All You Need To Know About Wrapped Tokens

  • May 14, 2021
  • Jennifer Moore
All You Need To Know About Wrapped Tokens

Coins existing on a given blockchain are non-transferrable to another and bitcoin cannot work on Ethereum. The reason behind this is the lack of cross-chain interoperability between blockchains. This is where wrapped tokens come in. Wrapped tokens signify a way to circumvent this limitation and leverage non-negative assets on a blockchain. 

Ethereum happens to be increasingly drawing digital assets from different blockchain protocols now. With modern design patterns, putting digital assets like Bitcoin on Ethereum is now possible. It is as they can readily interact with decentralized finance applications. 

Also Read: What Do You Need To Know About Elastic Supply Token?

By the term wrapped, it means an original asset that happens to confine in a wrapper. It happens to be a kind of digital vault that facilitates the wrapped variant to be developed on a different blockchain. Different blockchains come with different functionalities and one cannot communicate with one another. There is a difference between the Bitcoin and Ethereum blockchain. But, when it comes to wrapped tokens, there is much more to it apart from different blockchains. Let us explore it further. 

What Is Meant By Wrapped Tokens? 

A wrapped token happens to be a tokenized variant of another cryptocurrency. It is combined with the value of assets it represents and generally can also be redeemed or unwrapped at any point. 

Moreover, it is an asset that happens to be hosted on the Ethereum blockchain with a value that remains the same as a different underlying asset. Therefore, it is not necessary to be on the same blockchain at all. In other words, wrapped tokens refer to an ERC 20 token having a value similar to another asset, either through a smart contract or by being supported with a different underlying asset. 

For example, wrapped Bitcoin refers to a token having the same value as one Bitcoin. This is because smart contract algorithms reduce their value in real time, thereby regulating the underlying fund with the demand and supply data retrieved from user transactions. The users of wrapped tokens receive an equivalent value amount. This in exchange for money that is wrapped within an asset. Moreover, it is pretty easily mobilized by DApps. 

The aim of wrapped tokens is to address the restrictions of the lack of cross-chain interoperability within two different blockchains. Wrapped tokens make it possible when it comes to move the data between the two, thereby making it easy to trade wrapped tokens, similar to any different asset. 

Working Principle of Wrapped Tokens

Wrapped tokens receive support from a variety of algorithmic balances. Moreover from checks along with organizational roles and an equal amount of underlying currency or asset. DApps can readily process the transactions of such tokens much quicker. 

Easily conducting transactions on behalf of the users as wrapped tokens have a trustless nature.  A platform preserves and supports every one-to-one by underlying assets. The complicated model of wrapped tokens is sufficient to provide the uses of decentralized applications with native access to different cryptocurrencies without blocking both blockchains during the processing of decentralized application transactions. A minimal amount of gas charge on Ethereum is all it needs. 

Governance on Wrapped Tokens

The governance of W tokens is by assigning roles to organizations. They are predominantly given to custodians who carry underlying assets and burn or mint new rap tokens. On the other hand, merchants also offer a medium to the buyers of wrapped tokens while users happen to own them. 

Types of Wrapped Tokens

As Ethereum refers to the biggest virtual asset finance ecosystem, wrapped tokens act as a host on additional blockchains. However, there are additional stablecoins pegged to the dollar. Among the initial wrapped assets, many were stablecoins under fiat.

There are additionally euro, yuan, yen, and numerous other Fiat stablecoins that are usually based upon the Ethereum blockchain. Apart from that, there is a Zcash token. It provides the users of Ethereum decentralized applications with the advantages of the coin’s anonymity. Other than that, it is a reliable thing to invest in Zcoin that helps in boosting its market. 

Definition of Zcash

Zcash is a cryptocurrency that anonymously transacts with no information of address visible on the public ledger. Zcash offers easy transactions. 

Owing to its cutting-edge system, Zcash takes account of zero-knowledge proofs. Zcash transactions can happen with algorithmically significant certainty concerning their validity without the revealment of contents. As far as privacy individuals are concerned, payments on wallets are safe and verifiable. Especially from broadcasting the amounts or addresses. 

Benefits of Leveraging Wrapped Tokens

Even though blockchains possess their own standards for tokens. In this case, the use of wrapped tokens allows non-native tokens on a provided blockchain. Other than that, it can enhance capital efficiency and liquidity both for decentralized and centralized exchanges. The wrapping idle assets are capable of developing more connections between liquidities. 

With that, the best benefit highlights transaction fees and times. While Bitcoin comes with some attractive properties, it is not the quickest and sometimes can be pretty expensive to use. Erasing such kinds of problems is possible with such tokens. It can provide lower fees and quicker transaction times. 

Wrapped Tokens: Use Cases

Wrapped tokens come in handy in various cases. We are going to discuss them below. 

1) The act of asset tokenization can enhance the speed of transactions, improve transparency, and boost usability, thereby enhancing security. 

2) Tokenization comes with a mechanism to enforce on-chain policies. Such enforcement makes rules and regulations more transparent. Moreover, they do not depend on a particular party to enforce them, thereby being immune to manipulation. 

3) The wrapped token framework makes it simple to represent a cryptocurrency like Bitcoin on the Ethereum blockchain and vice-versa, thereby harnessing all capabilities. 

4) Stablecoins backed by Fiat currency make it easier for traders to keep their money within a cryptocurrency without having to bother regarding price fluctuations. 

Also Read: Tokenization: Blockchain’s Reply to Assets Sale and Real Estate Project Funding 

Winding Up

Wrapped tokens facilitate an asset issued by a particular blockchain to support one another. They improve the liquidity as well as the capital efficiency of decentralized as well as centralized exchanges, thereby bridging the gap between multiple chains’ isolated liquidity, hence offering quicker transaction times. But, they also require a custodian to hold the funds. Moreover, they cannot utilize it for actual cross-chain transactions. Apart from that, the procedure of minting can further be costly because of high gas fees. 


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