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

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


  • Wrapped tokens are a manner to make use of cryptocurrencies reminiscent of Bitcoin or Dogecoin on blockchains apart from the blockchain they have been initially constructed on.
  • Wrapped tokens are backed 1:1 by their underlying asset, which is saved in a digital vault.
  • Wrapped tokens are an answer to the issue of blockchain interoperability.

One method to perceive blockchains reminiscent of Bitcoin and Ethereum is as separate distributed databases. As blockchains are separate, they’ll’t talk simply with one another. 

You possibly can’t use your Bitcoin straight on the Ethereum blockchain, as a result of solely the Bitcoin blockchain “is aware of” that you simply maintain Bitcoin. 

Wrapped tokens have been created as an answer to this drawback. With wrapped tokens, you may successfully transfer property between blockchains and use them throughout the crypto ecosystem.

What are wrapped tokens?

Wrapped tokens are property that enable the worth of a local asset from one blockchain to switch to a different blockchain. The most effective-known wrapped tokens is Wrapped Bitcoin (WBTC). WBTC is pegged 1:1 to the worth of Bitcoin (BTC), in order that one WBTC ought to at all times equal one BTC. However in contrast to BTC, WBTC is obtainable as ERC-20 or TRC-20 tokens, which suggests it may be used and traded on the Ethereum and Tron blockchains.

In a manner, wrapped tokens are much like stablecoins reminiscent of USDT, which comply with the worth of the U.S. greenback. Simply as one WBTC is pegged to the worth of 1 BTC, one USDT is pegged to the worth of $1. 

What makes a wrapped token a wrapped token, although, is not only whether or not it’s pegged 1:1 to the worth of one other asset. It is the know-how behind it and the best way through which its worth is backed and maintained.

Do you know?

On January 14, 2021, CoinMarketCap briefly (and erroneously) listed the market cap of WBTC as 432 quadrillion US {dollars}, or greater than 1,000 occasions the overall estimated wealth on the planet, in line with the

Monetary Instances.

How do wrapped tokens work?

Wrapped tokens are created and destroyed by a course of referred to as “minting” and “burning.” To mint a wrapped token reminiscent of WBTC, the underlying asset, on this case BTC, is distributed to a custodian who shops the BTC in a digital vault. As soon as the underlying BTC has been locked away, an equal quantity of WBTC will be minted. 

This course of may also be understood as “wrapping.” The underlying asset is “wrapped up” in a digital vault utilizing a wise contract, and a newly wrapped asset is minted to be used on one other blockchain.

To burn WBTC, the identical course of is adopted, however in reverse. The WBTC is faraway from circulation, and the equal quantity of BTC is launched from the digital vault and allowed again into circulation. 

Simply as minting wrapped tokens will be considered “wrapping” the underlying asset to create a token of equal worth to be used on one other blockchain, burning wrapped tokens will be considered “unwrapping” the underlying asset.

This technique of minting and burning, or wrapping and unwrapping, implies that all wrapped tokens, from WBTC to renDOGE (a wrapped type of Dogecoin), are backed by an equal quantity of their underlying forex. For each 100 renDOGE that has been minted, 100 DOGE are being held to again the worth of the wrapped token.

What’s so particular about wrapped tokens?

Wrapped tokens reminiscent of WBTC provide interoperability between blockchains in order that folks can transfer property simply and make the most of options and functions on different blockchains. These benefits is perhaps quicker transaction occasions, decrease charges, or yield farming alternatives.

Whereas the quantity of WBTC in circulation has been steadily rising, bridges—an answer which lets you wrap your personal tokens to maneuver them throughout blockchains—have been proliferating. 

This comes with some dangers: bridges have been the goal of a lot of hacks, and Ethereum creator Vitalik Buterin wrote in January 2022 that their safety vulnerabilities have been why he’s “pessimistic about cross-chain functions.” 

Examples of wrapped tokens

  • 🎁₿ WBTC – Challenge that wraps BTC to be used on the Ethereum blockchain; operated by the WBTC DAO and began collectively by Kyber, Ren, and BitGo
  • 🎁Ξ WETH – Wrapped ETH, or WETH, was created by a bunch of tasks run by 0x labs and is an ERC-20 model of Ethereum that can be utilized as an asset on DeFi protocols
  • 🐕 renDOGE – Wrapped model of Dogecoin that may be minted utilizing the RenBridge on the RenVM protocol

The way forward for wrapped tokens

Attaining interoperability between totally different blockchains is a problem for the business.

One drawback is that as extra blockchains are created, the variety of bridges wanted to make sure that property on a blockchain can simply switch to each different blockchain will increase exponentially. 

Options are being developed to attempt to make bridging property between blockchains simpler and extra environment friendly. A method to do that is with a bridge hub, which refers to a central bridge that every one different blockchains bridge to. An instance of that is Darwinia, a cross-chain bridge hub being constructed on Substrate.

For the foreseeable future, no less than, bridges and wrapped tokens are set to proceed to be a central a part of the answer for interoperability.

Keep on high of crypto information, get each day updates in your inbox.

Supply hyperlink

Leave a Reply

Your email address will not be published.