Interoperability issue always hinders cryptocurrencies, preventing them from operating on different blockchains. Therefore, wrapped tokens became the key to addressing this problem by allowing digital assets to function on blockchains other than the ones they were running on. In this article, we will explain wrapped tokens in detail. We will explore the differences between wrapped tokens and stablecoins, the types, as well as the process of wrapping.
What Are Wrapped Tokens?
Wrapped tokens are digital assets that can function on blockchains other than the ones they were created for. They are pegged to the value of the original digital asset they are based on and can be transferred from one blockchain to another with the help of bridges. Wrapping a token involves placing it in a digital vault, creating another version of the token, and pegging its value to the original asset. Wrapped tokens enable seamless cross-chain transactions.
Wrapped Tokens and Stablecoins
Stablecoins and wrapped tokens are linked by the concept of “pegging.” Stablecoins are pegged to fiat currencies, while wrapped tokens are pegged to crypto assets. Additionally, stablecoin values are influenced by changes in the fiat currency they are pegged to, while the volatility of the crypto ecosystem determines the value of wrapped tokens.
Types of Wrapped Tokens
There are two types of wrapped tokens – cash-settled and redeemable. Cash-settled wrapped coins cannot be exchanged for the original digital asset, but they can be sold for fiat currency. On the other hand, redeemable wrapped coins can be exchanged for unwrapped versions of equivalent amounts and can be reversed back to the original asset.
How Are Tokens Wrapped?
To wrap a token, the platform’s token standard must be taken into account. Token standards are the rules guiding the development of tokens on a blockchain. For example, Ethereum uses the ERC-20 standard. When a user sends a digital asset to a merchant, the asset is forwarded to a custodian who mints a wrapped coin of the same value. The wrapped token is then sent back to the user.
Top Ten Wrapped Tokens by Market Cap
The top ten wrapped tokens by market cap are as follows:
- Wrapped Bitcoin (WBTC) – pegged to Bitcoin.
- Wrapped Binance Coin (WBNB) – pegged to Binance Coin.
- renBTC – pegged to Bitcoin.
- Wrapped Ethereum (WETH) – pegged to Ethereum.
- Wrapped Filecoin (WFIL) – pegged to Filecoin.
Wrapped tokens are an important development in the world of DeFi, enabling seamless cross-chain transactions and providing a solution to interoperability issues. It is revolutionizing the DeFi ecosystem by solving the problem of blockchain interoperability. By pegging cryptocurrencies with other assets and utilizing bridges, it is possible to use assets on different blockchains, thereby promoting liquidity and increasing accessibility. As the DeFi ecosystem continues to grow, wrapped tokens will play an increasingly significant role in expanding its capabilities and use cases.
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