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What Are Wrapped Cryptocurrencies and How Do They Work?

The crypto industry never ceases to surprise enthusiasts with new technologies. Find out what wrapped cryptocurrencies are, what makes them unique and how we can use them to achieve a better financial future.

The wrapped version of cryptocurrencies is a logical step toward the rapid evolution of decentralized finance and decentralized applications (dApps). Wrapped tokens and coins allow cryptocurrencies like Bitcoin to be used on different Blockchains that are not their native network –like Ethereum, for example — without a constant exchange, significantly raising liquidity and the user base of DeFi apps.

Furthermore, as DeFi becomes more and more widespread and essential for online activities and e-commerce, wrapped cryptocurrencies have become a necessary aspect of the ecosystem, allowing several holders of different coins to interact and exchange them. They resemble stablecoins because their value is pegged to another asset. While stablecoins’ value is pegged by national currencies (like the Dollar, the Euro, and the Pound), Wrapped tokens’ value is pegged to the original cryptocurrency.

A wrapped token is essentially an asset on the Blockchain of destination, pegged to the value of a native digital currency. For example, wBTC is tied to Bitcoin’s price, but it exists on Ethereum’s Blockchain. wBTC is not Bitcoin but represents Bitcoin locked up in Smart Contracts on Ethereum’s Blockchain.

Why do we need Wrapped Tokens?

You probably know that one of the most significant issues of today’s cryptocurrency sphere is interoperability. Now that unprecedented capital is being invested and adoption rates are rising exponentially, someone had to work on connecting isolated Blockchains for more remarkable growth.

Cryptocurrencies are tied to specific Blockchains, like Ethereum, Solana, and Binance Smart Chain. However, they can operate only on their native Blockchain because the necessary infrastructure allows multiple types of cryptocurrencies native to their original networks to exist. Thus, these wrapped tokens were created and they mimic the initial cryptocurrency, but they can live on different Blockchains, so cryptocurrency holders have the freedom to explore other networks too.

For example, a significant part of the DeFi and dApp ecosystems rely primarily on Ethereum rather than Bitcoin. Usually, this would be frustrating for Bitcoin holders because otherwise, they could get involved only by buying other cryptocurrencies from different Blockchains. Such a situation would determine the Bitcoin holder to diversify his or her portfolio. Even if diversification is not a bad thing — on the contrary, it is recommended for traders and investors — sometimes it could represent an impediment, depending on the investor’s situation. So the easiest way is to create a shared space where exchanges are more accessible.

Wrapped tokens raise the liquidity and efficiency of portfolios through conversions because they offer their users additional trading opportunities.

How does it work?

As mentioned above, wrapped tokens are tied to their native cryptocurrency, and original assets are locked in secure Smart Contracts, through which the user receives a 1-on-1 exchange. After the initial coin is sealed, the user will obtain a Wrapped ERC-20 token standardly used to create and issue Smart Contracts on Ethereum’s Blockchain. A simple exchange-back is enough if the user wants to receive its original asset back.

The first wrapped cryptocurrency was developed for Ethereum, and it was created before the ERC-20 standard. However, because of interoperability, wETH was made in ERC-20’s framework to allow users to exchange their coins for other tokens living on the ERC-20 standard. Due to the massive potential that ERC-20 has, other wrapped cryptocurrencies were created that were not ETH native initially. A good example is Wrapped Bitcoin or wBTC.

Wrapped Bitcoin

wBTC is the most popular wrapped cryptocurrency, with a dominance of over 80% amongst wrapped tokens. Wrapped Bitcoin is helpful because it allows BTC investors to connect their assets, or technically, a synthetic investment that offers the same exposure to Bitcoin’s price — in Decentralized Finance protocols built on Ethereum. wBTC unlocks the potential of transforming Bitcoin into a yielding asset that can earn interest from liquidity pools.

Building bridges

Besides Wrapped tokens, bridging across networks can also be done. For example, bridging for Polygon allow users to move cryptocurrencies and other digital assets from Ethereum’s network and trade them at a higher speed and lower costs. In addition, there are massive bridges, like Wormhole, that support several different networks, from Solana to Bitcoin and even NFTs. Bridges could soon conquer the Decentralized Finance market because it is much easier to trade wrapped cryptocurrencies in a single place rather than individual coins.

You can find wBTC and other wrapped currencies on Your Friendly Crypto Exchange. Register now on IXFI and discover the possibilities the future has to offer.

Disclaimer: The content of this article is not investment advice and does not constitute an offer or solicitation to offer or recommendation of any investment product. It is for general purposes only and does not take into account your individual needs, investment objectives and specific financial and fiscal circumstances.

Although the material contained in this article was prepared based on information from public and private sources that IXFI believes to be reliable, no representation, warranty or undertaking, stated or implied, is given as to the accuracy of the information contained herein, and IXFI expressly disclaims any liability for the accuracy and completeness of the information contained in this article.

Investment involves risk; any ideas or strategies discussed herein should therefore not be undertaken by any individual without prior consultation with a financial professional for the purpose of assessing whether the ideas or strategies that are discussed are suitable to you based on your own personal financial and fiscal objectives, needs and risk tolerance. IXFI expressly disclaims any liability or loss incurred by any person who acts on the information, ideas or strategies discussed herein.

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