What is Wrapped Token?

Science Learning

1970-01-01 08:00 Update

What is a wrapped token?

Wrapped token (Wrapped Token) generally refers to the issuance of the native asset (Coin) of a certain blockchain, such as BTC to the Bitcoin network, to the mapping/agent asset (Token, pass).

Want to see what wrapped tokens are available? You can refer to TokenInsight's wrapped token tags.

The wrapped token maintains a 1:1 mortgage relationship with its original Coin. For every original Coin packaged, a wrapped token will be issued on another chain. Wrapped tokens mainly solve the problem of the inability of native assets to circulate between different chains, and were the mainstream solution before the emergence of Layer Zero.

Wrapped tokens are used to mortgage original assets and mint new representative tokens in another standard. As long as different format standards are met, the same original asset can have multiple Wrapped Tokens (such as WBTC)

Why do you need to wrap tokens?

Blockchains and blockchains are independent distributed databases, a bit like stand-alone machines and stand-alone machines, which are not connected to each other.

Almost every chain will have its own native asset Coin. These Coins are not interoperable due to different nodes and consensus.

If you want to know more about it, please refer to "What is a node" and "What is a consensus mechanism"

Therefore you cannot The BTC Coin is used directly on the blockchain, because only the nodes of the Bitcoin network recognize that you own BTC. The packaged token issues the corresponding Token through the escrow agent Coin method to represent the value of the Coin, achieving the purpose of asset circulation in other ecosystems.

The essence of a wrapped token is that it is just a representation, a representation. Because some blockchains can do things that other blockchains cannot do, and different original coins cannot be used by other chains. So the early developers made this proxy and called it a wrapped token, so you could basically hold the original Coin and use the asset on any other chain.

What are the typical wrapped tokens?

The most typical Wrapped Token is WBTC, created by BitGo, Kyber and Ren in 2019. Taking WBTC as an example, Wrapped BTC (WBTC) is an ERC-20 standard token linked to BTC at a 1:1 ratio and circulates on the Ethereum network. (WBTC also has a TRC-20 standard version, which is circulated in the Tron network)

WBTC is created and issued (Minting) through the custodian. There are many types of custodians, including merchants, multi-signature wallets, DAOs, and even smart contracts. With the right custodian, anyone can mint and issue WBTC. The user first sends the BTC in the Bitcoin network to the custodian, and the custodian will regard it as collateral and store it in the Digital Vault to lock it, and then transfer it to the Ethereum (or Tron) network through its own smart contract at a 1:1 ratio. Minting WBTC is a process of Wrapping on Ethereum.

Similarly, users can also apply to destroy WBTC and redeem their original BTC assets (Bitcoin network).

If you hold BTC Coin on the Bitcoin network, you only need to mint it into WBTC to lend other Token assets or earn interest in protocols such as AAVE in Ethereum.

Mainstream Wrapped tokens: Wrapped BTC, renBTC, Wrapped ETH (created by 0x Labs in 2017, it is an ERC-20 standard Token in the Ethereum network, representing the value of ETH, because ETH itself is not an ERC -20 Token cannot satisfy many DApp functions, so it is more convenient to cast it into a wrapped token).