTC) was launched in January 2019. As we know, bitcoin is not supported on the Ethereum network, and Ethereum provides far more features than Bitcoin. One of these features includes dApps In the DeFi system.
Wrapped Bitcoin (WBTC) was invented to provide the possibility and availability of Bitcoin on the Ethereum network while also offering the versatility of an ERC-20 token. As we know, the Bitcoin network doesn’t provide the DeFi ecosystem feature, which means that Bitcoin cannot be used for DeFi transactions.
Therefore a wrapped Bitcoin is created to substitute the original bitcoin trade inside the DeFi system on the Ethereum platform while the value of the bitcoin remains the same.
In other words, a BTC owner may loan Bitcoin using smart contracts linking their account to a DeFi network and receiving a predetermined profit every year. On the other hand, borrowers utilize their cryptocurrency as backup, which is immediately transferred to the lender in case of a collapse.
Using this sort of financial system, people who are investing can still earn some profits even during times of financial crisis when the asset price falls. Hence we can say that it is a big contribution to the industry.
A wrapped Bitcoin token is secure from a technological standpoint. It is more likely to be held on secure systems like Ethereum or BSC. Once it is converted into a standard token such as ERC-20 will secure the associated network. One issue with WBCT is that it requires a custodian to mint and burn an asset.
So the person wrapping his asset needs to have trust in the custodian. If a custodian releases and distributes the actual Bitcoin to another party, the ERC-20 token holder will have a useless asset left.
Wrapped Ethereum or WETH was introduced in 2017 by 0x labs. These wrapped tokens have been modified to comply with the ERC-20 protocol. This entails that resources that are non-Ethereum can be used on Ethereum.
Minting and burning coins on Ethereum, as expected, costs gas. This is because Ether is turned into ERC-20 by WETH, a marketable ETH variant that adheres to decentralized financial standards.
Token specifications may be thought of as a collection of criteria that a token should adhere to in order to be interoperable within other Ethereum-based applications and networks. Similarly, various token protocols are employed to define distinct collections of assets and are interoperable with certain services.
Take a fungible token as an example. Wrapped ETH introduces ETH users to a completely new realm of decentralized money. They may use WETH to barter with several other Ethereum-based cryptocurrencies and pledge money.
The operation of a wrapped Ethereum is the same. You’ll need a custodian to mint your token while keeping the value of the token intact.
Other Wrapped Tokens
Wrapped bitcoin and wrapped Ethereum are among the most popular ones. Tokens on Ethereum must be ERC-20 certified. Some other tokens that are on Ethereum are as follows.
Basic Attention Token (BAT)
It is among the most prominent Ethereum-based wrapped token that addresses marketing issues on the internet. People are given BAT depending on their existing Web reviews. These tokens can then be used for the marketing of products. In a nutshell, it generates revenue and recognition.
It is also known as OmiseGO. Its goal is to reduce gas costs and improve the overall performance of the Ethereum platform. It minimizes the time it takes to conduct a transfer by enhancing the effectiveness of the Ethereum platform. As a result, OMG is an important wrapped coin on ERC-20.
WXRP wrapped token is formed by wrapping XRP, symbolizing XPR. It is an Ethereum-based network and enables the usage of XRP in DeFi apps and may be purchased, leased, and exchanged via digital asset exchanges.
Moreover, besides Ethereum, there are other platforms as well that supports wrapped tokens.
Binance Smart Chain is one such network that supports both WBTC and WETC. To function on a BSC network wrapped token must be BEP-20 certified. The abovementioned tokens may be wrapped using the Binance Bridge, which provides one of the most secure methods of minting wrapped tokens and launching those on the BSC network.
These tokens can be utilized for cryptocurrency exchanges or yield farming purposes. It is important to understand that minting and burning tokens charge certain gas expenses that must be paid. Luckily, the BSC network has cheaper wrapping and unwrapping costs than others.
Other than WBTC and WETC another token that works on the BCS network is Wrapped Polkadot.
Benefits of Wrapped Tokens
Wrapped tokens can help with quicker and more effective transfer of assets and payment, minimizing the requirement for middlemen and the danger of mistakes or corruption. Hence making transactions more efficient and simple for its users
enhanced security Since we know that smart contracts are used to produce wrapped tokens with certain rules and regulations to be followed by the token. This can deliver greater protection and visibility than conventional financial products.
Furthermore, wrapped tokens are supported by the asset they are based on, which implies that the worth of a wrapped token depends on the market value of the underlying asset.
This offers investors a measure of consistency and safety because the wrapped token price is not reliant on the performance or collapse of a specific task or firm.
Wrapped tokens can eliminate the necessity for middlemen, lowering the expense of monetary operations. Furthermore, DeFi applications frequently do not necessitate consumers to undergo the similar extensive and costly check-in process as conventional banking firms, which can help customers save money.
Wrapped tokens might symbolize and convey the funds previously not conceivable or practicable to exchange via a decentralized way. This can make some assets more accessible and open up new investing options.
Wrapped tokens, for instance, may be utilized to symbolize conventional commodities such as real estate and equities, allowing for the introduction of novel investment possibilities and the opportunity to exchange existing commodities in a highly effective and safe way.
Drawbacks of Wrapped Tokens
The entire point of cryptocurrency is to function on a decentralized system. However, because a custodian is responsible for the release of wrapped, they are vulnerable to centralization. The issue is that whenever wrapped tokens are wrapped, they are not carried out natively in the intended blockchain but rather via centralized software.
Another small downside of wrapped tokens is the expense of minting. Minting and burning coins incur gas expenses, which might lead to lapse. Nonetheless, the advantages of wrapped tokens exceed the disadvantages.
Furthermore, it is envisaged that these small drawbacks will be eliminated soon. Maybe in the coming future, a custodian such as a smart contract will not be required to mint or burning.
Dependence on a Custodian
Although wrapped tokens are always improving, they require a custodian to carry out the wrapping or unwrapping of an asset. If the custodian is defective, the minting and burning process will also be problematic.
Why Should You Invest in Wrapped Tokens?
Wrapped tokens seem to become increasingly significant due to the rising requirement to employ other cryptocurrencies on a given blockchain. As a result, dealing in wrapped tokens, particularly using WBTC, may be quite rewarding in the extended term.
Wrapped tokens are comparable to regular tokens. In reality, they are purchased and traded at the same price. As a result, the rise in the value of a token will also cause a rise in the value of the wrapped token.
Furthermore, wrapped tokens improve accessibility and effectiveness both for decentralized and centralized exchanges by allowing assets to be moved across various networks that would typically stay independent.
Another perk of wrapped tokens is that it provides faster transaction speeds and cheaper costs, which are especially advantageous for sluggish blockchain network like Ethereum.
Several options are available for the development of wrapped tokens. Wrapped tokens, for example, may be employed to symbolize conventional assets such as equities, allowing for the introduction of fresh investment possibilities as well as the opportunity to trade existing assets in a highly secured and effective fashion.
Secondly, wrapped tokens might symbolize stablecoins, which are digital assets that are linked to a certain asset or cryptocurrency. They are intended to retain a stable value.
Stablecoin wrapping can enable the establishment of novel financial products and trading possibilities. Several cryptocurrencies can be represented via wrapped tokens, opening up new marketplaces and investment options.
Wrapped tokens could also symbolize assets such as gold and silver, opening up new marketplaces and alternative investment options. Finally, last but not least, wrapped tokens are distinct assets such as NFTs, that indicate possession of a certain object or value. Wrapping NFTs has the potential to open up market opportunities and economic possibilities.
In the end, we can say that wrapped token possesses the ability to fundamentally alter our thinking of the blockchain network and its interoperability. Wrapped tokens enable interconnectivity by allowing multiple blockchain assets to be utilized in a single ecosystem.
More and more platforms are embracing this novel approach, and it’s going to be fascinating to witness how wrapped tokens impact the fate of the crypto business and may even change our thinking about cryptocurrencies in general.