What Are Wrapped Tokens?
Wrapped tokens have opened new opportunities for crypto investors by allowing them to deploy assets from one chain to another in tokenized form.
Read on to learn about wrapped tokens, how they work, and which wrapped coins are the most popular.
Wrapped tokens explained
A wrapped token, also referred to as a wrapped coin, is a tokenized version of another cryptoasset. It is referred to as a wrapped token because the original digital asset is put in a “wrapper,” essentially a digital vault, that allows the wrapped version of the crypto to be created on another blockchain network.
Unlike the original asset, wrapped tokens can be used on non-native blockchain networks and ultimately redeemed for the original crypto.
You can think of a wrapped token being similar to a stablecoin in that it derives its value from another asset, which in this case is fiat currency. In the case of wrapped tokens, however, the value is derived from a cryptoasset.
Wrapped tokens improve interoperability between different blockchains with the underlying tokens operating cross-chain. For instance, the Bitcoin (BTC) network is completely unaware of what is happening with the Ethereum (ETH) network. However, if you hold wrapped tokens, you can create connections between different blockchains and benefit from their functions.
Because wrapped tokens are pegged to another asset, they are usually managed by a custodian that wraps and unwraps the asset. The first crypto asset to be wrapped was bitcoin to form wrapped bitcoin (WBTC), which is used in the Ethereum network to enable bitcoin holders to deploy BTC in the Ethereum decentralized finance (DeFi) ecosystem.
How do wrapped coins work?
Wrapped coins usually require a custodian to mint tokens. The wrapping process is initiated by merchants like CoinList, Airswap, and AAVE, who send a request to the custodian to mint the wrapped version of the original token on a different blockchain.
Using the example of wrapped bitcoin (WBTC), the custodian needs to hold BTC 1 for each WBTC 1 that is minted. Proof of this reserve is recorded on-chain.
The wrapped tokens are converted back into the original asset when the merchant puts in a request to the custodian to “burn” (destroy) the wrapped tokens and release the original asset from the reserves. In essence, the custodian acts as the wrapper of the asset.
Again, using the example of wrapped bitcoin, for every WBTC token that exists, there is the equivalent value of BTC being held by the custodian.
Top wrapped coins
Here is a list of the top wrapped tokens ranked according to market capitalization.
Wrapped bitcoin is beneficial to users as they can use it to plug into DeFi protocols on Ethereum. This means WBTC, a synthetic asset offering the same exposure to bitcoin’s price, unlocks the potential to transform bitcoin into a yield-bearing asset. You can even use WBTC to earn returns from liquidity pools on Uniswap or Yearn Finance.
To get hold of wrapped bitcoin, you can use merchants such as CoinList to wrap your BTC. The merchant will send your BTC to a custodian who mints WBTC equivalent to the bitcoin you sent and keeps the original asset locked away.
If you decide to redeem your WBTC for bitcoin, the merchant will send a burn request to the custodian, who will, in turn, destroy the wrapped bitcoin and release your original bitcoin to you.
This system of minting and burning ensures that bitcoin and WBTC are pegged in the ratio of 1:1. You can also purchase wrapped bitcoin at crypto exchanges. As of April 1, 2022, the total market capitalization of WBTC is over USD 12 billion.
WBNB can be traded directly with alt tokens on the Binance Smart Chain. Wrapped BNB also extended to ERC-20 to facilitate cross-chain transfers.
As of April 1, 2022, the total market capitalization of Wrapped BNB is over USD 2.3 billion.
renBTC (RENBTC) is the second most popular wrapped version of bitcoin. renBTC tokens are ERC-20 compatible and pegged to the value of bitcoin.
RENBTC was introduced into the market in 2021 and is minted on the RenVM. RenVM is an open protocol that gives access to cross-blockchain for decentralized applications (dapps). RenVM supports cryptoassets such as BTC, BCH, and ZEC.
Minting renBTC is a pretty simple process that involves you simply sending your bitcoin to RenVM, which secures the asset and mints an equivalent number of renBTC tokens on Ethereum.
renBTC does not rely on a burn mechanism to keep its value pegged to BTC but operates on a direct supply peg, ensuring that there is enough bitcoin in reserve to cover the circulating supply of renBTC.
To redeem renBTC all that is needed is for you to send your renBTC to RenVM, and your native bitcoin will be refunded. The RENBTC tokens will be destroyed to maintain the supply and reserves at an equilibrium.
As of April 1, 2022, the total market capitalization of RenBTC is over USD 600 million.
Wrapped tokens use cases
As many crypto networks have their token standards, such as ERC20 for Ethereum and BEP20 for BSC, these standards can’t be ported across several chains.
Wrapped tokens allow the use of non-native tokens on a given blockchain.
Wrapped tokens can also be used to increase liquidity and capital efficiency for crypto exchanges and decentralized trading venues. The ability to wrap idle digital assets and deploy them cross-chain leads to shared liquidity between different decentralized applications.
Also, more often, wrapped tokens can be used in blockchain networks that offer lower fees and faster transaction times than the native chains.
The main raison d’être for wrapped tokens, however, is to deploy assets in the DeFi market to earn yield. That was the original idea behind wrapped BTC and remains the main driver of the wrapped token market today.
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