To talk about wrapped tokens, think of it as an American tourist in Japan. There are dozens of unique shops around you. When you open your wallet, it’s full of dollars. None of the stores will accept your physical USD, only credit or Japanese Yen.
You are in an exciting position. Sure, your dollars have value, but they are in an environment where they are out of the loop.
That is the predicament that users of the Bitcoin blockchain find themselves in. While the crypto-assets themselves are solid, the environment locks them out.
As you look through your wallet, you notice some unique coins that the store owners have no problem accepting. All this while still having the equivalent worth of the dollar. That is what wrapped tokens are, and that is the solution.
At a Glance: Unwrapping a Wrapped Token
Before we talk about understanding wrapped tokens, we have to clear some things up. A common misconception is that all these coins are the same, sans their price. While on the surface, that is true, there is a lot more if you dig a bit deeper.
Although people tout all cryptos as decentralized exchanges, that isn’t always true. For example, decentralized finance makes use of different blockchains. Think of blockchains as a logbook where they keep all the data.
That means under most circumstances, and non-native tokens will not be able to enter since the blockchain will not accept them. The most common one is the Ethereum blockchain which most new assets use.
A wrapped token is tokenized version of different crypto assets defined for a specific blockchain, not their own. It’s like having special permission from other blockchains to accept it. Wrapped Bitcoin, for example, allows bitcoin users to access the Ethereum blockchain without an issue.
How Wrapped Tokens Work?
To understand what wrapped tokens are, you have to know their purpose. Please think of the wrapped version of currency as a particular type designed for a specific blockchain, not their own. That means their non-native assets operate in a completely different system. However, these tokens have special since blockchains are issuing tokens unique for them.
Wrapped tokens allow people to use new blockchains while still maintaining the price of their original currency. This technology means that if you use wrapped Ether to access blockchains for BTC or vice versa.
By having these around, you can access greater centralized and decentralized exchanges. You can do whatever you want with it, such as selling, trading, or lending it without a problem.
You can cash it out for the same worth as its regular counterpart when you are done with it. So a wrapped bitcoin will have roughly the same worth as a standard bitcoin.
Types of Wrapped Tokens
When thinking about what has wrapped tokens, you also consider their stability. Many wrapped tickets, such as stablecoin have assets backing them to keep their value. With cash-settled tokens, though, the difference here is that you cannot take the tokens out for these assets.
Instead, you can get the value of these tokens from the custodian holding, which has licenses and physical shares to maintain worth. That means you get the equivalent amount of these tokens when you decide to case out. The money is transferred, and after the unwrapping process, you can then use this money to buy more currency.
On the other hand, redeemable tokens are tokens that the assets directly back. If you want to redeem their value, you can do so in the form of the support the tokens come from. Assets come in different shapes, with stocks being the most common. So, for example, Teslas tokenized the version of their stocks. As the name suggests, these tokens are linked to the Tesla stock, and you can redeem them in that form.
Many wrapped eth currencies use this method by transforming your wrapped tokens into the original token they are from. That reduces the need to repurchase currency since you can invest it immediately.
Use of Wrapping Token in Cryptocurrency
The wrapped version of tokens can remove one of the few remaining barriers to the digital vault. The playing field is even more decentralized as investors can plug their assets into multiple chains. They do not have to limit themselves to the blockchains of their specific currency.
At the same time, they do not have to worry about losing money to exchange rates like with regular currency. That promise ensures that the price of your original asset remains as it always is.
Limitations of Using Wrapped Tokens
Although wrapped tokens can give you more access to different blockchains, that is all they do. On their own, wrapped tokens cannot allow for complete cross-currency exchanges, at least not yet. Instead, you are dependent on a custodian holding to help you for the time being.
Advantages of a Wrapped Token
- The most significant advantage of wrapped tokens is greater accessibility to cryptocurrencies. Now you can have assets that work on different blockchains making trading more accessible.
- With all the currencies accessible in one blockchain, they can all work on one app or program instead of keeping multiple ones at a time.
- The different currencies can cover the advantages of the other. For example, bitcoin can increase liquidity and capital, while Ethereum has the software. With wrapped tokens, you can combine both and improve the market overall.
- Accessing multiple chains for a single currency prevents its own given blockchain from getting bloated and degrading.
Disadvantages of a Wrapped Token
- People’s most significant issue with wrapped tokens is some safety concerns. Wrapped tokens require centralized organizations to access the minting process, making it vulnerable to manipulation.
- The whole idea of having an organization in charge of the minting process defeats the purpose of having decentralized finance defi platforms. that fact turns many people off from entirely investing in wrapped tokens.
Different Types of Wrapped Token
- Wrapped Bitcoin
BTC is one of the oldest and most stable cryptos currently available. This popularity means that BCT enjoyed unprecedented levels of liquidity and investment, much more than most currencies. However, the issue with Bitcoin is that its software is the first, therefore, the oldest one, and that means it doesn’t enjoy the same modern developments of newer blockchains. To combat this, BCT is now offering a tokenized version.
Wrapped BTC is a version of bitcoin specially designed to work for everyday uses without worrying about price loss. Each of these currencies has a value equal to a regular Bitcoin but is incredibly easy to exchange for real bitcoin whenever you need it.
Aside from being easy to use in transactions, it also enjoys compatibility with the erc 20 blockchains. Having compatibility also means more liquidity is available for these other blockchains.
- Wrapped Ethereum
Ethereum is quickly becoming one of the most popular cryptos, and its blockchain is the most used. As second-generation crypto, it has the advantage of using the latest technology for its blockchain.
With regular Ether, the lack of standardization means that not all assets can function the same. Different Ether currency can be generated by other people can work in different ways. Aside from being able to pay gas prices, not all of these assets can work on the same apps.
The wrapped Ether weth answers this and allows them to be traded on all platforms of Ether. Aside from just being able to sell, there are now more functions with wrapped Etherium than its standard counterpart.
Instead, Ethereum offer wrapped tokens that you can use when trading in other blockchains.
Its purpose is to bridge the gap between blockchains to offer a seamless bridge between them. Their RenBCT is simply their most successful because it targets the two largest cryptos. With this system, you can create smart contracts between the two in seemingly native environments.
To access this RenBTC is pretty simple. Once you access a Ren virtual machine, you can send your BTC there to get a wrapped token.
- Wrapped BNB
As with other wrapped tokens, wrapped BNB is Binance coin’s attempt to make wrapped tokens that are compatible with ERC 20. Although highly successful, you cannot use BNB outside its blockchain, which seriously hampers its use.
That is why they are offering Wrapped BNB or WBNB as a way to broaden your crypto options. This new system is there, so they don’t have only to rely on Binance chainlink.
This wrapped token gives Binance traders a chance to trade and use their assets without harming their environment. By transferring it to ERC 20, traders will not devalue the original BNB. or flood their system.
- Wrapped NXM
An interesting example is NXM which people use for government services. The government uses it as a form of insurance or access to utilities. While the crypto model is innovative, it also limits its uses.
In response, NXM now uses a tokenized version to operate on wrapped ether weth. For many people, this is now their way of using WNXM in trades or deals. As a market product, it can give users a chance to gain more capital. Having more users and access to it can also increase the value of the currency, which can help the government too.
Wrapped Tokens on Binance Smart Chain (BSC)
Aside from erc 20, Binance’s innovative chain is another commonplace for traders to do business. Initially, the original Binance blockchain only worked for Binance coins.
After buying assets, you can easily trade them with the various apps and programs that use the Binance intelligent contracts. That should give you plenty of room to choose the best place to do business.
With this BSC, you can access cryptos such as BCT, Ethereum, tether, and many other currencies. However, once you have those assets, you will have to pay gas fees for the unwrapping tokens. This is true for all blockchains, though you do not need to worry about high gas fees.
However, with Binance, the gas fees are noticeably smaller than Ethereum. Despite being newer on the market, these lower fees allow it to stay competitive.
Not everything is perfect with the BSC, though, as people have some issues. Although a rival of Ethereum, it borrows a lot from its blockchain. It seems pretty dependent on building off what Ether already has and doesn’t innovate as much.
Is Wrapped Token better than Bitcoin?
This is an interesting comparison. In some ways, it certainly is better than standard Bitcoin, and it depends on who you ask. It certainly is for some people, primarily those who view it as currency. On the other hand, people who use bitcoin for trading might prefer the original.
If you want to use bitcoin in everyday transactions, it is better because of wrapped tokens. These tokens have the advantage of being usable in more systems, which means they are easier to exchange, and more stores are likely to accept them. Aside from their accessibility, the wrapped BTC also has faster transaction times. For traders, accessing their money faster, even by a few seconds, is a huge advantage.
Since tokenized BTC bases its value on its native currency, their value is compared to each other. However, WBTC is now getting more popular because of its decentralized nature. With it, you don’t have to deal with centralized exchanges.
How Safe is a Wrapped Token?
As with crypto in general, there are quite a few concerns about the safety of wrapped tokens. Like any new technology, some people are unsure how safe they are. If you wonder about that, you should know that they are generally safe.
The advantage that these tokens have is they are on established platforms. While they may use different blockchains than their native asset, these other blockchains are pretty safe. For example, places like the BCT or Ethereum are proven platforms.
The real issue is less about security breaches and the minters in charge of the tokens. As of now, many cryptos such as BCT let centralized organizations handle the minting process. Although they promise to continue minting wrapped tokens, there is a fear they might take advantage of the system.
Although there are pushes for a decentralized smart contract to handle the minting, centralized groups are still in charge of it.
The most crucial part of understanding what is wrapped tokens are is knowing what it is? It is here to answer an existing need with crypto traders, and that is to break down the few remaining barriers and make trading easier. While it certainly can do that, there are still a lot of places where it can still improve. The wrapping process can still get faster and more efficient, for example, speedier transaction times.
What is essential to remember is that the technology is still new. That means that the technology can still improve and likely will in the new future. As long as its creators believe that there is potential in the idea, they can continue to improve it. What matters though, is that there is support for these projects.
In that regard, support is quite strong as many traders are pushing for improvements in technology. Only time will tell if wrapped tokens can reach their full potential.