What are wrapped crypto assets?
Have you ever wondered if it’s possible to use Bitcoin on Ethereum, or Ether on BNB Chain? For most of crypto’s history, using one network’s asset on another network was not possible. But wrapping is a method of solving this problem.
Wrapped tokens are a synthetic representation of one token that can be used on another network, and the assets can be “unwrapped” if a user wants to move their assets back to their home network.
Let’s dive deeper into how wrapped tokens work.
Wrapped tokens are very similar to how stablecoins work. Dollars cannot be used on Ethereum, but dollars sent to Tether or Circle are exchanged for “dollar tokens” that can be used in crypto. The same thing happens with Bitcoin. Wrapped Bitcoin, called WBTC, is a form of bitcoin that is sent to a custodian and exchanged for “bitcoin tokens” that are ERC-20 assets usable on Ethereum. Other forms of wrapped tokens besides Bitcoin also exist.
These wrapped tokens increase interoperability between different blockchains, and the underlying tokens can essentially move from one chain to another.
Also, many blockchains have their own token standards (ERC-20 for Ethereum or BEP-20 for BSC), these standards cannot be used across multiple chains. Wrapped tokens allow the use of non-native tokens on a given blockchain.
Even better, wrapped tokens can increase liquidity and capital efficiency for both centralized and decentralized exchanges. Bitcoin, for example, can be used in all sorts of DeFi applications instead of just staying on the Bitcoin network.
And finally, a big benefit is trading times and fees. Although Bitcoin has some fantastic properties, it is not the fastest and can sometimes be expensive to use. These issues can be mitigated by using a wrapped token version on a blockchain with faster transaction time and lower fees.
Wrapped tokens help create more bridges between different blockchains. They open up a world where capital is more efficient and apps can easily share liquidity with each other. Not everyone will use wrapped tokens, but they can be very useful for certain people who want more functionality for their assets.