Wrapped crypto tokens are digital assets that reflect the value of another cryptocurrency from a different blockchain. They were developed to tackle the issue of interoperability among various blockchains. Take Bitcoin and Ethereum, for example; these two popular blockchains run on different protocols and can’t directly communicate with one another. Wrapped tokens help bridge this divide, enabling assets from one blockchain to be utilized on another.
Creating a wrapped token involves locking the original asset in a digital vault and minting a new token on a different blockchain. This new token reflects the value of the original asset and can be used on the blockchain where it was created. For instance, Wrapped Bitcoin (wBTC) is a token on the Ethereum blockchain that represents the value of a Bitcoin.
Learn more about Wrapped token
In the world of decentralized finance (DeFi), wrapped tokens are super important. They enable quick, smooth, and efficient fund transfers, which are vital for DeFi applications. For example, a user can convert their Bitcoin into wBTC and utilize it on Ethereum-based DeFi platforms. This gives users the chance to leverage the unique features and services that various blockchains provide.
Wrapped tokens also boost liquidity in the DeFi ecosystem. By making it possible for assets from different blockchains to be used across any platform, they enhance the total capital available in the DeFi market. This can lead to increased trading activity and potentially more engagement for users.
Some Types
There are different kinds of wrapped tokens, and each one stands for a unique original asset. For instance, Wrapped Bitcoin (wBTC) is a wrapped token that reflects Bitcoin on the Ethereum blockchain. Other examples are Wrapped Ether (WETH), which is a tokenized form of Ether on the Ethereum platform, and Wrapped Luna (bLuna), a token that represents Luna on the Terra network.
The wrapping and unwrapping process consists of swapping the wrapped token for the actual underlying asset.
The Future
Wrapped tokens have already made a mark in the DeFi world, but there’s still a lot of untapped potential. As tech keeps advancing, we can look forward to more innovations in wrapped tokens. For example, various blockchains are beginning to play around with wrapped tokens to improve access to DeFi apps.
That said, it’s crucial to understand that creating and managing wrapped tokens still needs a trusted custodian to hold the original assets. This need kind of goes against the whole decentralized vibe of blockchain tech. So, future progress in wrapped tokens might aim to tackle this issue and push for a more decentralized approach.