What are wrapped tokens?
Wrapped tokens are “copies” of crypto assets issued on another blockchain that are secured by the original coin. Why do we require them? How do they relate to cross-chain bridges? Let’s figure it out together!
This type of token is provided with an underlying asset in a 1:1 ratio, has the same price, and allows you to broaden the application possibilities, such as trading on decentralized exchanges that do not support the “original”
Wrapped Bitcoin (WBTC), which was released on the Ethereum network, is the most well-known example of a wrapped cryptocurrency. It is commonly used in decentralized finance (DeFi).
Why do we need wrapped tokens?
With the development of the decentralized market, particularly DeFi-applications, there is a need to transfer liquid crypto assets from one network to another.
Wrapped tokens are intended for this purpose. The user receives the value of BTC in the Ethereum or Tron ecosystems when using WBTC. WBTC can be left as collateral for a stablecoin loan or used in profitable farming — all without the need for centralized exchanges and services.
Furthermore, WBTC simplifies the work of exchanges, wallets, and services by eliminating the need to configure individual nodes.
How did WBTC appear and when?
WBC is the result of the Wrapped Tokens project, founded by three organizations: BitGo, Kyber Network and Ren. It was first announced in October 2018 and officially launched on January 31, 2019.
The WBTC ecosystem has dozens of renowned certified merchants, including Compound, Maker, Blockfolio, Uniswap, CoinGecko, Aave and 0x — they are responsible for the emission and burning of WBTC.
How are wrapped tokens created and how do they work?
A wrapped token is issued by transferring a crypto asset to a special storage facility and then issuing the wrapped token through a special smart contract.
In the case of WBTC, the user should transfer BTC to the specified Bitcoin network address, after which the WBTC will be released and moved to the desired Ethereum network address.
A special service is in charge of issuing the wrapped token, storing the underlying asset in a smart contract, and issuing the wrapped version of the token all at the same time. The reverse exchange occurs by burning the WBTC in the Ethereum network and then “unlocking” the collateral in the bitcoin network.
What about cross-chain bridges?
Cross-chain bridges are a set of automated smart contracts that allow assets to be transferred from one network to another by issuing a wrapped token in it.
Bridges’ primary function is to provide compatibility for networks and applications that are isolated from one another. To begin using BTC for farming on the Ethereum network, for example, the user must first transfer the BTC coin to an ETH address, which is what bridges do.
In the case of WBTC, a full list of trusted bridges can be found on the Wrapped BTC website.
What cross-chain bridges and wrapped tokens do we know?
Aside from WBTC, there are many wrapped tokens of other coins whose release is only limited by the technological capabilities of a specific network and applications. Here are a couple of examples:
Wrapped Ethereum (WETH)
A wrapped version of the ETH coin. Because most DeFi applications on the Ethereum network use tokens of the ERC-20 standard, and the ETH coin does not belong to it (it was released prior to the standard’s adoption), WETH was created. It simplifies the ether exchange process.
WETH can be released in several dozen blockchains, including Polygon, Binance Smart Chain, Solana, Near, Avalanche and Fantom. This wrapped version of ETH is one of the most widely used tokens in the market of DeFi applications and profitable farming. WETH is also used, for example, in trading on the OpenSea NFT platform.
Wrapped tokens in the BNB Chain network
Binance blockchain developers have created a special Binance Bridge to release wrapped versions of popular crypto assets on their network. The user can wrap BTC, ETH, XRP, USDT, BCH, DOT and other coins to take advantage of the capabilities of the BNB Chain network itself and the applications built on it.
Wrapped tokens on the Solana blockchain
One of the most popular bridges for Solana is Wormhole, which connects the network with Ethereum, Avalanche, Oasis, Binance Smart Chain and Polygon. The set of tokens and networks is constantly expanding.
Wrapped tokens on the Avalanche blockchain
In addition to the bridges controlled by individual applications, the developers have launched the official Avalanche Bridge from Ethereum to Avalanche, which can wrap popular stablecoins (USDC, USDT, BUSD) and other assets of the ERC-20 standard.
Wrapped tokens on the Near blockchain
This blockchain’s developers have presented a Rainbow Bridge solution for transferring liquidity from Ethereum to Near. The team attempted to wrap the most popular tokens in DeFi: stablecoins (USDT, DAI, TUSD), WBTC and WETH, decentralized exchange tokens (1INCH, UNI), credit protocol tokens (AAVE, COMP), and exchange tokens (HT, CRO).
Risks of using wrapped Tokens
Wrapped tokens are a convenient way to interact with applications from various networks. However, there are some risks that should be considered.
To begin, cross-chain bridges, like any other smart contract, may have code vulnerabilities. This is supported by the February 2022 hacking of Wormhole on the Solana blockchain. The attackers used the exploit to withdraw approximately 120,000 WETH ($320 million at the time of the hack) from the project pool.
Second, there is a risk of centralization. Private keys that provide access to funds stored in the bridge may fall into the hands of attackers. The underlying asset will simply be transferred to a third-party address, and the user will be unable to return the collateral. This occurred with the Axis Infinity project and their Ronin Bridge at the end of March 2022. As a result, hackers were able to withdraw approximately $625 million in cryptocurrency assets.
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