Wrapped Tokens: A Comprehensive Guide

You may have probably noticed that you cannot utilize bitcoin on Binance Smart Chain or ethereum on Binance?

Tokens that reside on one blockchain cannot be moved to a different blockchain, however, the case appears to be different for Wrapped tokens.

Firstly, a wrapped token is a cryptocurrency that has been tokenized. It’s an asset that’s housed on the Ethereum blockchain and has the same value as another primary asset, even though the primary asset isn’t on the Ethereum blockchain or any blockchain at all.

As a result, it is a method of packaging a coin so that it can be used on a blockchain other than its own without affecting its worth.

Wrapped tokens keep their original coin’s value (1 WBTC = 1 BTC). The token can indeed be unwrapped at any point to reveal its true nature.

Wrapped tokens are identical to solid coins, with the exception that solid coins are fiat currencies, but wrapped tokens are assets that live on another blockchain.

On the Ethereum blockchain, for example, Bitcoin cannot be utilized for payments. However, it can be used on the Ethereum Blockchain when transformed to wrapped Bitcoin, which is an ERC-20 token.

The same is true for Ethereum, which cannot be utilized to perform ERC-20 smart contracts until it is wrapped (WETH). As a result, these examples show how wrapped tokens to aid in the compatibility of non-Ethereum tokens with the network.

How do you generate Wrapped Tokens?

To generate a wrapped token, the user, the merchant, and the custodian are all involved in the process.

This is because a user requires the tokens, a merchant dispenses the wrapped token, and a custodian retains the underlying assets and mints the wrapped tokens. going over to Wrapped Bitcoin (WBTC) wrapped token creation process.

The customer will contact the merchant to express his desire in the WBTC

The merchant will contact the custodian once more to demand the minting of WBTC

Once the custodian receives an equal in Bitcoin from the merchant, the WBTC will be sent to his Ethereum wallet address. The merchant may be required to go via their KYC and AML procedures during this procedure.

Lastly, users and merchants can trade BTC and WBTC on exchanges such as Binance, Uniswap, and Kyber.

A token can also be unwrapped or redeemed, as previously explained. To unwrap a token, the merchant must submit a burn application to the custodian, who will then provide the necessary BTC. Wrapped tokens can be used in a variety of ways.

Asset Tokenization is the process of tokenizing assets in order to hasten operations, improve transparency, improve the utility, and promote scalability.

Stablecoins are supported by fiat money, allowing merchants to store their money in a cryptocurrency without fear of price volatility.

With the wrapped structure, it’s easy to depict any cryptocurrency, such as Bitcoin, on Ethereum, allowing you to take advantage of all of Ethereum’s features.

Tokenization provides a way to enforce policies on the blockchain. Enforcement regulations are more open with an on-chain policy because they are not enforced by a single individual.

Currently, the bulk of ERC20 trade in centralized exchanges is done with BTC rather than ETH, while most decentralized exchanges offer ETH/token trading pairings rather than BTC/token trading pairs. Wrapped tokens can assist in bridging this gap and providing the necessary liquidity on DEXs.

Knowing the different types of wrapped token

Wrapped tokens can be divided into three groups:

The first is centralized

You must deposit your BTC or other assets in a centralized third-party trading platform to fall into this category. This exchange will function as an intermediary, locking your assets in smart contracts before minting and sending you a new ERC20 token. BitGo is one of the best instances of a company that provides this type of service. One disadvantage of this platform is that you must completely rely on this middleman to fulfill its obligations.

The second is trustless

Trustless You may wrap your bitcoins using the decentralized technique. Smart contracts manage the custodial duties. Because the tokens are sealed in smart contracts that cannot be modified without the user’s permission, they are entirely safe.

The Synthetic Assets

You must lock your tokens inside smart contracts in this sector, and in exchange, you will obtain a synthetic asset with the same value. The synthetic asset is supported by the platform’s native tokens.

Wrapped tokens serve as a link between several blockchain networks. A wrapped token is a tokenized representation of an asset that exists on a different blockchain. Wrapped tokens promise a world in which capital is more productive and applications may readily share liquidity.

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