WHAT IS A WRAPPED TOKEN?

Cryptocurrency investors often cannot access particular decentralized finance (DeFi) applications because the crypto coins they hold can’t be traded on other blockchain networks. Just as it is impossible to run android applications on a mac laptop without specific software, it is the same with crypto coins, except that with crypto, there Is something called a ‘wrapped token.’

A Wrapped token is a token that represents a cryptocurrency (e.g., Bitcoin) on another blockchain and allows it to run on that blockchain with all the benefits of the native coin to which it is attached. It will enable unsupported assets like Bitcoin to be traded on DeFi platforms. Also, wrapped tokens have a physical sibling called ‘stable coin.’

A few of the popular wrapped tokens will be discussed below, such as wrapped Bitcoin wrapped Ethereum and their significance… learn more in the body of the article.


A wrapped token is a tokenized form of a cryptocurrency meant to represent it on another blockchain network. The reasoning behind the name is that the original cryptocurrency is wrapped in a kind of digital vault that allows it to be created on other blockchains.

It is a token controlled by the price movements of the native coin it represents, although it can be traded on another network. Wrapped tokens serve as a bridge between different blockchain networks to improve the interoperability of cryptocurrencies on other blockchains networks. Some platforms like Emblem vault can wrap entire cryptocurrency wallets instead of single coins.

They ensure that cryptocurrencies of one blockchain can run on another blockchain and, by doing so, gain benefits only present on that network. For example, most DeFi applications are run on ERC-20 standards on the Ethereum blockchain, meaning that Bitcoin users will be unable to access such platforms unless they could somehow trade Bitcoin on the Ethereum blockchain. To understand the concept, let's look at some examples of wrapped tokens.


IMPORTANT TERMINOLOGIES ASSOCIATED WITH WRAPPED TOKENS

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Before going further, let's look at some terminologies associated with wrapped tokens to understand the concept better.

DeFi: Decentralized finance refers to financial instruments that enable transactions, borrowing, and lending between two parties without the help of intermediaries (banks, exchanges, etc.). DeFi protocols use smart contracts on a blockchain to bring about decentralization.

DApps: Decentralized applications are digital applications that run on a blockchain system. They rely on multiple computers to not be controlled by a single authority.

DEX: Decentralized exchange is a peer-to-peer marketplace that enables non-mediated transactions between crypto traders.
ETHEREUM: Ethereum is a decentralized, open-source blockchain, second only to the Bitcoin blockchain. It is home to most DApps, DeFi protocols, and DEXs. For this reason, many wrapped tokens are designed to run on ERC-20 standards on the Ethereum blockchain.


EXAMPLES OF WRAPPED TOKENS

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Wrapped tokens are sometimes regarded as siblings of stable coins because stable coins are tokens pegged or attached to fiat currency as wrapped tokens are linked to cryptocurrencies. There are many wrapped tokens currently in the crypto market, the most popular ones being wrapped Bitcoin (wBTC) and wrapped Ethereum(wETH) following closely behind, then a few others like wrapped Tron(wTRX) and wrapped BNB (wBNB). Let's look into some examples;

WRAPPED Bitcoin:
As the name implies, wrapped Bitcoin is the token representing Bitcoin on the Ethereum blockchain. It is an ERC-20 token created by BitGo, Kyber, and Ren in 2019. As of Feb.2022, the token had a market value of over $10 billion, with wrapped Bitcoin occupying 81% of the market for wrapped tokens, as shown on dune analytics.


Wrapped Bitcoin creates an avenue for Bitcoin investors to invest their assets in Ethereum-based decentralized finance (DeFi) protocols and monetize them through liquidity pools, like Uniswap.


Wrapped can be acquired through a wBTC merchant like Ren

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The merchant acts as a middleman who will send your Bitcoin to a custodian (in this case, BitGo) to mint a newly wrapped Bitcoin and store your deposited Bitcoin. If you wish to redeem your original Bitcoin, later on, the merchant will ask the custodian to burn your wBTC and return your Bitcoin to you.

This operation system ensures that the ratio of wrapped Bitcoin to Bitcoin in circulation remains 1:1 at all times. Another way to acquire wBTC will be to buy from a trusted platform like Gate.io.

WRAPPED ETHEREUM
Wrapped Ethereum is an ERC-20 token created in 2017 by Ox labs. It varies from Wrapped Bitcoin in that wBTC’s primary focus is to move Bitcoin onto other blockchains, but wETH looks to trade wrapped Ethereum tokens on the Ethereum blockchain. Now, it should be noted that the native Ethereum coin does not run-on ERC-20 standards and is not compliant with DeFi protocols.
The introduction of wETH allows Ethereum to be traded on DeFi applications. wETH is not really wrapped as the name implies but is bought through smart contracts or decentralized exchanges (DEX) in exchange for ETH.

WRAPPED BNB
BNB is the native token of the Binance chain. Binance smart chain (BSC) was created to increase the functions of the Binance chain but BNB can only function on the smart chain when wrapped. Wrapped BNB (wBNB) is a BEP-20 token created because the original BNB does not follow BEP-20 standards.

This token which runs on the Binance smart chain can be utilized by decentralized exchanges (DEX) and is useful when users want to exchange BNB for other tokens on the blockchain or trade with altcoins on the Binance exchange platform.


BENEFITS OF WRAPPED TOKENS

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NTEROPERABILITY: wrapped tokens improve the interoperability of crypto coins on other blockchains. Even crypto assets like NFTs are not excluded. Wrapping makes it possible to port NFTs of one blockchain onto another blockchain. Bitcoin and Solana NFTs can now be hosted on the Ethereum blockchain as long as they are wrapped.

Axie infinity also introduced a purpose-built bridge called Ronin Bridge to turn their NFTs into Ethereum-based NFTs.

PROFIT MAXIMIZATION: Wrapped tokens make it possible for cryptocurrencies to run on the Ethereum blockchain, have access to more DeFi platforms, and benefit from liquidity pools.

GAS FEES: By using the Ethereum blockchain, users can have access to significantly lower gas fees and faster transaction speed. This is because the second generation blockchain is twice as fast as the Bitcoin blockchain.

A significant disadvantage of wrapped tokens is the introduction of centralization into the world of decentralized blockchain networks. Wrapping Bitcoin requires you to entrust your asset to a third party in exchange for a wrapped Bitcoin.


HOW TO BUY WRAPPED Bitcoin (wBTC) ON Gate.io

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First, you’ll be required to have a Gate.io account. Secondly, fund the account with any cryptocurrency of your choice, such as USDT, BTC, etc. After funding, go to the trading area and purchase wBTC. On Gate.io, you can trade wBTC with margin accounts or quantitative strategies.



Author: Gate.io Observer: M. Olatunji
* This article represents only the views of the observers and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.