If you are a crypto enthusiast, then you might have heard of wrapped crypto tokens. Imagine being able to use your favorite cryptocurrency across multiple platforms, interesting right? This is the power of wrapped crypto tokens. Bitcoin and Ethereum have entirely different protocols and functionalities due to the differences in their algorithms, restricting them from communicating with each other. This approach challenges the existence of an interoperable ecosystem. There comes the usage of wrapped crypto tokens, as they can eliminate the boundaries in transacting and extending interoperability within the DeFi sphere. Wrapped crypto tokens allow digital currencies from one blockchain to be utilized and operated on another by creating a bridge between blockchain networks.
So what exactly are the wrapped tokens, how do they work, and what is their importance? This article will provide answers to these questions.
What are Wrapped Crypto Tokens?
Wrapped cryptocurrency tokens are digital currencies that are linked to the value of another digital currency. They are called ‘wrapped’ because they are secured within a smart contract, meaning that the token can be used on a blockchain that is compatible with the original asset. Wrapped tokens are intended to address the issues of interoperability across different blockchains.
The most prevalent example of a wrapped token is Wrapped Bitcoin (WBTC), which enables Bitcoin to be utilized within the Ethereum ecosystem. The original asset will be wrapped into a digital vault and a newly minted token will be developed to transact on other platforms.
How do Wrapped Tokens Work?
The custodian is the one who keeps and protects the original asset. A custodian can be a centralized organization or any decentralized protocol. The actual asset will be locked in reserve to restrict double spending and maintenance of trust within the ecosystem.
After locking the original asset, an equivalent amount will be developed as a set of wrapped tokens. These wrapped tokens can be used to transact across different platforms like decentralized exchanges and lending protocols. Hence, it offers users an opportunity to earn interest without selling their original tokens.
In the long run, a user will return these tokens to the custodian holding the original asset when the wrapped token is no longer needed. This activity will burn the wrapped token out of existence. When the supply turns zero, the user will get the original asset back.
All the processes associated with wrapping aim to make the process complete and open for every user in the ecosystem. The custodian will publish evidence of reserves, allowing users to examine how much the wrapped token has been backed by them. There will be frequent audits and security checks conducted to ensure the reliability of the system.
Types of Wrapped Tokens
There are several types of wrapped tokens available in the market. Let’s look at some of the popular wrapped tokens.
Wrapped BNB (WBNB)
Wrapped BNB is a wrapped version of Binance Coin (BNB) designed to let the asset move across blockchains on the Binance Smart Chain. Trading, staking, and liquidity providing will be available to BNB holders using DeFi applications.
Wrapped XRP (WXRP)
Wrapped XRP is the wrapped version of XRP, which has many characteristics with other wrapped tokens. The token uses bridging technology to bridge the gap between XRP and other networks while keeping the token’s value intact.
Wrapped Litecoin (WLTC)
Wrapped Litecoin is an Ethereum-interfacing version of the popular cryptocurrency, Litecoin. It offers access to decentralized applications without physical attendance. This wrapped token will also allow Litecoin holders to access opportunities such as yield farming, lending, and a liquidity pool. Wrapped Litecoin eliminates the gap between Litecoin and other networks by increasing its usability and interoperability.
Wrapped Zcash (WZEC)
WZEC catches Zcash, the privacy-preserved digital asset, as it moves its functions to extended networks like Ethereum. As a result, any Zcash token holder who values privacy can participate in public DeFi applications without jeopardizing the assets they control. With Zcash being wrapped, its privacy and transparency would be carried down to newer platforms.
Are Wrapped Tokens a Good Investment?
Wrapped tokens are seen as a worthwhile investment in the cryptocurrency market, with DeFi playing a key role. Within just one year, around $800 million worth of Bitcoin has been converted into wrapped Bitcoin (WBTC), providing an idea of the current capitalization of the industry.
According to the research, wrapped tokens are capable of increasing the liquidity and capital efficiency of centralized and decentralized exchanges due to the ability to move the asset across different chains that will remain isolated.
Wrapped tokens facilitate quick transaction times and lower fees than Bitcoin and Ethereum, attracting users widely. Additionally, wrapped tokens provide fractionalized ownership, allowing holders to purchase and hold a small fraction of the asset.
Conclusion
Wrapped tokens are designed to expand the cross-chain interoperability and usability of cryptocurrencies across different networks. Wrapping allows individuals and organizations to try out new financial opportunities while ensuring their assets are compatible with multiple platforms. Wrapped tokens not only enhance the utility efficiency of the crypto sphere but also pave the way for the next generation of blockchain ideas and integration.