Step into the fascinating world of cryptocurrency innovation as we unravel the mysteries behind ‘Wrapped Tokens.’ Ever wondered what they are and how they work? While all the buzz around cryptocurrency is focused on the coins, there are other crypto assets, like something called a wrapped token. Let’s find out more about this and how it works!
Suppose you want to use my Ethereum (on the BNB chain) on Dapp or Dex, but you don’t have it in your wallet or have but on the ETH chain. This is really frustrating because, in both cases, you cant use it, but thanks to whoever created the wrapped tokens.
It doesn’t matter if it’s wrapped or not if you are just a trader or beginner, but it matters if you want to use Defi or DEX with your BTC or ETH.
The main purpose of wrapped tokens like Bitcoin, Ethereum, is to bring them on a different blockchain so we easily use them on Dapps.
There are currently over 50 wrapped tokens, and the most popular are WBTC, WETH, and WBNB.
To understand easily, let’s say you are in space and your spaceship gets hit by something. To restore damage, you have to go outside the spaceship and fix it manually, so you need to wear a spacesuit to survive in a different environment, and that suit will work as a wrapper.
So in terms of wrapped tokens, a wrapped token is a tokenized version of another cryptocurrency. It’s pegged to the value of the asset it represents and can typically be redeemed for it (unwrapped) at any point. It usually represents an asset that doesn’t natively live on the blockchain that it’s issued on. Read More
Basically, the wrapped token is a native cryptocurrency inside the wrapper and derives its value from its original cryptocurrency, but it runs on a different blockchain. WBTC derives its value from BTC, and WETH derives its value from ETH. Satblecoin is another example that derives its value from fiat currency, but a stablecoin is not a wrapped token.
How do wrapped tokens work?
There are many merchants, like AAVE and 0x, who work as custodians to mint wrapped tokens on a certain blockchain, such as ETH or BSC. When a user requests to convert the original coin into a wrapped token, the custodian mints the same amount as the original coin.
In the case of WBTC, it is mint by DAO, so when you convert BTC into WBTC, DAO releases the WBTC into your wallet. Similarly, when you want your BTC back, you have to convert from your WBTC and the amount of WBTC you convert is destroyed by DAO and you will get your BTC back.
All wrapped tokens are limited to their original coin, and a custodian is required to release and hold wrapped tokens because traders can’t independently use wrapped tokens for cross-chain transactions.
What is the purpose of the wrapped token?
The purpose of the wrapped token was simple. Bring a native on a different blockchain network so we can use them on Dapp, especially Defi.
The wrapped token is blessed for Bitcoin holders. Now they can use Dapp without selling or exchanging their bitcoin.
And the best thing is wrapped token price will be the same as the original coin. In the case of WBTC or BTCB, the price will be the same as BTC in the future. So technically you don’t have bitcoin but have bitcoin in form of another coin.
How do I get the wrapped token?
Many centralized trading platforms offer wrapped tokens for trading with certain pairs, such as BTC, ETH, and USDT. But if you want to do something extra, then try to get on decentralized exchange, but make sure you have ETH or BNB in your wallet for ERC20 or BEP20 coin, respectively. You can use them on various Defi or Dapp to maximize income.
Some popular wrapped tokens.
Wrapped Bitcoin (WBTC): Wrapped Bitcoin delivers the power of Bitcoin with the flexibility of an ERC20 token. WBTC is the first ERC20 token backed by Bitcoin. Completely transparent. 100% verifiable.
Wrapped Ethereum (WETH): The Ethereum network’s native currency, Ether (ETH), was created way before the ERC-20 protocol that powers Defi services. So, for ETH to be compatible with ERC-20, WETH was created.
Wrapped BNB (WBNB): It is a BEP-20 token built on the Binance smart chain.
Advantage of the wrapped token.
To highlight some of the primary advantages of the wrapped tokens, I’m taking WBTC as an example. Utilization of BTC on Dapps as a form of WBTC because the bitcoin blockchain does not have the ability to execute smart contracts.
The transaction speed of wrapped bitcoin is much faster than that of bitcoin. Normally, Bitcoin processes 3-5 transactions per second, while Ethereum processes 10-15 transactions, and Binance’s smart chain processes 55–60 transactions per second.
WBTC could be much cheaper than BTC. Bitcoin on BSC charges less than a $1 transaction fee.
Disadvantage of the wrapped token.
Safekeeping your bitcoin is one of the massive disadvantages of using a wrapped token. Unlike a traditional token, a wrapped token involves a third party because someone has to hold the user’s bitcoin, making it centralized. And also, the wrapped token does not follow an automated smart contract, which is really risky because you cannot get back your bitcoin until the custodial releases it.
Vitalik Buterin said – I’m worried about the trust models of some of these tokens. It would be sad if there ends up being $5b of BTC on Ethereum and the keys are held by a single institution.
In wrapped token management, an organization involves and mostly they are anonymous, like DAO for WBTC, it becomes a more severe problem if a single person governs the organization and controls the wallet key alone because no one knows that person.
Maybe it is still growing, but the wrapped token concept is really cool because it provides a better opportunity to do something extra with our money. If we solve some issue, then we can say bitcoin, but better. It should be noted that WBTC is not only a wrapped token.
If you holding any valuable wrapped token and using it wisely on Defi, then you are one step ahead of those holders holding original crypto.
By the way, what do you think about wrapped tokens? Do you have any wrapped tokens? And, as always, do your own research before investing in crypto.✌