“Wrapped”, because the title suggests, is actually a wrapped model of cryptocurrencies that may work on blockchains aside from its personal. The worth of wrapped tokens is tied to the underlying cryptocurrency. For instance, 1 BTC is equal to 1 Wrapped BTC. Wrapped tokens enable cryptocurrencies for use throughout a number of blockchains, increasing their performance.
BTC can solely be used on the Bitcoin blockchain, however wrapped Bitcoin can be utilized on the Ethereum blockchain. They’re of the identical worth because the underlying coin, and we’d like them as a result of Tokens have to be interoperable throughout completely different blockchains to facilitate diversified transactions. We all know that the video games we play on our telephone can’t be performed on our pc, however with the suitable software program, we are able to play them on a pc as effectively. Tokens additionally operate the identical approach. Bitcoin gained’t work on the Ethereum blockchain until it’s wrapped.
Most cryptocurrencies are native to their blockchains; they’ll’t immediately work together with different chains. Wrapped tokens make it attainable for Tokens like Bitcoin to be “wrapped” and utilized in blockchains that weren’t beforehand suitable, unlocking a brand new world of potentialities for decentralized finance.
How does Wrapped Tokens work?
For a token like Bitcoin to be wrapped, there must be three main gamers:
Minting (Creating Wrapped Tokens)
For those who maintain a foreign money, corresponding to bitcoin, and also you wish to commerce on the Ethereum blockchain, you ship your Token to a custodian. The custodian is a set of codes that act as a bridge between you, your unique token, and the wrapped token. The custodian ensures that the worth of the wrapped token is similar as the unique Token.
Custodian
When you ship your tokens to be wrapped, the custodian will mint an equal quantity in wrapped tokens. Since new tokens are created within the course of, your unique tokens are locked in a particular form of digital vault.
Burning (Redeeming Wrapped tokens) :
The wrapped tokens can be “unwrapped” and was the unique type by way of the identical custodian by way of a time period known as burning. To place it merely, the wrapped tokens are destroyed, and the tokens that have been beforehand locked are launched.
Wrapped Token and Native tokens
1. Native Tokens
They’re the native cryptocurrencies of their respective blockchain. For instance:
Native tokens are necessary to their respective blockchains as they’re used for transaction charges, community safety, and governance. These tokens solely work on their native networks until they’re wrapped and transferred to a different blockchain.
2. Wrapped Tokens
Wrapped tokens are only a minted model of the unique tokens that can be utilized on a unique blockchain. For instance, Wrapped Bitcoin (wBTC) is a Bitcoin wrapped and issued on the Ethereum blockchain. Though wBTC represents a bitcoin, it follows Ethereum’s token customary (ERC-20). This helps it to work together with the Ethereum-based functions and platforms like decentralized exchanges (DEXs)
The Way forward for Wrapped Tokens
Wrapped tokens diversify new alternatives for utilizing Currencies like Bitcoin and Ether on non-native platforms. As expertise evolves, we are able to see many developments to be made within the discipline of wrapped tokens. Many new blockchains are beginning to experiment with wrapped tokens to facilitate entry to DeFi functions. However there are darkish sides to wrapped tokens as effectively. It depends on a trusted custodian for the custody of underlying belongings, which contradicts the decentralized nature of DeFi. If the custodian is compromised, hacked, or mismanaged, the customers’ funds may very well be in danger. A centralized custodian might doubtlessly freeze or seize the funds when pressured from an exterior supply or regulatory motion.
Conclusion
Wrapped tokens have eliminated the restrictions set on cryptocurrencies and digital belongings by making a bridge between in any other case remoted blockchains. These tokens play a vital position in connecting these chains and offering interoperability and elevated liquidity. Wrapped tokens maximize the utility of their underlying belongings. It’s an revolutionary and versatile answer.
As decentralized finance (DeFi) continues to evolve, wrapped tokens are additionally evolving, and they’re increasing the probabilities for decentralized buying and selling, lending, and yield farming.
FAQs
Wrapped tokens will be secure, however they don’t seem to be risk-free. They depend upon belief, both in a custodian that holds the unique coin or in a protocol that locks it by way of good contracts.
Wrapping a coin permits it for use on a non-native blockchain.
It’s not Bitcoin, however relatively a separate ERC-20 token that tracks Bitcoin’s worth.
The present wBTC to USD conversion fee is $121,684.00 per wBTC.
The custodians that situation wBTC embrace centralized exchanges (CEX), decentralized exchanges (DEX), or a bunch of decentralized organizations (corresponding to a DAO) that handle the token’s provide and try to make sure that the bitcoin backing the tokens matches the quantity of wBTC issued.
