A wrapped token is a valuable asset in disguise. By taking an asset and wrapping it up, you can use that asset on a different blockchain. However, you are not exactly taking that asset and wrapping it. Before learning more about wrapped tokens, we must first know the differences between coins and tokens.
A coin has its own native blockchain, which keeps track of all the data. However, tokens rely on another blockchain and do not have their own blockchain. In practice, it is possible to make a token in less than a day, but it would take weeks or even months to develop a blockchain for a coin. Many investors pay attention to this when weighing their options and view coins as more reliable. However, tokens have more utility and have various use cases.
Tokens and coins can only be used on their own native blockchains and not on other blockchains. Because of this, it is not possible to deposit Bitcoin on a dApp that runs on the Ethereum blockchain. Wrapped assets came into being to fix this issue of inter-blockchain interoperability. By wrapping an asset, a Bitcoin, for example, you lock up your real Bitcoin and mint a Wrapped Bitcoin as a token on the Ethereum network. This wrapped token is not the same as your original asset, but it represents it on the new blockchain.
Wrapped tokens are similar to stablecoins; they are tied to another asset in terms of price and quantity. For example, one WBTC token’s price is equal to one Bitcoin, and there can only be 21 million WBTC in circulation, just like how Bitcoin’s maximum supply is 21 million.
The utility of wrapped tokens can vary depending on the blockchain and assets. Some blockchains have possibilities and features that others do not have, i.e., higher processing speed, features on a dApp, etc. If you have an asset on a blockchain that is overloaded with transactions and takes too much time to process your transaction, you can wrap your asset and use it on a faster blockchain.
Pro tip: Many traders use WETH on Polygon blockchain to do things they would normally do on Ethereum blockchain, but much quicker and with less fee.
It is not possible to make more wrapped assets than the assets you own, thanks to custodians. A custodian is a third party and can be a DAO, a real person or a smart contract, which verifies that the user has the amount of currency they are saying they have to exchange that for the wrapped version of that currency. By doing this, no one can create wrapped tokens based on assets they don’t own or create more than what they own. The custodian then takes the asset and gives the corresponding amount of the wrapped version of the original asset. The vice versa is also possible. However, once the custodian receives the wrapped asset and gives the original asset, it destroys the wrapped asset.
REN is a company that has expanded blockchain interoperability with the introduction of the RenVM protocol. RenVM enables cross-chain exchanges, and by using this, users can create wrapped tokens on Ethereum. RenVM also offers other blockchain destinations like Polygon, Avalanche, Solana and many more, and users can wrap assets like Bitcoin, Dogecoin, ZCash on the said blockchain. It is essentially a translator which converts digital assets to the format needed by the destination chain. To get a complete list of wrapped assets and destinations, check RenVM Protocol.
Wrapped assets provide you with faster transactions and grant you options you didn't have on the original blockchain. However, we’re not financial advisers, and any information on Cryptologi.st is purely for educational purposes. We have provided everything you need to compare your options and choose what works best for you. We believe awareness is the key to successful investment decisions.
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