What is a Wrapped Token?
A wrapped token is a token of a cryptocurrency connected to another crypto’s worth. It’s called a wrapped token because it was transferred through a wrapper, a sort of digital vault that enables the wrapped version to be generated on another blockchain.
Different blockchains provide varying features. The Bitcoin network is ignorant of what’s going on in the Ethereum blockchain. With wrapped tokens, though, there will be further bridges across multiple blockchains.
Wrapped tokens are a way to circumvent this limitation and use non-native assets on a blockchain.
How do Wrapped Tokens Work?
A wrapped coin is a clone of another cryptocurrency that is tokenized. It is related to the worth of the commodity it serves and at any stage it will usually be exchanged for it (unwrapped). It typically reflects an asset from which it is issued and does not exist natively on the blockchain.
In the case of a stablecoin, it’s typically tied to fiat money. In the case of a wrapped coin, it’s typically a native commodity residing on another blockchain.
There is no good way to transfer data between blockchains, since blockchains are different networks. Wrapped tokens improve interoperability across multiple blockchains-in effect, the underlying tokens may go cross-chain.
It’s worth mentioning that you don’t have to care about the wrapping and unwrapping process if you’re an ordinary user; you can merely exchange these bundled tokens like any other cryptocurrency. You can, for instance, exchange WBTC on Uniswap with any cryptocurrency.
WBTC is an ERC-20 token that is intended to carry a one-to-one peg to Bitcoin’s value, enabling you to use BTC on the Ethereum network easily.
Usually, wrapped tokens include a custodian, an individual who retains a sum of the asset equal to the wrapped amount. A dealer, a multi-sig wallet, a DAO, or even a smart contract may be this custodian.
So, in the case of WBTC, for every 1 WBTC that is minted, the custodian has to carry 1 BTC. On-chain evidence that this reserve remains.
A dealer sends BTC to be minted by the custodian. In compliance with the sum of BTC sent, the custodian then mints WBTC on Ethereum. The merchant sends in a burn order to the custodian when the WBTC has to be traded back to BTC, and the BTC is issued from the reserves.
The custodian, you might think of as the wrapping and unwrapper. In the case of the WBTC, a DAO is carried out to incorporate and delete custodians and merchants.
How Should I use Wrapped Tokens?
While several blockchains have their own token standards, these requirements should not be used by several chains (ERC-20 for Ethereum or BEP-20 for BSC). On a defined blockchain, wrapped tokens permit the usage of non-native tokens.
Furthermore, wrapped tokens will improve liquidity and resource efficiency for both centralized and decentralized exchanges. Using a wrapped token will shorter processing times and lower costs on a blockchain.