What Are Wrapped Tokens? Wrapped tokens have opened new oppo | Big Bang Coin
What Are Wrapped Tokens?
Wrapped tokens have opened new opportunities for crypto investors by allowing them to deploy assets from one chain to another in tokenized form.
Read on to learn about wrapped tokens, how they work, and which wrapped coins are the most popular.
Wrapped tokens explained
A wrapped token, also referred to as a wrapped coin, is a tokenized version of another cryptoasset. It is referred to as a wrapped token because the original digital asset is put in a “wrapper,” essentially a digital vault, that allows the wrapped version of the crypto to be created on another blockchain network.
Unlike the original asset, wrapped tokens can be used on non-native blockchain networks and ultimately redeemed for the original crypto.
You can think of a wrapped token being similar to a stablecoin in that it derives its value from another asset, which in this case is fiat currency. In the case of wrapped tokens, however, the value is derived from a cryptoasset.
Wrapped tokens improve interoperability between different blockchains with the underlying tokens operating cross-chain. For instance, the Bitcoin (BTC) network is completely unaware of what is happening with the Ethereum (ETH) network. However, if you hold wrapped tokens, you can create connections between different blockchains and benefit from their functions.
Because wrapped tokens are pegged to another asset, they are usually managed by a custodian that wraps and unwraps the asset. The first crypto asset to be wrapped was bitcoin to form wrapped bitcoin (WBTC), which is used in the Ethereum network to enable bitcoin holders to deploy BTC in the Ethereum decentralized finance (DeFi) ecosystem.
How do wrapped coins work?
Wrapped coins usually require a custodian to mint tokens. The wrapping process is initiated by merchants like CoinList, Airswap, and AAVE, who send a request to the custodian to mint the wrapped version of the original token on a different blockchain.
Using the example of wrapped bitcoin (WBTC), the custodian needs to hold BTC 1 for each WBTC 1 that is minted. Proof of this reserve is recorded on-chain.
The wrapped tokens are converted back into the original asset when the merchant puts in a request to the custodian to “burn” (destroy) the wrapped tokens and release the original asset from the reserves. In essence, the custodian acts as the wrapper of the asset.
Again, using the example of wrapped bitcoin, for every WBTC token that exists, there is the equivalent value of BTC being held by the custodian.
Top wrapped coins
Here is a list of the top wrapped tokens ranked according to market capitalization.
Wrapped bitcoin
Wrapped bitcoin (WBTC) is the most popular wrapped token. The ERC-20 conversion of bitcoin was launched in 2019 by BitGo, Ren, and Kyber and represents over 75% of the market for wrapped tokens.
Wrapped bitcoin is beneficial to users as they can use it to plug into DeFi protocols on Ethereum. This means WBTC, a synthetic asset offering the same exposure to bitcoin’s price, unlocks the potential to transform bitcoin into a yield-bearing asset. You can even use WBTC to earn returns from liquidity pools on Uniswap or Yearn Finance.
To get hold of wrapped bitcoin, you can use merchants such as CoinList to wrap your BTC. The merchant will send your BTC to a custodian who mints WBTC equivalent to the bitcoin you sent and keeps the original asset locked away.
If you decide to redeem your WBTC for bitcoin, the merchant will send a burn request to the custodian, who will, in turn, destroy the wrapped bitcoin and release your original bitcoin to you.
This system of minting and burning ensures that bitcoin and WBTC are pegged in the ratio of 1:1. You can also purchase wrapped bitcoin at crypto exchanges. As of April 1, 2022, the total market capitalization of WBTC is over USD 12 billion.
Wrapped BNB
Wrapped BNB (WBNB) is a tokenized version of BNB that conforms to the BEP20 standard. Consequently, you can use wrapped BNB on the Binance Smart Chain (BSC) and not BNB.
