Wrapped tokens explained

What is a wrapped cryptocurrency and how does it function? Why do wrapped tokens even exist? Coindesk answers this succinctly: “Trying to trade Bitcoin on the Ethereum blockchain is a little like trying to get a PC game to run on a Mac — it won’t work unless you install special software.” Wrapping a cryptocurrency solves that problem.

A wrapped token represents a cryptocurrency — let’s say Bitcoin — and has the same value as the original cryptocurrency, but it can be used on certain non-native blockchains and later redeemed for the original cryptocurrency.

This is necessary with DeFi, as the majority of DeFi protocols work on the Ethereum blockchain. Users would not be able to do anything with their Bitcoin in the DeFi system unless it has been wrapped so that transactions can take place on the Ethereum blockchain.

The benefits of wrapped tokens

As Coindesk says, “One of the biggest benefits of wrapped tokens is they create greater interoperability between non-compatible cryptocurrencies and blockchains.” For example, on DeFi platforms they allow Bitcoin lending or borrowing. Consequently they provide greater liquidity to decentralized services and boosts the utility of crypto assets.

The most popular of the wrapped tokens is Wrapped Bitcoin (wBTC), which if you look at a crypto price chart, is exactly the same price as ‘original’ BTC. The wrapped token is an ERC-20 token, which is a standard related to the Ethereum blockchain. Wrapped Bitcoin is useful because it allows Bitcoin investors to “plug their asset — or, technically, a synthetic asset that offers the same exposure to Bitcoin’s price,” into DeFi protocols on Ethereum. It also means the owner of wBTC can use them as a ‘yield-bearing asset’ that returns a profit via liquidity pools.

How do I wrap my Bitcoin?

You can wrap the BTC you own by going to sites such as DeversiFi, Kyber or Ren, Coindesk suggests. This is what happens: “The merchant sends your Bitcoin to a custodian who mints newly wrapped Bitcoin at a 1:1 ratio and stores your deposited Bitcoin. When you want to redeem your wBTC for Bitcoin, the merchant will send a burn request to the custodian who will then destroy the wBTC and return your Bitcoin back to you.” Alternatively, you can buy wBTC for other cryptocurrencies on centralized or decentralized exchanges.

Wrapped ETH (wETH) are also available. One of the main purposes of wETH is to trade synthetic ether right on the Ethereum blockchain. With wETH, owners can trade directly with other Ethereum-based altcoins and pledge funds to DeFi protocols.

Bridges are the next big thing

This is a basic explanation of how wrapped tokens work: there are more complex aspects to wrapped tokens, such as the use of ‘bridges’ that port assets to different blockchains, such as Polygon, Osmosis Gravity Bridge and the Wormhole Bridge, with the latter supporting many different blockchains. Coindesk says, “Bridges may soon conquer the DeFi market; it’s easier to trade wrapped tokens in one place rather than wrapped individual cryptocurrencies.” Or perhaps “the future of DeFi will make it so seamless to trade tokens across blockchains that you won’t even realize you’re using a bridge or a wrapped token.”

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Creditum is the mobile application integrating regular cash with Crypto, Holding, Buying, Exchanging and Spending

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