Tokens, or wrapped tokens, stand in for another asset or form of money on a blockchain. A wrapped token essentially “wraps” or “encapsulates” the value of an additional asset in a way appropriate for a specific blockchain.
Wrapped tokens are an example of tokenization, which is converting physical assets or other currency into tokens that can be used on a blockchain. Tokenization makes trading, tracking, and managing assets on a blockchain simple and can speed up the development of new financial tools and apps.
A custodian frequently backs wrapped tokens. A custodian is a dependable party that keeps the underlying asset in reserve while also issuing the wrapped token on the blockchain.Wrapped token standards are frequently developed using defined protocols, such as ERC-20 for tokens based on Ethereum.
Benefits of Wrapped Tokens
Wrapped tokens can facilitate the transfer of assets between several blockchains, enabling cross-chain interoperability. For instance, if an asset is not natively supported on the Ethereum blockchain, a wrapped token can be developed to represent that asset on Ethereum, enabling its use in applications built on the Ethereum network.
Wrapped tokens can raise an asset’s liquidity by making it accessible across several blockchains, potentially boosting the asset’s user base and use cases. Wrapped tokens make it possible for decentralized financial instruments to be developed on decentralized blockchains, such as stablecoins or synthetic assets.
Examples of Wrapped Tokens
Wrapped Bitcoin (WBTC)
In the Ethereum blockchain, WBTC is a wrapped token that stands in for Bitcoin. It can be used in Ethereum-based services like decentralized exchanges and lending platforms, and it is backed by an equivalent amount of Bitcoin that is kept in reserve by a group of custodians.
Wrapped Ether (WETH)
In the Ethereum blockchain, WETH is a wrapped token that stands in for Ether. Only ERC-20 tokens—the industry standard for tokens based on Ethereum—can be exchanged on decentralized exchanges, where it is used to facilitate Ether trading. Using specialized smart contracts known as “wrappers,” users can convert Ether to WETH and back again.
Conclusion
Wrapped tokens are digital coins that stand in for other assets on a blockchain. Wrapped tokens frequently make use of defined protocols to guarantee interoperability and simplicity of use. They are typically backed by an equivalent quantity of the underlying asset, which is kept in reserve by a custodian. Wrapped tokens are a crucial tool in the fast developing blockchain ecosystem because they give decentralized applications and financial systems a way to add additional assets and functionality.
Disclaimer
The views and opinions stated by the author, or any people named in this article, are for informational ideas only, and they do not establish financial, investment, or other advice. Investing in or trading crypto assets comes with a risk of financial loss.
Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.
Source: https://www.thecoinrepublic.com/2023/03/09/corners-of-wrapped-tokens-tokens-wrapped-as-gifts/