Going undercover: what are wrapped tokens?
Xbox owners will never know the eerie brilliance of Ghost of Tsushima. Likewise, PlayStation owners will never experience Halo’s intergalactic warfare without an Xbox or a PC. Until recently, holders of cryptocurrency had similar experiences.
Blockchains were not designed to communicate with each other. On the one hand, this made every blockchain benefit more valuable. But on the other, it disadvantaged users looking for more options and experiences.
Fortunately, this is no longer an issue.
What are wrapped tokens?
Wrapped tokens represent one cryptocurrency on another blockchain. For example, BTC holders use Wrapped Bitcoin (WBTC) when interacting with Ethereum. The value of these tokens is pegged to the native currency: WBTC 1.00 is equal to BTC 1.00.
For a long time, BTC users could not take advantage of Ethereum’s utilities, including decentralized apps (DApps) and smart contracts. Since these are some of the industry’s most powerful tools, BTC users were highly disadvantaged.
Wrapped tokens were developed to solve the problem of interoperability.
How do wrapped tokens work?
There isn’t any actual wrapping involved. Instead, the original asset is put in a kind of digital vault. This enables the creation of a tokenized version of the asset.
Wrapped tokens let users spend time on foreign blockchains without paying extra for the privilege.
It will be easier to understand with an example.
Wrapped tokens in practice
Typically, you cannot use BTC on Ethereum’s blockchain. However, users can overcome this obstacle by utilizing wrapped tokens. From start to finish, the process involves just four simple steps.
- The user sends BTC to a custodian, which is a provider of storage and security services.
- Using a smart contract, this custodian then creates, or mints, the equivalent number of ERC-20 tokens WBTC (ERC-20 is a token standard for smart contracts to create non-fungible tokens on the Ethereum blockchain).
- These tokens are then sent to the user’s address.
- The user is now free to access all of Ethereum’s functionalities.
A deeper dive
- Proof of Assets (PoA)
Wrapped tokens operate according to the concept known as Proof of Assets (PoA). This mechanism ensures that for each wrapped token that is minted, there exists an equivalent of the original asset held by the custodian.
- Custodians
The custodian holds an equivalent amount of wrapped assets in the reserves. But many entities can manage the vault, including companies, merchants, Distributed Autonomous Organizations (DAOs), multisignature wallets (or multisig, for short), and smart contracts.
- Burning
The wrapping process is entirely reversible. Users simply send a burn request to the smart contract’s address. Once signed by the custodian, the BTC is redeemed. The necessary amount is deducted from the merchant’s WBTC balance, and the WBTC supply is reduced.
Ease of access
To receive wrapped tokens, users only have to make a request and transfer the funds. But the process isn’t merely simple. It’s also transparent. Token count and creation, transaction rules and removals, and holder count can be seen on a public blockchain explorer by anyone.
Popular Cryptocurrencies
Wrapped tokens can be created for any cryptocurrency. Ethereum is also not the only blockchain creating them. Binance Smart Chain (BSC) and the Tron Network create the BEP-20 (standard) and the TRC-20 (standard) tokens, respectively. These tokens are also available for Bitcoin, Ethereum, and other blockchains.
What wrapped tokens can do for you
- Multiple functionalities
Wrapped tokens can be used for various operations that were previously unavailable beyond native blockchains. This is a major benefit for the market since BTC’s market dominance was estimated to be 47.17 percent, according to Coinmarketcap’s data for July 2021.
- Liquidity
Wrapped tokens can bridge the gap between isolated liquidity on multiple chains. For example, BTC can be wrapped and used on a more vigorous blockchain. Platforms like Balancer take this to the next level with liquidity pools, where users can cache various tokens, not only ERC-20.
- Optimized transactions
Instead of waiting or paying high fees, users can simply wrap their crypto and complete their transactions on another blockchain. Additionally, DApps can process wrapped token transactions much quicker, as they are not worked through multiple blockchains.
- Decentralized Finance (DeFi)
Wrapped tokens enable holders of cryptocurrencies like Bitcoin and Bitcoin Vault to explore DeFi opportunities. They open doors to smart contract platforms like Binance Smart Chain and Ethereum.
DeFi is one of the most significant trends to sweep the industry in recent years. Many cryptocurrencies are now developing ways to take advantage of the phenomenon. One such coin is BTCV.
Wrapped BTCV (wBTCV)
Given the influx of new users generated by DeFi solutions, any cryptocurrency without access is doomed to fail. wBTCV was created to integrate with the DeFi ecosystem. In this respect, BTCV is a forward-thinking coin with a detailed roadmap for expansion.
wBTCV is pegged to BTCV on a one-to-one ratio. It is a tokenized version of BTCV on the Binance Smart chain. As a BEP-20 token, it can be used to access any BSC smart contract and DApp. And if the user decides to return to the native coin, the wrapped tokens can be burned to redeem the BTCV.
wBTCV expands the BTCV ecosystem by giving users access to functionalities that include smart contracts, DApps, DeFi yield farming and lending platforms, and BEP-20 compatible wallets. DEXs (decentralized exchanges) make all of this possible. This is a significant achievement since past access to BEP-20 tokens required a time-consuming CEX (centralized exchange). With a DEX, you can trade all BEP-20 tokens instantly.
Ethereum used to be the go-to place for tokens. But rapid growth makes Binance an exciting alternative. The BSC caters to decentralized applications without congesting the original chain. This makes faster transactions possible, which, not surprisingly, makes the platform extremely popular.
BSC already handles about 21% of Ethereum’s transaction size, but with 0.6% of the gas fees. This is the reason BTCV decided to launch wBTCV on the BSC platform. As such, wBTCV is what’s known as a BEP-20 token, the standard developed for the BSC. This token was both derived from and fully compatible with the ERC-20 standard.
Key takeaways
Wrapped tokens improve interoperability for the projects that embrace them. This gives users access to a universe of previously unexplored functionalities. This is particularly beneficial for BTC users, who previously had no access to Dapps, smart contacts, and DeFi.
Wrapped tokens make it possible to experience the best of both worlds without added expense, something that benefits the entire industry.
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