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Wrapped Tokens – A Complete Guide For Beginners

Published: Monday, 6th June, 2022 - 13:39

Cryptocurrencies are one of the only facts in the financial market guaranteed to guarantee astronomical profits in the future. There has been a rapid increase in their value which has provided investors with significant gains. Despite the numerous advantages that digital assets have provided, the assets themselves have faced some limitations. A limitation of some digital assets is that they cannot be transferred from one blockchain to another as their blockchains are based on different standards. Consequently, some tokens could not benefit from added functionality from blockchains that differed from the ones upon which they were created. Wrapped tokens were developed to combat this issue, and they were introduced into the market as a solution to the problem. This article aims to examine the advantages wrapped tokens can offer traders in the market in 2022.

Whenever you attempted using your cryptocurrency on a different blockchain than its native blockchain, you may have had to wrap your tokens to make it work. How does surrounding your tickets benefit you, and how does it work?

A Tokens wrapped in code are assets like cryptocurrencies or NFTs that can be utilized on non-native blockchains so they can be used on a blockchain that is not native. When a token is wrapped, its value remains unchanged, while its original value remains with the custodian who holds the permit.

What Are Wrapped Tokens?

To put it simply, an encapsulated token is a representation of an original ticket, but one that can be used on multiple blockchains, not just a single one, as the actual receipt cannot be used on all blockchains. Wrapped tickets are similar to stablecoins since their value is derived from an asset generally stored on the blockchain.

Opensea, one of the DeFi platforms, allows users to trade, lend, and borrow unsupported assets like Ethereum with wrapped tokens.

Due to their inherent nature, blockchains and their native tokens can only be used by other blockchains once they have been wrapped, which means you cannot use Bitcoin on the Ethereum blockchain without surrounding it.

By enclosing a token, a more significant amount of interoperability (ability to work with other applications) is achieved between the different blockchains and the different DeFi platforms. A token can be easily transferred and used on a non-native platform.

There is an ether-like coin called WITH, which is compatible with the ERC-20 standard.

After ETH was released, the ERC-20 standard was developed that defined how tokens can be transferred to one another and how tokens on the Ethereum blockchain could keep a consistent record of those transfers.

Usually, wrapped tokens comprise an escrow account, which requires a custodian – some type of entity that maintains an identical amount of the original asset to that of the wrapped tickets. Usually, custodians are merchants, multisig wallets, DAOs, or smart contracts.

If we were dealing with WETH as an example, the custodian would need to hold 1 ETH for every 1 WETH, which is coined. Because all this is done on the blockchain (a distributed ledger), anyone can easily verify it.

Generally speaking, for the WETH to be minted, a merchant must send ETH to the custodian in equal amounts as the ETH. As part of the exchange process, if the WETH needs to be exchanged back to ETH, the merchant can simply send a burning request to the custodian (thus destroying the wrapped version), and the ETH will then be released from the merchant’s reserve.

Why Do We Need Wrapped Tokens?

Indeed, as a result of reading this post, after you read it, you already had the thought of using your wrapped bitcoin on the Ethereum network, but you were unable to do it, couldn’t you? Because these two blockchains were developed at different times and have other characteristics, it is technically impossible to integrate these two blockchains without the use of bridges like those provided by pNetwork.

Bitcoin is unaware of what is happening on the Ethereum blockchain and cannot even begin to understand it. As a result, the use of the chain across chains becomes impossible in the absence of a connector such as pNetwork. It is not sufficient to own wrapped tokens in the form of pTokens to benefit from their functions, but if you do so, you will benefit from further connections between different blockchains.

It would be reasonable to claim that the most relevant reason to use pTokens, in this case, would be that they can be used for yield farming, lending, staking, and other DeFi platform applications.

Most DeFi projects are located on the Ethereum network, but these are expanding rapidly to work with multiple network solutions at once. As of October 2021, the pNetwork generates tokens for 11 different blockchains, generating pTokens on 11 other blockchains.

How do wrapped tokens work?

For example, we shall use Wrapped Bitcoin (WBTC), an Ethereum-based tokenization of Bitcoin. The WBTC token is an ERC-20 token that’s supposed to be pegged at an almost one-to-one rate to the value of Bitcoin. This will allow Ethereum users to use Bitcoin on the network effectively.

The custodian can be an individual merchant, a multisig wallet, a decentralized autonomous organization, or even a smart contract. For WBTC, the custodian must hold 1 BTC for each WBTC minted, and this proof of reserve is on the blockchain.

When a merchant sends bitcoins, the custodian allows him to mint them through the custodian—according to the amounts of BTC sent, the custodian mints WBTC on Ethereum. WBTC is redirected back to BTC when the merchant sends a burning request to the custodian, and the BTC is released from the reserves so that the merchant can exchange it back to WBTC. As the custodian, you can think about them as the wrapper and unwrapper of the package. WBTC, in its case, performs the act of adding and removing custodians and merchants with the help of a DAO.

Tether (USDT) may be referred to as a wrapped token, but that is not quite that. Tether does not hold an exact amount of USDT circulating in their reserves for every USDT traded, so USDT and USD are generally traded. Real-world cash equivalents and receivables from loans are made up of real-world cash equivalents and assets. USDT tokens serve as a way to wrap around the fiat equivalent of a US dollar.

Three Advantages of Using pTokens

Tokens wrapped in pTokens offer the following three benefits:

  1. Use non-native tokens on any other blockchain: It does not matter if specific blockchains have their standards for tokens (for example, Ethereum’s ERC-20 or BSC’s BEP-20). The exact requirements cannot be applied to different blockchains. A variety of blockchains support smart contracts, and the use of pTokens allows the use of non-native tokens.
  2. Increase liquidity from isolated blockchains: On decentralized exchanges, wrapped tokens can boost liquidity and increase the utilization of resources. If blockchains can be linked in a way that wraps unused assets from one blockchain and uses them in another one, then liquid assets on previously isolated chains will be connected.
  3. Better transaction times and fees: Although Bitcoin has some excellent features, at times, it can be relatively slow, and its use of it can be pretty costly. pNetwork’s wrapped version (pBTC) on Layer 2 networks such as Polygon or Arbitrum has quicker transaction times and lower fees than its wired version (pBTC).

The WBTC wrapped token has the most bitcoins based on its peg to BTC’s value.

Types of Wrapped Tokens

Several high-value tokens have gone to the top pile since the idea behind wrapped tokens was first conceived. Here are some examples of tokens that are currently wrapped within the market.

1.    Wrapped Bitcoin

It was first brought to the media’s attention in 2018 when its development was first brought to the public’s attention. However, it was launched in January 2019. On the Ethereum blockchain, wrapped bitcoin is a digital asset, essentially a tokenized asset. It uses the ERC-20 token standard, unique to Ethereum and can only be used with Ethereum. By using ERC-20 token standards, traders will now be able to use their assets across a wide range of the blockchain. Users can use Ethereum to access essential services in the DeFi market, such as lending and other services such as digital currency.

In addition to wrapped Bitcoin, decentralized exchanges can use wrapped Bitcoin. The price of Wrapped Bitcoin doesn’t change compared to Bitcoin, as mentioned in the beginning. Custodians assigned to carry out the liquidity transfer from Bitcoin to Ethereum care about this. Wrapped Bitcoin is worth $42,372 on CoinMarketCap, and has jumped by 0.28% over the past 24 hours. The market cap of this cryptocurrency is about $11,097,996,674 while the 24-hour trading volume is about $141,609,823.

2.    Wrapped Ethereum

Ox In 2017, Labs developed Wrapped Ethereum and launched it. Wrapped Ethereum was developed within the Ethereum network instead of wBTC, intended for use on other blockchains. WETH converts Ethereum to ERC-20, one of its most notable features. Almost all DeFi protocols on the network can use this time. Trading the token on Ethereum gives traders access to all of its features, allowing them to use the token for services across the board. Trading Wrapped Ethereum using smart contracts is the only way traders can acquire the tokens. The tokens are not minted like Wrapped Bitcoin. CoinMarketCap currently lists wrapped Ethereum at $2,923, showing a downside of 0.28%. It has been reported that $1,466,547,145 has been traded in the last 24 hours for this token.

3.    RenBTC

Wrapped Bitcoin, RenBTC and other similar tokens are designed to mirror the price movements of the Bitcoin digital currency. The protocol required for these tokens is the Ethereum ERC-20. As a result, traders can exchange the token for one Bitcoin, as long as the token holds on to its value. There is no limit to the number of RenBTC that can be mint on the RenWay as long as they have a RenWay address. With the Ren platform, traders have access to Ethereum blockchains to trade different tokens based on the Ethereum blockchain. The forum will support the following cryptocurrencies: Bitcoin, Zcash, and Bitcoin Cash in the immediate future. Users of Wrapped Bitcoin send their tokens to RenVM, who locks them in a vault and subsequently mints the RenBTC tokens. The current price of RenBTC is $42,085 on CoinMarketCap or an increase of 0.09 percent over the last 24 hours.
The token has a circulating supply of 16,276 tokens and a trading volume of $1,943,112 in the last 24 hours.

4.    Wrapped BNB

It is the wrapped version of Binance’s BNB token that gives users a greater sense of the value of the BNB token. The wBNB is different from the BNB because it conforms to the BEP20 token standard and not the BNB standard. Traders can use the Binance Smart Chain token to access various services across that platform. In addition to these services, there are decentralized exchanges on the network which allow the exchange or use of these services. Although this application uses the BEP20, it was not developed or owned by anyone. In the past 24 hours, wrapped BNB has gained one percent in trading at $404, representing a gain of 1.01%. With a present market capitalization of $2,220,456,561, the last 24 hours’ trading volume of $461,778,216, it’s current market cap is around $2,220,456,561.

5.    Wrapped NXM

On the blockchain, wrapped NXM token is a utility token that can be easily transferred from one party to another. To distinguish this feature from others, only members who have been able to complete the KYC process can wrap and unwrap tokens. Using the standard NXM tokens as payment for membership in the NXM blockchain, a network that provides intelligent contract coverage for purchases, users can attain ownership of the NXM blockchain. By joining NXM, you can participate in the governance of the blockchain and assess risks and claims. During the purchase process, the network burns 90% of the funds and gives 10% to the member to be used for claim submission. The 24-hour price loss for the wrapped NXM is 0.82%, which is reflected in its price of $33.10. This company has a market cap of 55,505,848 dollars and a trading volume of 2,368,998 dollars in the last 24 hours.

How do wrapped tokens impact the crypto market?

In the instance that a wrapped token is used, it saves the user from having to exchange or swap tokens. Wrapped tokens act as an intermediary between two blockchain networks. In this way, different blockchain networks can communicate with each other.  Every blockchain network is unique and has its pros and cons. As a result, if wrapped tokens were not created, these cryptocurrency networks would be isolated from one another. This would lead to them becoming less efficient and more challenging to use.

Transactions can be sped up and made more efficient when tokens are wrapped around them. It is estimated that one block is added to the Bitcoin blockchain approximately once every ten minutes. However, one of the essential points is that the average time difference between two blocks is three minutes on the Ethereum network. To enable users to spend Bitcoin in the Ethereum network, Wrapped Bitcoin, also known as WBTC, is an ERC20 Token. 

Cryptocurrency and blockchain technologies are built on transparency and decentralization. Wrapped tokens further bolster this philosophy, and merchants wrap tokens after their native digital tokens have been converted. Generally speaking, a custodian is in charge of minting and burning wrapped tokens.

Wrapped tokens are minted and burned through highly decentralized processes, so any single party is not able to influence the process. Several parties are involved in issuing new tokens, but the custodians do not control their distribution, which lies in the hands of merchants.

Token custodians can’t create new tokens independently, and the blockchain contains all relevant information. Anyone can check the website to find out how many tokens are held by the custodian and how many wrapped tokens are issued. The system’s transparency builds trust in it, which in turn assists the larger DeFi community.

Are wrapped tokens a good investment?

There is a growing acceptance of wrapped tokens in the future. There was about 800 million dollars worth of Bitcoin converted into wBTC in just over one year, indicating how much money is currently involved in the industry.

According to Arcane Research, there are currently about 189,000 Bitcoins locked on the Ethereum blockchain in 2021, which is quite a significant increase. The circulating supply of Bitcoins has now reached a record high of 18.73 million, meaning that DeFi has now used 1% of Bitcoin’s circulating supply via wrapped bitcoin tokens.

The facility to move assets across multiple chains that would otherwise remain isolated makes wrapped tokens more liquid and capital-efficient for centralized and decentralized exchanges alike.

Additionally, wrapped tokens have the advantage that they enable fast transaction times and lower transaction fees, which are particularly attractive to slow blockchains like Bitcoin or Ethereum.

In contrast to other types of assets, wrapped tokens also allow for fractionalized ownership, which means that token owners can buy and hold only a tiny percentage of the assets.

Wrapped tokens on Ethereum

Wrapped tokens on Ethereum are tokens that were previously created on other blockchains but have been made to comply with the standards set forth by the ERC-20 standard. In non-specialists’ terms, Ethereum can support assets that are not native to Ethereum. Gas costs are incurred when wrapping and unwrapping tokens on Ethereum.

On the Ethereum system, one of the most exciting examples of a wrapped token is wrapped ether (WETH). Let’s recap: Ethereum is a decentralized network based on ETH (ether), which is the native currency for transactions. The ERC-20 standard, on the other hand, specifies the means of issuing tokens on Ethereum. For example, OmiseGO (OMG) and Basic Attention Token (BAT) are tokens that adhere to the standard ERC-20 format.

It should be noted that since the ERC-20 standard was not developed before the development of ETH, it is not compliant with it. In this way, a problem arises because many DApps require the exchange of ether for a token in the ERC-20 format. That is why WETH (wrapped ether) has been developed. The ERC-20 standard is a wrapper for ether, which is compliant with the ERC-20 standard, and it allows for tokenized ether to be used on Ethereum!

Wrapped tokens on Binance Smart Chain (BSC)

You can wrap Bitcoin and many other cryptocurrencies on BSC, just like how wrapped tokens can be used on the Ethereum platform (such as Ethereum DAOs).

In addition to the Binance Bridge, the Binance Smart Chain provides the opportunity to wrap your digital currencies into BEP-20 tokens that can be used for purposes on the Binance Smart Chain. You can either trade your assets after they have been brought to BSC or use them in various yield farming applications once they have been brought to BSC.

Unlike other blockchains, BSC’s wrapping and unwrapping cost significantly less gas than other platforms. For more information about Binance Bridge, please see our detailed article.

Limitations of wrapped tokens

Tokens today are most frequently wrapped by custodians – third parties who hold an equivalent amount of the asset in addition to the wrapped amount. An exchange can be either a merchant or a Decentralized Autonomous Organization (DAO). A multisig wallet can represent the latter (which uses multiple private keys to sign transactions).

It is known as minting when you create a wBTC. A merchant must initiate the process of minting coins, and the custodian performs it. It is essential to understand that in the case of wBTC, the custodian can be thought of as a wrapper or unwrapped.

However, there is a risk of centralization of control since wrapped tokens rely on the platform issuing them. Wrapping isn’t currently a feature that a smart contract can automatically perform, so it may increase manipulation risks and undermine the principle of decentralization.

Closing thoughts

Tokens that are wrapped will offer a suitable solution to the issue of transferring tokens across blockchains. Aside from the tokens that have been listed above, there are various methods by which other tokens can be wrapped. Even so, it is essential to take note that these wrapped tokens are pegged to the total asset price they are based on. It follows, then, that one should take care when deciding which assets to include in one’s portfolio.

These tokens should be researched before traders purchase them. Diversifying their portfolio is also a wise decision during times of market volatility.

The encapsulated token facilitates the creation of more bridges between the different blockchains. This is a tokenized version of an asset native to another blockchain that resides on a wrapped token. The interoperability of the crypto and decentralized finance (DeFi) ecosystems is enhanced. The wrapping of tokens opens up a world where capital is more efficient, and applications can share liquidity more efficiently.

This post first appeared on: CryptoCy News

Author: Jay Howell
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