Summary

Wrapper tokens are cryptocurrency tokens that are pegged to the value of another cryptocurrency. It is called a "wrapped token" because the original asset is placed within the "wrapper." It is a digital vault that enables the creation of a wrapped version of an asset in another blockchain.

What is its significance? Different blockchains have different functions and cannot transmit information to each other. The Bitcoin blockchain knows nothing about the activity in the Ethereum blockchain. Wrapped tokens change the status quo and build bridges between different blockchains.

Introduction

Bitcoin cannot be used in Ethereum, and Ethereum cannot be used in Binance Smart Chain Are coins making you very depressed? Tokens in a specific blockchain cannot be easily transferred to another blockchain.

Wrapped tokens can circumvent this limitation and support the use of non-native assets in the blockchain.

What is a wrapped token?

A wrapped token is a tokenized version of another cryptocurrency. It anchors the value of a specific asset and usually supports the redemption (unpackaging) of the anchored asset at any time. Wrapped tokens represent assets that are generally not issued within the blockchain in which they are located.

With its value derived from another asset, you can think of it as a product similar to a stablecoin. Stablecoins are typically pegged to fiat currencies, while wrapped tokens typically derive their value from native assets in another blockchain.

Blockchain is an independent system, and there is currently no ideal method for transferring information between chains. Wrapper tokens promote interoperability between blockchains by allowing underlying tokens to essentially cross-chain.

It is worth noting that ordinary users do not need to worry about the wrapping and unwrapping process, and only need to trade these wrapped tokens normally like other cryptocurrencies. For example, Binance offers the WBTC/BTC market.

How do wrapped tokens work?

Take Wrapped Bitcoin (WBTC) as an example, which is the tokenized version of Bitcoin in Ethereum. WBTC is an ERC-20 token that anchors the value of Bitcoin at a 1:1 ratio and supports the efficient use of Bitcoin on the Ethereum network.

Wrapped tokens are usually inseparable from a custodian, that is, an entity that holds assets equivalent to wrapped tokens. Custodians can be merchants, multi-signature wallets, decentralized autonomous organizations (DAO), or even smart contracts. In the case of WBTC, the custodian needs to hold one BTC for every WBTC minted. Proof of the reserve is stored on-chain.

How does the packaging process work? The merchant sends the Bitcoin to the custodian and requests the tokens to be minted. Custodians mint WBTC in Ethereum based on the number of Bitcoins received. When it is necessary to exchange WBTC back to Bitcoin, the merchant initiates a destruction request to the custodian, and the Bitcoin will be released from the reserve. You can think of the custodian as the executor responsible for packaging and unpacking. For WBTC, the Decentralized Autonomous Organization (DAO) is responsible for adding/removing custodians and merchants.

Some community members believe that Tether (USDT) is a wrapped token, but this view is not accurate. Although USDT can generally be exchanged for U.S. dollars at a ratio of 1:1, for the USDT in circulation, Tether does not hold an equivalent amount of physical U.S. dollars as reserves, but instead holds cash, other cash equivalents in the real world, assets and loan receivables accounts. However, the concepts are very similar. Each USDT token is a wrapped version of the U.S. dollar fiat currency.

Wrapped tokens in Ethereum

Wrapped tokens in Ethereum are from other blocks The tokens of the chain are processed to be compatible with the ERC-20 standard. Therefore, users can use non-native assets in Ethereum. As you might expect, performing the wrapping and unwrapping of tokens in Ethereum requires a gas fee.

The implementation of these tokens is unique and we describe it in detail in the Tokenizing Bitcoin article.

Wrapped Ethereum (WETH) is an interesting example of a wrapped token in Ethereum. Let’s briefly review: Ethereum (ETH) is used to pay transaction fees on the Ethereum network, and ERC-20 is the technical standard for issuing tokens on Ethereum. For example, Basic Attention Token (BAT) and OmiseGO (OMG) are both ERC-20 tokens.

However, Ethereum was developed before the ERC-20 standard and is not compatible with it. Problems arise because many DApps require users to convert between Ethereum and ERC-20 tokens. Wrapped Ethereum (WETH) came into being. It is a packaged version of Ethereum, compatible with the ERC-20 standard, and is essentially the tokenized Ethereum in Ethereum!

Wrapped tokens in Binance Smart Chain (BSC)

Compared with wrapped tokens in Ethereum Similar to coins, users can wrap Bitcoin and many other cryptocurrencies in Binance Smart Chain (BSC).

Binance Bridge allows crypto assets (BTC, ETH, XRP, USDT, BCH, DOT and other tokens) to be packaged into BEP-20 tokens, thereby Used in Binance Smart Chain. Transfer assets to BSC to trade or use them in various liquidity mining applications.

Wrapping and unpacking requires paying gas fees, and Binance Smart Chain (BSC)’s gas fees are much lower than other blockchains. To learn more, read our article introducing Binance Bridge.

Advantages of using wrapped tokens

While many blockchains have proprietary token standards (Ethereum ERC-20 or BSC’s BEP-20), but these standards cannot be used across multiple chains. Wrapper tokens, on the other hand, enable the use of non-native tokens in a specific blockchain.

In addition, they can improve liquidity and capital utilization on centralized and decentralized trading platforms. Wrapping idle assets for use on another blockchain helps create more connections between otherwise siled liquidity.

The last important advantage is transaction time and fees. While Bitcoin has some excellent properties, it is not the fastest and usage fees are sometimes high. This is actually acceptable, but it sometimes causes some headaches. These issues would be alleviated by using wrapped tokens on a blockchain where transactions are faster and fees are lower.

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Limitations of using wrapped tokens.

Currently, most implementations of wrapped tokens require users to trust the custodian holding the funds. With current technology, wrapped tokens cannot be used for true cross-chain transactions and usually require the help of a custodian.

A more decentralized solution is under development, and the minting and redemption of wrapped tokens are expected to be completely trustless in the future.

High fuel bills can add to the cost of the casting process and create some slippage.

Summary

Wrapped tokens help build more bridges between different blockchains. It is a tokenized form of another blockchain’s native asset, which can effectively improve the interoperability of cryptocurrency and the decentralized finance (DeFi) ecosystem. Wrapped tokens open up a new world where money moves more efficiently and applications can share liquidity easily and conveniently.