What Are Wrapped Tokens? How They Work and What They’re Used For

Wrapped tokens allow you to use cryptocurrencies created for one blockchain on another blockchain. Since blockchains are independent systems, they need help to connect.

You can’t use your bitcoin on the Ethereum blockchain; it’s like how various nations require different currencies. Just as you didn’t earn your euros in a store in the United States, you can’t use your bitcoin on the Ethereum blockchain.

This issue can be resolved by using wrapped tokens. Coins can be “wrapped” on blockchains other than their native ones.

Wrapping a token entails exchanging one token for another token of equal value through a smart contract, a piece of code that is stored on the blockchain and can hold and move payments.

Consider this equivalent of trading a $1 bill for four quarters. Quarters and dollar bills have the same value, but only quarters may be used in a pinball game. A dollar bill cannot be used in a pinball machine. Similarly, wrapping a token will change its denomination or value. Wrapping the token will allow it to be used on the intended blockchain.

The Ethereum blockchain will allow you to wrap bitcoin so it can be used on the Ethereum system. This procedure allows you to use bitcoin just as Ether (the native currency of the Ethereum network). In return for using your bitcoin on the Ethereum network, however, you’ll have to pay a small fee in Ether.

What are wrapped tokens?

What are wrapped tokens

Wrapped tokens allow you to use cryptocurrencies created for one blockchain on another blockchain. Since blockchains are independent systems, they need help to connect.

This issue can be resolved by using wrapped tokens. Coins can be “wrapped” on blockchains other than their native ones.

Wrapping a token entails exchanging one token for another token of equal value through a smart contract, a piece of code that is stored on the blockchain and can hold and move payments.

Consider this equivalent of trading a $1 bill for four quarters. Quarters and dollar bills have the same value, but only quarters may be used in a pinball game.

Wrapped tokens are resources that enable the value of a native asset from one blockchain to migrate to another. This can happen when one blockchain wraps another blockchain in its blockchain.

Wrapped Bitcoin is one of the most well-known examples of a wrapped token (WBTC). Since the value of one WBTC is based directly on the price of one Bitcoin (BTC), the two currencies should always be equivalent.

However, unlike BTC, WBTC may be obtained as either ERC-20 or TRC-20 tokens. This indicates that it can be utilized and traded on the Ethereum and Tron blockchains.

To some extent, wrapped tokens are comparable to stablecoins such as USDT, which is pegged to the United States dollar. One WBTC is equivalent to one Bitcoin (BTC), and one USDT is equivalent to the value of one dollar (USD).

It is not enough to say that the price of a wrapped token is pegged in exact proportion to the price of another asset for a wrapped token to be considered a wrapped token. The technology underpins it and the method through which its value is supported and preserved.

How wrapped tokens work?

How wrapped tokens work

Wrapped tokens are constructed to allow them to remain autonomous and be used interchangeably with other assets. This can be done using smart contracts and protocols created by a network’s developers.

For a wrapped token to exist, you must first have a protocol that allows its creation and development. Protocols act as the groundwork for wrapped tokens while wrapping itself is exchanging one token for another, thus allowing it to be used on another blockchain.

The wrapping process is affected by the use of a smart contract. To wrap a token, a piece of code is stored on the blockchain to hold and manage the transaction. The code enables you to extract the value of one asset, such as Bitcoin (BTC), and exchange it for another asset (WBTC).

Once it has been wrapped, the new token can be used or exchanged in any way you see fit. Wrapped tokens can be purchased directly from a retailer, or your existing cryptocurrency can be converted into wrapped tokens by a retailer.

After receiving your cryptocurrency, the retailer will forward it to a custodian, who will store it in a secure online location. After the coin has been safely stored away, the custodian will mint a wrapped token that represents your original coin. This process is known as minting.

If you wanted to utilize bitcoin on the Ethereum blockchain, your custodian would first store one bitcoin in a digital vault and then create one wrapped bitcoin token (WBTC) on the Ethereum blockchain.

WBTC stands for wrapped bitcoin token. After that, you could spend your 1 WBTC, which represents a bitcoin stored in a digital safe on the Ethereum blockchain.

Destroying a wrapped token is necessary to obtain the unwrapped version of the coin it represents. Burning is the term used to describe the procedure in which the custodian releases the locked original coin and then destroys the wrapped token.

Once it is burned, the original coin can be spent or sold. A new coin, which is a copy of the original coin, will then be minted by the custodian.

Furthermore, it is also possible to create a token from scratch and wrap it to make it operate on another blockchain. This can be done through a method known as tokenization.

In this scenario, the developer creates a new token that has already been given a value but does not exist in a space of its own. In this instance, the value of the new token is based on the value of some other asset.

Benefits of wrapped tokens

Interoperability:

Many blockchains are interdependent and can be used simultaneously. However, since every blockchain has its token, holders may be hesitant to exchange these tokens for other assets. This is because they will lose their value. Wrapped tokens eliminate this problem since they allow you to use a specific cryptocurrency on another blockchain while maintaining its original value.

Speedy and cheaper:

Wrapping a token allows users to utilize cryptocurrencies anywhere on a given blockchain while eliminating the need for an exchange. This significantly reduces the time and costs associated with cryptocurrency transactions.

Security:

When using a wrapping service, you can exchange your token for another cryptocurrency without worrying about stealing or losing your assets. If you want to change coins, you only need to create a new one and wrap it. You will then be able to hold it securely on another blockchain.

Convertible:

Since wrapped tokens can be used interchangeably with other assets, they may also be called convertible tokens. This characteristic allows you to convert other assets into wrapped tokens, which can then be exchanged for yet another asset. Therefore, since wrapped tokens are used as an intermediary or bridge between different blockchains, they may also be referred to as bridges.

Liquidity:

Being blockchain-agnostic, wrapped tokens can be exchanged on any blockchain platform. In addition, they can be traded and traded across multiple blockchains, providing liquidity.

Enhanced Security:

Since wrapped tokens maintain their value and the underlying asset’s value, they are inherently safe. This makes it impossible for anyone to steal your assets, even if they control both blockchain platforms.

The WBTC token is functional and easy to use. Its production will be managed by the Ethereum blockchain and can be freely exchanged with Bitcoin. In addition, it will be backed by fractional reserves available at any time under our reserve fund.

Transaction Fees:

Since wrapped tokens are blockchain-agnostic, they can serve as “bridges” connecting different blockchains. Wrapped tokens can significantly reduce transaction fees when transferring one asset to another or sending value from one blockchain to another without establishing a connection between the two chains.

Enhanced Speed:

If wrapped tokens are used in place of exchanges, the time it takes for a transaction to be completed will be reduced drastically.

Uses of Wrapped Tokens

The uses for wrapped tokens are extensive and many. The most common uses for wrapped tokens include the following:

Exchange:

By exchanging one token for another, you can enable your cryptocurrency to be used anywhere on a given blockchain. In addition, this will enable you to exchange it with other assets such as fiat currency or stocks. It can also be exchanged on its blockchain with another token or asset of your choosing.

Fixed:

Since wrapped tokens are fixed, they can only be used on a given blockchain. Therefore, they cannot be transferred to another blockchain or used to trade with another asset.

Interoperability:

To use the various features of Ethereum and Bitcoin, you need to first exchange them for a token on these blockchains. However, it is not possible in the real world if you want to trade between these two platforms using standard currency.

You can only do so as a collector. In this scenario, you will have to lease your assets out to an exchange which will hold them until you swap them for another asset. However, if you want to trade the same assets on both blockchains, it is only possible by first exchanging them on a blockchain.

This is where the purpose of wrapped tokens comes into play. Through this process, you can establish a bridge between two blockchains. Once the token is created, you can trade it with other assets on either blockchain.

Token Standards:

Developers use wrapped tokens to create their token standards. Each standard has its characteristics which include aspects such as usable permission and cost of issuance. In addition, they also include aspects like the protocol of issuance, the amount of time needed to issue the token, and a backend storage method.

Innovation:

You can create new blockchains through wrapped tokens or use others to create your own. This allows the creation of new blockchains while still maintaining the value of the tokens on other blockchains.

You must choose a provider that can provide high-quality wrapped tokens at a reasonable price. If you use such providers, your blockchain token will be very useful and impact your entire blockchain ecosystem.

The future of wrapped tokens

Today, blockchain technology is taking the world by storm. Every step forward that technology takes gets a bigger and greater response.

Blockchain protocols, cryptocurrency, smart contracts, and token standards are some of the technologies you are likely aware of. One area where we see this new technology gaining a positive impact is in the world of financial banking systems.

The world is continuously changing, and soon we will see the next wave of innovation in the financial banking industry. Steps toward this innovation are being taken by big corporations such as IBM, Mastercard, and many others.

In addition, we also see governments slowly allowing cryptocurrency into their programs. As the world continues to evolve with this new technology, it is reasonable to assume that blockchain technologies will influence other industries. Blockchain technology is a gift that was made for developers. In many ways, the future of wrapped tokens lies in the hands of developers.

The future of wrapped tokens is bright. The companies that provide high-quality wrapped tokens will be rewarded for this technology and its use. Today, only a few companies have chosen to provide such quality wrapped tokens, while others are still experimenting with the technology.

However, this is a positive sign since there are still many providers making good use of blockchain technology today. The industry needs help to achieve interoperability between the many blockchains in use.

One of the problems is that when more blockchains are built, the number of bridges required to guarantee that assets on a blockchain may easily move to every other blockchain increases dramatically. This is an issue since it makes it more difficult to transfer assets.

There are currently efforts to develop solutions that will enable connecting assets between different blockchains to be simpler and more effective.

A bridging hub, essentially a central bridge to which all other blockchains connect, is one method for accomplishing this goal. One such instance is the construction of Darwinia, a cross-chain bridge hub that is being done on Substrate.

It appears that bridges and wrapped tokens will, at the very least for the foreseeable future, play a pivotal role in implementing the solution for interoperability.

Conclusion: Wrapped tokens are here to stay for a long time

It is important to note that wrapped tokens are not a new invention but a technology used differently before it was executed in the blockchain world. Its adoption in the blockchain world is not only because of its benefits but also because of its potential to become the future of blockchain technology.

The world has adopted blockchain technology in over a thousand ways, and the number of uses continues to grow daily. This is also the case with wrapped tokens, which continue to impact distributed ledgers significantly.

As people and institutions continue to embrace this revolutionary technology, it is reasonable to expect many services to improve, thus helping to streamline the transactions between value-bearing assets.

Wrapped tokens are here for a reason. They are helping to make blockchain technology the most unified and efficient network in the world. As the use of wrapped tokens continues to grow, the number of bridges will also grow, thus making the ease of interoperability that was once a dream become a reality. The future is exciting and full of opportunities.