What are Wrapped Tokens? | The Gift of Blockchain
 
 
 
 
 
 

What are wrapped tokens? How wrapped tokens bring the gift of blockchain in many ways

/ 07:21 AM August 05, 2021

Read the word “wrapped token,” and ideas of gifting cryptocurrency may come to mind. Yet, these coins are beyond mere presents for friends and family. Either they help you invest in other assets or give certain cryptos more features.

We will go through the two ways to define wrapped tokens. Then, we will talk about the potential benefits and risks you get from wrapping assets and cryptos. More importantly, we will see if it’s a good idea to invest in these types of assets.

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Nowadays, we have so many cryptocurrencies that allow us to do things we couldn’t before. If we adopt them into our daily lives, there must be a way to work together. See how wrapped tokens provide a way to do this.

Why do people wrap assets into tokens?

Wrapped tokens may refer to tokenized assets. They represent non-crypto investments like stocks and real estate. However, they add qualities found in cryptocurrency.

In other words, these allow you to invest in the original asset as if it’s crypto. What good does that do? Check the following list to find out:

FEATURED STORIES

  • Buying bits of an asset – You can buy a smaller piece of an old-timey asset. Let’s take stocks, for example. If a share costs $100, you have to pay that whole amount. If it’s a wrapped token, you could purchase a tenth of that share for $10.
  • Fewer red tape – Selling real estate can be a hassle. You have to follow several procedures while spending at every step. Thanks to wrapped tokens, investing in a property is fast and easy.
  • Stablecoins – If you already invest in cryptos, you may have heard of stablecoins. These are backed by real-world assets, such as gold and fiat currency. They also work as a payment method! What’s more, they help investors buy and sell.

Why do wrapped tokens “contain” other coins?

Another way to define wrapped tokens is “cryptos within cryptos.” They are crypto assets that are made to work on other blockchains. Let’s take Wrapped Bitcoin (WBTC), for example.

Ethereum also follows the ERC-20 standard. It’s an ERC-20 token that’s pegged to an equivalent amount of bitcoin (BTC). By wrapping bitcoin, it can work on the ETH network.

Why would you do that? Bitcoin doesn’t have a few features found in Ethereum. For instance, it doesn’t run smart contracts quite as well. That changes when you wrap bitcoin.

The tokenized version gets to use smart contracts with the same quality. In turn, BTC on Ethereum’s blockchain gains more features. Here’s a simple version of how it works:

  1. A merchant submits bitcoins to a custodian. This entity could be another merchant, a multisig wallet, or a Decentralized Autonomous Organization (DAO).
  2. The custodian “mints” wrapped bitcoins on Ethereum depending on the BTC sent.
  3. Now you have wrapped bitcoins!

We used wrapped bitcoins again as an example to explain it easier. Yet, you may find other wrapped tokens on Ethereum. The Binance Smart Chain also has some!

You may also “unwrap” those coins. First, the custodian will burn the wrapped coins. Then, they will release its pegged asset. Note that wrapping and unwrapping cost gas fees.

Other wrapped tokens may work without a custodian. Instead, it’s replaced by a smart contract or virtual machine. However, they are riskier since they’re prone to errors and bugs.

The types, benefits, and risks of wrapped tokens

Are there different kinds of wrapped tokens?

As you’ve noticed, tokenized assets come in various forms. We mentioned those with and without a custodian.

Though you may divide them into two other types:

  • Cash-settled tokens – You can’t redeem these for the pegged asset. The stock tokens from Binance are a good example. However, the crypto exchange ceased support for this asset type.
  • Redeemable tokens – These are the opposite of cash-settled tokens. Also, these are the tokens we’ve been talking about earlier. You may ask a custodian to unwrap these wrapped tokens. In return, you get the asset tied to them.

The biggest draw for wrapped tokens is interoperability. We explained how it allowed bitcoins to work in the Ethereum network.

Yet, it has other benefits such as:

  • Liquidity – Wrapped tokens could improve the capital efficiency of cryptocurrencies. In other words, they could provide a coin supply for those buying and selling cryptos. What’s more, they work for both centralized and decentralized exchanges.
  • Transaction speed – They allow investors to buy and sell quickly. This is important since crypto prices move nearly every second!
  • Better security – Wrapping your coins can keep them safe. They let you gain more control of your private keys. Also, custodians prefer secure exchanges.
  • Transaction fees – Wrapped tokens could lower costs for crypto transfers.

Of course, even wrapped tokens have a bad side. Still, learning about them helps you maximize the use of these coins.

  • Custodian quality – Wrapped tokens depend on custodians. If it has some problems, so will the wrapping and unwrapping process. In turn, this could ruin its value and security. Here are some potential risks with wrapped coins:
  • Centralization – The point of using cryptocurrencies is to have a decentralized system. Having custodians in charge of wrapped tokens could mess with that goal.
  • Mint costs – Wrapping and unwrapping costs gas fees. This could cause slippage. It’s when there aren’t enough people selling an asset. In turn, buyers might not get their coins at their desired prices.

Should I invest in wrapped tokens?

Should I invest in wrapped tokens?

These cryptos can help create a better DeFi ecosystem. This feature may turn them into a good investment. If you’re planning to buy some, you might want to stick with well-known names.

We mean purchasing wrapped tokens pegged to bitcoin, ethereum, and the Binance smart Chain. These are big names in the crypto space.

Wrapped tokens from these networks are likely to have better development. This means they’re likely to have fewer risks. At the time of writing, the price of WBTC is $39,459.19.

As expected, it’s close to bitcoin’s current price at $39,420.29. If you’re planning to buy the wrapped versions, why not buy the real deals too!

It’s best to invest in winning assets! It may be a good idea to buy BTC, ETH, and BNB too. These are at the top of the cryptocurrency list.

Final Thoughts

Please invest based on your research. Learn more about cryptocurrency so you can invest wisely. Never spend money that you can’t afford to lose.

There’s another reason why you should understand cryptos. You might find hidden gems below the top 10s! Plenty of the other well-known coins started from the bottom.

For more crypto insights, read other articles from Inquirer USA. Also, explore other sources on the internet. Learning is your first investment before you enter the crypto market.

Learn more about wrapped tokens

What does wrapping crypto mean?

It means allowing it to work on another blockchain. For example, Wrapped Bitcoin works on the Ethereum network. You could wrap cryptos for other blockchains, though.

What’s the point of wrapped bitcoin?

Wrapping bitcoin gives it features from Ethereum. For example, WBTC gets to use ETH smart contracts. As a result, you get to apply bitcoin for more uses.

What is a wrapped asset?

It’s a cryptocurrency that’s tied to a conventional asset. This could be precious metals, property, and even fiat currency. Some stablecoins work like wrapped assets.

Disclaimer: This article is not the official guide to wrapped tokens but is based on the author’s research or personal experience.

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TAGS: Bitcoin, crypto, interesting topics, USFINANCE
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