Ethereum is the most appealing digital commodity of all blockchain protocols. It's due to the widespread acceptance of the ERC20 standard, as well as Ethereum's popularity as the preferred blockchain technology for Decentralized Finance (DeFi) projects. The value tokenized on Ethereum grew exponentially in Q4 2020. More protocols will launch wrapped versions of their tokens on Ethereum in 2021 as the ecosystem's network effects continue to evolve.
Have you noticed that you can't use BTC or ETH on Binance Smart Chain?
Tokens that reside on one blockchain cannot be moved to a different blockchain. Wrapped tokens show you how to use Bitcoin on Ethereum and transform it into an income-generating asset. Let's take a closer look at wrapped tokens in this post.
Wrapped tokens
A wrapped coin is a cryptocurrency that has been tokenized. It's an asset that's hosted on the Ethereum blockchain and has the same price as another underlying asset, even though the underlying asset isn't on the Ethereum blockchain or any blockchain at all. As a result, it is a method of wrapping a coin such that it can be used on a blockchain other than its own without losing its value.
On the Ethereum blockchain, for example, Bitcoin cannot be used for transactions. However, it can be used on the Ethereum Blockchain when converted to wrapped Bitcoin, which is an ERC-20 token. The same is true for Ethereum, which cannot be used to process ERC-20 smart contracts until it has been wrapped (WETH). As a result, these examples show how wrapped tokens aid in the compatibility of non-Ethereum tokens with the network.
Wrapped tokens keep their initial coin's worth (1 WBTC = 1 BTC). The token may also be unwrapped at any time to reveal its true existence. Wrapped tokens are identical to stable coins, with the exception that stable coins are fiat currencies, while wrapped tokens are assets that live on another blockchain.
What is the process for making wrapped tokens?
The customer, the merchant, and the custodian are all involved in the production of wrapped tokens. A customer requires the tokens, a merchant distributes the wrapped token, and a custodian keeps the original assets and mints the wrapped tokens. Let's walk through the WBTC wrapped token formation process.
1. The customer will contact the merchant to express his interest in the WBTC.
2. The merchant will contact the custodian once more to order the minting of WBTC.
3. Once the custodian receives an equivalent in Bitcoin from the retailer, the WBTC will be sent to his Ethereum wallet address. The merchant may be required to go through their KYC and AML procedures during this operation.
4. Finally, users and merchants can trade BTC and WBTC on exchanges such as Binance, Uniswap, and Kyber.
A token may also be unwrapped or redeemed, as previously stated. To unwrap a token, the merchant must submit a burn request to the custodian, who will then release the required BTC.
Wrapped Tokens in Action
Wrapped tokens can be used in a variety of situations:
Asset Tokenization is the method of tokenizing assets in order to speed up transactions, improve transparency, increase accessibility, and increase scalability.
Stablecoins that are backed by fiat money, allowing traders to hold their money in a cryptocurrency without fear of price fluctuations.
With the wrapped system, it's easier to reflect any cryptocurrency, such as Bitcoin, on Ethereum, allowing you to take advantage of all of Ethereum's features.
Tokenization provides a way to apply policies on the blockchain. Compliance rules are more straightforward for on-chain policy because they are not enforced by a single party.
Today, the bulk of ERC20 trading in centralized exchanges is done with BTC rather than ETH, and most decentralized exchanges offer ETH/token trading pairs rather than BTC/token trading pairs. Wrapped tokens can help bridge this gap and provide the required liquidity on DEXs.
Wrapped tokens on ethereum
Wrapped tokens on Ethereum are tokens that are consistent with the ERC20 specifications but originate from other blockchains. It means that traders can use Ethereum to exchange digital assets that aren't native to the network. Wrapped Ether is a unique example of Ethereum wrapped tokens.
ERC-20 is the technological standard for issuing Ethereum tokens, and ETH tokens are used to pay for transactions on the Ethereum network. Since ETH was produced before the ERC-20 standard was established, it is not compatible with the ERC-20 standards. As a result, many dApps would require their traders to convert between ether and ERC-20 tokens, posing a problem. The ERC-20 standard is compatible with a wrapped version of the Ether. On Ethereum, it may be a tokenized version of ether.
Wrapped tokens on binance smart chain
It's possible to wrap Bitcoin and other cryptocurrencies for use on Binance Smart Chain, just like the previous one (BSC). There is a Binance bridge in BSC that enables crypto assets such as BTC, ETH, XRP, USDT, BCH, DOT, and others to be wrapped in BEP-20 tokens for use on the Binance Smart Chain.
Traders can exchange digital assets on various yield farming applications after taking them to the BSC platform. The Binance Smart Chain charges a gas fee for wrapping and unwrapping tokens, but it is substantially less than other blockchains.
Types of wrapped tokens
Centralized
You must deposit your BTC or other assets in a centralized third-party trading network to fall into this category. This exchange will serve as an intermediary, locking your assets in smart contracts before minting and sending you a new ERC20 token. BitGo is one of the best examples of a company that provides this type of service. One disadvantage of this platform is that you must fully depend on this intermediary to fulfill its obligations.
Trustless
You can wrap your bitcoins using the decentralized process. Smart contracts manage the custodial duties. Since the tokens are locked in smart contracts that cannot be modified without the user's permission, they are absolutely safe.
Synthetic assets
You must lock your tokens into smart contracts in this group, and in exchange, you will obtain a synthetic asset of the same value. The synthetic asset is backed by the platform's native tokens.
Benefits of wrapped tokens
Liquidity
Despite the fact that the Ethereum ecosystem is very large, there is a risk that numerous DEXs and other platforms will be unable to sustain their operations due to a lack of liquidity. Low liquidity is bad because it makes it difficult for traders to exchange their tokens at their desired rates. Wrapped tokens, on the other hand, provide the requisite liquidity to the crypto market.
Scalability
As opposed to regular tokens, wrapped tokens deliver quicker and less expensive transactions. Wrapped bitcoins are stored on the Ethereum blockchain rather than the Bitcoin network directly. When compared to BTC transactions, WBTC transactions are quicker and less expensive.
Enhanced functionality
Wrapped tokens have more features than regular tokens. WBTC, for example, may make use of smart contracts on the Ethereum blockchain. After Ethereum, smart contracts became a reality. When the requirements are met, smart contracts will self-execute computer programs.
Yield farming
You will gain interest on cryptocurrencies you lend out by using yield farming. By lending your crypto and gaining interest on it, WBTC helps you to engage in yield farming.
Staking
Staking is a method of earning incentives by locking the assets in smart contracts for a fixed period of time. Since native cryptocurrencies are unable to do so, you must wrap your tokens in order to reap the benefits of staking.
Limitations of wrapped tokens
Wrapped tokens would necessitate confidence in the custodian keeping the funds. Since wrapped tokens must go through a custodian, they cannot be used for cross-chain transactions. The minting process can be expensive, with high gas costs and the possibility of slippage.
The future of wrapped tokens
Wrapped tokens have a promising future because they plan to improve blockchain interoperability. Wrapped tokens have already been adopted by a number of DEXs and protocols, including Compound, Bitgo, Ren, Uniswap, Gnosis, and Kyber, and are doing well in the crypto industry.
The wrapped token idea is likely to grow in popularity over time as stock markets embrace it. It will allow corporate bonds and municipal debt to be wrapped and placed on the blockchain. As a result, a large number of investors would be attracted to the blockchain, increasing its liquidity. To become decentralized, the future revolves around the minting and redemption of wrapped tokens.
Wrapped tokens serve as a link between different blockchain networks. A wrapped token is a tokenized representation of an asset that exists on a different blockchain. Wrapped tokens promise a future in which capital is more productive and apps can easily share liquidity.
