Coins existing on a given blockchain cannot be just transferred 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 for circumventing 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.
By the term wrapped it means an original asset that happens to be confined 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.
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.
It is an asset that happens to be hosted on the Ethereum blockchain with the value that remains the same as a different underlying asset. 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 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. It 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 in exchange for money that is wrapped within an asset that 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 moving the data between the two, thereby making it easy for trading wrapped tokens, similar to any different asset.
Wrapped tokens are supported by a variety of algorithmic balances and checks along with organizational roles and an equal amount of underlying currency or asset. Decentralized applications can readily process the transactions of a wrapped token much quicker as they are not worked through multiple blockchains.
Transactions on behalf of the users can be done confidently as wrapped tokens have a trustless nature. It happens to be preserved by a platform that supports every one-to-one backed 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.
The governance on wrapped tokens is usually done by assigning required roles to organizations. They are predominantly given to custodians who carry underlying assets and burn or mint new raps tokens as required. On the other hand, merchants also offer a medium to the buyers of wrapped tokens while users happen to own them.
As Ethereum refers to the biggest decentralized finance ecosystem, wrapped tokens are usually those that are hosted on additional blockchains, however, are additionally stablecoins pegged to the dollars. Among the initial wrapped assets, many were stablecoins backed by 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.
Zcash refers to a cryptocurrency that anonymously can be transacted with no information of address visible on the record of the public ledger. It is easily transacted and is a special cryptocurrency that gets its value from the capability to allow private transactions in a public blockchain.
Owing to its cutting-edge system, Zcash takes account of zero-knowledge proofs. Zcash transactions can happen with the algorithmically significant certainty concerning their validity without the revealment of contents. As far as privacy-focused individuals are concerned, it indicates that payments can easily be made to their wallets which is safe and verifiable from broadcasting the amounts or addresses involved.
Even though the various blockchains possess their own standards for tokens, such standards cannot be utilized across numerous chains. In this case, wrapped tokens allow non-native tokens to be leveraged on a provided blockchain. Other than that, it can enhance capital efficiency and liquidity both for decentralized and centralized exchanges. The capability of wrapping idle assets and utilizing them on a different change can develop more connections between liquidities that are otherwise isolated.
With that being stated, 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. Such kinds of problems can be eradicated by utilizing a wrapped version of Bitcoin on a blockchain. It can provide lower fees and quicker transaction times.
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 and does 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 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.
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 for holding the funds and cannot be utilized for actual cross-chain transactions. Apart from that, the procedure of minting can further be costly because of high gas fees.