Wrapped tokens are tokenized versions of cryptocurrencies that are pegged to the value of the original coin and can be unwrapped at any point. Almost every major blockchain has a wrapped version of its native cryptocurrency.
The mechanism of such coins is similar to that of stablecoins.
USD-based Stablecoins are essentially ‘wrapped USD’ in the sense that dollar-pegged stablecoins can be redeemed for FIAT dollars at any point. In a similar fashion, wrapped coins can be redeemed for the original asset at any time.
Wrapped coins solve a particular problem because of the low interoperability of blockchains since native coins of one chain cannot be used on another chain.
Wrapped tokens:
- Allow non-native assets to be used on any blockchain
- Build bridges between networks
- Implement interoperability in the cryptocurrency space
Here are the 4 common wrapped tokens you should know about:
Wrapped BNB (wBNB)
The primary distinction between BNB and Wrapped BNB is that BNB is not affiliated with the BEP-20 standard, whereas wrapped BNB is. As a consequence, wrapped BNB (wBNB), not BNB, will be used on the Binance smart chain. BEP-20 is a standard that allows any token on the Binance Smart Chain to be used consistently by other applications ranging from wallets to diversified exchanges.
Wrapped BTC (wBTC)
Wrapped Bitcoin is a digital token that has the same value as one Bitcoin but is based on ERC-20 (Ethereum’s blockchain) which makes it usable on the Decentralized Finance ecosystem largely based on the Ethereum blockchain technology.
Wrapped ETH (wETH)
Wrapped Ethereum is a tradable version of ETH that is compatible with the decentralized finance protocols. This has been created as the native form of Ethereum which is very efficient and fast for Decentralized Finance ecosystems. With wETH, investors can trade directly in other Ethereum-based altcoins and pledge their funds into decentralized exchanges that function on ETH protocols.
Wrapped AVAX (WAVAX)
Wrapped AVAX or WAVAX, is a token that represents AVAX 1:1 and conforms to the ARC20 token standard. By conforming to ERC20, it allows for increased functionality across any application that handles ERC20 tokens.
You can always convert your WAVAX to AVAX 1:1 and vice versa.
In order to use AVAX on the Ethereum network, you will first need to wrap it to WAVAX before sending it across the Avalanche-Ethereum bridge.
How Wrapped Coins Work
Wrapping coins means investors have to go through a custodian. Based on investor and trader demand, merchants trigger the minting process of wrapped tokens by sending a certain amount of a native crypto, such as BTC, to a custodian who mints an equivalent amount in wrapped tokens.
On the flip side, when a client needs to convert back their wrapped token back to the “real” token, for example, when wBTC needs to be converted back into real BTC, the ERC-20 BTC token is burned (destroyed), and the locked BTC on Bitcoin is released.
The minting and burning of tokens is trackable and verifiable on the blockchain.
Wrapped tokens increase liquidity and capital efficiency for both centralized and decentralized exchanges due to the facility to move the assets across multiple chains that would otherwise remain isolated.
However, the involvement of custodians has exposed the process to criticism as this contradicts the decentralized ethos of cryptocurrencies.
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RECOMMENDED READING: Understanding BEP-20 Tokens – The Token Standard for the Binance Smart Chain (BSC)
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