Wrapped Token

A wrapped token is created to represent any token to be used on chains other than its native blockchain, and whose price is pegged to the price of the token it represents. Whether a token is wrapped or not can be easily identified by the letter “w” prefixed to the token icon. 

The difference between the original token and the wrapped token is that the original one can only be used on its network, while the wrapped token is available for other networks. Blockchain technology does not allow tokens minted on one blockchain to be traded on another blockchain in their original form. Wrapped token overcomes this limitation and enables cross-transactions between networks.

How Does Wrapped Token Work?

Wrapped tokens have required a type of asset called a depository, which is responsible for holding an amount of the original asset equal to the wrapped amount. The depository is usually a multi-signature wallet, a DAO, or a smart contract. 

In the case of wETH, the depository is required to hold 1 ETH for each 1 wETH minted. The confirmation can be done easily as the transactions are executed on the blockchain. The seller sends ETH to the depository to mint the same amount of wETH. When wETH needs to be converted back to ETH, the seller sends a burning request to the depository. Thus, the wrapped version is destroyed and ETH is released.

What They Are Used For?

What They Are Used For?

Wrapped tokens are traded on non-native blockchains. They enable trading, borrowing, or lending of unsupported assets, especially as DeFi platforms where funds need to move efficiently, smoothly, and fast and ETH. Wrapped protocols create greater interoperability between blockchains for more crypto utilization. 

Wrapping a token increases interoperability (the ability to work with other programs) between different blockchains and various DeFi platforms. Thus, a token can easily be transferred and used on a non-native platform. For instance, wBTC can be wrapped to generate passive income from DeFi lending, borrowing, and liquidity mining protocols built on Ethereum.

Wrapped Token Examples

Though wBTC and wETH are the most famous wrapped tokens, stable tokens are accepted as the first of their kind. For example, a stablecoin like USDT (Tether) is equal to 1 dollar. However, Tether does not hold the exact amount of physical USD for each USDT held. Their reverse includes different types of assets such as cash, cash equivalents, investments, and receivable loans.

Wrapped Tokens on the Ethereum (ERC 20) Network

The ERC-20 network is the most dominant network with the highest transaction volume among blockchains. This is why tokens created on other blockchains such as BSC, Solana, Avax, Cosmos, and Polkadot have wrapped versions on the ERC-20 network. Technically, wrapped versions of all tokens can be minted, no matter which network they were created on. 

Some of the most popular wrapped tokens on the ERC-20 network in terms of both trading volume and number of holders are wBTC, wETH, wBNB, wAVAX, wSOL, and wTRON. Wrapping tokens on different networks enables the use of financial services on DeFi platforms such as trading, staking, and farming. 

The most-traded wrapped token is WETH. Ethereum does not support the ERC-20 standard as it is developed before. Thus, WETH is developed to execute Ethereum transactions on the ERC-20 network. 

What is Wrapped Bitcoin (wBTC)?

What is Wrapped Bitcoin (wBTC)?

wBTC is the wrapped version of BTC created to perform on the ERC-20 network. wBTC helps provide a wider range of financial services to BTC holders by increasing the functionality and usability of Bitcoin. 

Blockchains and native cryptocurrencies are unique. Therefore, Bitcoin cannot be directly traded on the Ethereum blockchain. In other words, Bitcoin cannot be used on the Ethereum blockchain unless wrapped. Developed to overcome this restriction, wBTC provides sellers, institutions, and Dapps with a bridge to the Ethereum network while remaining in Bitcoin. 

You can convert any Bitcoin to wBTC and wBTC to BTC using various networks. This flexibility allows you to effortlessly switch between wBTC and BTC to suit your trading strategies.

Differences between BTC and wBTC

Since a wrapped coin is a tokenized version of the original cryptocurrency on another network, it uses the algorithm or standard of the network on which it was issued. Since a wrapped token usually derives its value from a different asset on the blockchain, wBTC is pegged to 1:1 to BTC and is transacted as an ERC-20 token. Thus, the value of bitcoin can be used with the programmability of Ethereum.

Wrapped Tokens on the Binance Smart Chain (BSC) Network

Just as BTC is wrapped to be traded on the Ethereum network, any token can be wrapped on the BSC network, which brings the possibility of performing at high speed and a low gas fee as BEP-20 tokens. With the Binance Bridge project, you can use wrapped versions of BTC, ETH, ATOM, LINK, XTZ, DOT, and many other tokens with BSC dApps.

How to Get a Wrapped Token?

Any token can be wrapped through various platforms. However, wrapping is not always necessary. You can find pre-minted and ready-to-use wrapped coin alternatives. You can buy these tokens on cryptocurrency platforms.

Advantages of Wrapped Tokens

Advantages of Wrapped Tokens

There are many reasons why investors want to wrap their BTC. First of all, wrap enables integration into the Ethereum ecosystem with its vast network, private wallets, dApps, DEXs, games and smart contracts. Wrapped Bitcoin users can even access DeFi lending, and borrowing networks without directly giving up or trading their Bitcoins directly. Many benefits of wrapped tokens on the blockchain are available. 

Some of the main benefits for all parties in the ecosystem are:

  • Scalability is one of the key advantages of token wrapping. Transactions with a wrapped token are faster and fee friendly.
  • The wrapped token provides users with more functionality compared to the original token. 
  • The most important feature of the Ethereum chain is the smart contracts provided to users. 
  • A wrapped token can benefit from the protocols offered by the Ethereum network.
  • One of the most important financial tools of DeFi platforms to users is staking. Converting BTC to wBTC allows you to benefit from staking options providing you to earn rewards by locking tokens for a certain period.
  • Yield Farming is another DeFi protocol continuing to gain momentum in the industry. Farming is different from staking in several ways. Specifically, farm protocols have shorter lock times. Many farming systems allow network users to lend their crypto with interest.

Disadvantages of Wrapped Tokens

Wrapping a token regardless of its name such as BTC, ETH or any other provides users with versatility on the blockchain. The concept of wBTC or wETH is very secure in the sense that the technology is robust. However, you should be aware of the risks before wrapping your tokens. 

One of the main concerns arises from the trust-based models of early-stage wBTC platforms. The security of the tokens is still a problem as the system works through a depository. The wrapping process cannot be automated by a smart contract on the Ethereum blockchain, instead, and is usually done in a centralized program, which can open the cause to manipulation. In this scenario, the risk of the platform unlocking BTC and releasing fake wBTC to the token holder is always a risk. 

Centralization is also an issue when it comes to wrapped tokens. As Ethereum creator Vitalik Buterin has expressed concern, tokens held in exchange make the system susceptible to centralization by alienating the decentralization underlying blockchain technology. For example, third-party depositories storing large amounts of BTC, minting new tokens, and monitoring the market cap of Bitcoin collateral can, over time, become elements of centralized power.

You can download Felixo Exchange to take advantage of wrapped tokens for financial transactions between different networks. 

Felixo Register
Written by Bircan Akalın
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I graduated from Istanbul Bilgi University, Department of Business Administration in 2019. I continue my career as a Marketing Specialist in 2020, and now I work as a Marketing Communications Specialist. I also write articles on cryptocurrencies and blockchain on the Felixo Blog.