Wrapped Token
A tokenized version of a cryptocurrency that allows it to be used on a different blockchain network, like Wrapped Bitcoin (WBTC) on Ethereum.
Wrapped Token: Bridging Cryptocurrencies Across Blockchains
What is a Wrapped Token?
A wrapped token is a tokenized version of a cryptocurrency that allows it to operate on a different blockchain network. By creating a "wrapped" representation, these tokens enable interoperability between otherwise incompatible blockchains. For example, Wrapped Bitcoin (WBTC) is a tokenized version of Bitcoin that functions on the Ethereum network.
How Do Wrapped Tokens Work?
Wrapped tokens are pegged to the value of the original cryptocurrency at a 1:1 ratio. This is achieved through a system of custodians or smart contracts:
Custodian: An entity or protocol holds the original cryptocurrency in reserve (e.g., Bitcoin for WBTC).
Token Minting: The custodian issues the wrapped token on the target blockchain.
Redemption: When the wrapped token is burned, the original cryptocurrency is released back to the user.
This process ensures that the wrapped token maintains the same value as the original cryptocurrency.
Benefits of Wrapped Tokens
Wrapped tokens offer several advantages:
Cross-Chain Compatibility: They enable cryptocurrencies like Bitcoin to be used on other blockchains, such as Ethereum.
Access to DeFi: Wrapped tokens allow holders of non-Ethereum cryptocurrencies to participate in decentralized finance (DeFi) applications like lending, borrowing, and staking.
Liquidity: By bridging assets across blockchains, wrapped tokens contribute to greater liquidity in the crypto market.
Popular Wrapped Tokens
Wrapped Bitcoin (WBTC): A tokenized Bitcoin on the Ethereum network, commonly used in DeFi applications.
Wrapped Ethereum (WETH): A tokenized version of Ethereum that conforms to the ERC-20 standard for broader usability within Ethereum-based platforms.
Limitations of Wrapped Tokens
Centralization Risks: Custodians holding the original assets may introduce a point of centralization.
Complexity: The wrapping and unwrapping processes can be technical and may involve additional fees.
Wrapped tokens play a crucial role in enhancing blockchain interoperability and expanding the use cases of cryptocurrencies. By bridging assets across networks, they unlock new possibilities for participation in DeFi and other blockchain ecosystems.
