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What Are Wrapped Tokens?

What Are Wrapped Tokens? - Photo 1

In 2022, there will be a vast number of cryptocurrencies that use various blockchains. Many applications, platforms, and smart contracts have emerged on the market that could employ tokens from various blockchains. Wrapped tokens are one of the bridges that permits you to communicate crypto-assets from one network to another.

What is a wrapped token? A wrapped token is a copy of a crypto asset on another blockchain but is pegged to the importance of the actual token. What is wrapped? It is named "wrapped" because the initial purchase is placed in a "wrapper," a digital storage that allows you to create a copy of the token on another blockchain.

Unraveling the Concept: What are Wrapped Tokens?

What is wrapped crypto tokens? Wrapped tokens are becoming increasingly famous in the crypto markets; they are created in different blockchain networks for different reasons, serving essential factors such as:

  • transaction rate, 
  • compatibility, 
  • and gas fees.

A wrapped token is an investment hosted on a blockchain whose importance is identical to another underlying asset, not native to the host blockchain. It is packaged because the actual buy is placed in a locker (secured by collateral), meaning its actual value and cost.

In this course, wrapped tokens decode interoperability issues by supporting additional blockchains with different usage cases. In most cases, other blockchains cannot interact with each other; wrap crypto tokens translate this special problem.

Contact between chains was not incorporated into the original idea of blockchain protocols; nevertheless, as technology has grown, there has been a need for cross-chain solutions. Interoperability supplies users with accessibility, transactional advantages, and quickness.

The concept of wrapping crypto BTC in Ethereum-based protocols is particularly compelling, made feasible by the wrapping tokens tool. Before employing wrapped tokens, copying BTC on the Ethereum network and other blockchains was unbelievable.

The Mechanics of Wrapped Tokens

Imagine you are a DeFi enthusiast already acquainted with DEX platforms mainly built on Ethereum, even though most DeFi coins and apps follow the Ethereum average. You enjoy cashing out bitcoins, but there is a concern: there needs to be a known bridge or link that could affect the cross-chain contact between these two different kinds of blockchains; Wrapped BTC helps solve this problem and delivers a fair amount of liquidity while.

With gratitude to wrapped crypto tokens, cross-chain communication between blockchains evolves possible, which is not likely natural. Wrapped tokens are custodial tokens - an object that contains an asset amount equal to the wrapped amount. This custodian could be a merchant, a multi-signature wallet, a DAO (Decentralized Autonomous Organization), or a smart contract. For example, in the case of WBTC, the custodian must hold 1 BTC for every 1 WBTC minted. Proof of this reserve exists on the web. As mentioned earlier, this is where stablecoins don't quite fit into the type of wrapped crypto tokens, as custody is only sometimes done 1-1.

Popular Wrapped Tokens in the Crypto World

BTC and ETH, in their pure form, BTC and ETH cannot participate in smart contracts when it comes to interaction between blockchains. Wrapped tokens are especially popular with decentralized crypto exchanges such as Uniswap or PancakeSwap. Most popular centralized crypto exchanges use wrapped tokens, including Binance or Coinbase. Any service that works with various crypto assets needs a bridge between blockchains, and wrapped tokens are a time-tested approach.

Also, wrap token can allow you to bypass the problems of the "native" token blockchain, such as slow transaction speed or high fees. Imagine you need to make many transactions in BTC - on the native blockchain of Bitcoin - it will be prolonged. Wrapped tokens can move faster and cheaper on other blockchains, although their native version remains with the custodian.

All in all, wrapped tokens are a convenient solution many services use.

Conclusion: The Integral Role of Wrapped Tokens in the Crypto Landscape

Unlike most well-known stablecoins, the wrapped coins have established more evident, with an independent safety audit ensuring complete ownership of WBTC. Nevertheless, the price of minting and burning is still growing; with coming technologies, we should see many advances in this development area.

Wrapped tokens are accountable for the growth of DeFi, as projects can now deploy tokens that were not initially native to the host chain. Great developments like this are expected to take creation to a new story as De-Fi innovation continues to drive.

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