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April 2024

Wrapped tokens are vital for the crypto economy. They create bridges between different blockchains. Wrapped tokens are tokenized coins on a blockchain other than its native.

What are Wrapped tokens?

Wrapped tokens are tokens pegged to the value of a cryptocurrency of a different blockchain other than its native. Wrapped tokens are backed by the original cryptocurrency in a 1 vs 1 ratio. Wrapped tokens are used to buy, sell, or trade different blockchain cryptocurrencies on a single blockchain. Different blockchains have different fundamentals and work on different algorithms. It is like running a PC game on a MAC. You need an interface to run a PC game on a MAC. This makes it hard to buy and sell a coin on a different blockchain. Wrapped tokens are meant to solve this problem and remove barriers between the blockchains.

Wrapped tokens are a good tool to function as a bridge between different blockchains. There are many different projects to solve the problem of communication between different blockchains. Interoperability is a hot topic in the crypto world since there are many different new blockchain projects on the market.

Wrapped Bitcoin is the most used and popular wrapped token. Wrapped Bitcoin tokens are available in almost all blockchains from Avalanche and Solana to Fantom and Polygon. Wrapped Bitcoin tokens are pegged to Bitcoin and their price is always the same as a real Bitcoin. Bitcoin has its native blockchain with its unique features. The bitcoin blockchain is not smart contract compatible. Developers are still able to create innovative ways to deploy smart contracts on the Bitcoin blockchain. The most used wrapped token is the wrapped Bitcoin ERC-20 token on the Ethereum blockchain.

Wrapped tokens are similar to stablecoins. Stablecoins are pegged to the value of a fiat currency since wrapped tokens are pegged to the value of a cryptocurrency. We can consider wrapped tokens as stablecoins because their price is stable. The price of one wrapped Bitcoin is always equal to the price of one Bitcoin. We can also say stablecoins are wrapped tokens of fiat currencies and vice versa. Centralized exchanges are good places to convert them from one to another. You can find BTC/WBTC exchange pairs on any centralized exchange.

It is very important to know the custody level of the wrapped coin. Custodian must hold the same number of coins for each wrapped token minted. The holding wallet can be a multi-sig wallet, a DAO, or a smart contract. Since blockchains are transparent and public, anyone should be able to see the proof of the reserve on a blockchain.

There are now Wrapped Ether tokens on Ethereum. The interesting fact about wrapped Ethers is that Ethereum coins are not ERC-20 compatible coins because the ERC-20 standards are set after the launch of the Ethereum blockchain. Ethereum hosts the most wrapped tokens than any other blockchain. You can trade, buy, or sell any coin on Ethereum by using its wrapped form.

Binance Smart Chain is a very big blockchain with its market cap and number of transactions. Many coins exist on Binance Smart Chain in the form of wrapped tokens. You can find wrapped Bitcoin, wrapped Ether, and wrapped tokens of many other major cryptocurrencies. Wrapped tokens on Binance Smart Chain must be BEP-20 compatible. The BEP-20 is the token standard on the BSC blockchain.

Wrapped tokens are good for liquidity. Wrapped tokens help capital efficiency to increase. Users can benefit from trading and using different coins on a single blockchain and save on cross-chain transfer costs. The most important point about wrapped tokens is the security of the funds and custody. Luckily, we have decentralized, smart contract-based autonomous platforms to mint and demint wrapped tokens. Before using a wrapped token, make sure it is issued by a trusted platform, DAO, or custodian.

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Wrapped Coin Comparisons

Article by Yunis
30 June 2021 (Updated 12 April 2024)
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