Wrapped tokens are often also quoted in crypto articles from Intraday. Not many people know what is meant by ‘wrapped’ and the function of this token in the blockchain ecosystem.
Why ‘wrapped’?
Simply put, a wrapped token is a cryptocurrency that is bound or backed by another cryptocurrency, i.e. a token that represents the original token.
But, the connection with the word ‘wrapped’ can be imagined with: the original token ‘wrapped’ or ‘covered’ with digital wrap so that a ‘wrapped’ version can be produced on another blockchain.
All the blockchains you know starting from Bitcoin, Ethereum, Cardano, XRP Ledger, and Solana feature varying functions. For native assets in a blockchain; Bitcoin (BTC) cannot circulate in the Ethereum ecosystem and vice versa.
Thus, the existence of wrapped tokens is intended to connect the two different networks. This is where the benefit of wrapped tokens comes in because you can transfer your assets from one network to another.
Investors also do not have to worry because the way of investing these assets is the same as investing in the original tokens.
Recognize wrapped tokens
Wrapped tokens are usually the original version tokens that work in Ethereum. This means each token is wrapped according to the ERC-20 standard. The way to distinguish it from the original token is through the letter ‘W’ at each beginning of the wrapped token symbol.
For example:
WBTC (Wrapped Bitcoin)
WETH (Wrapped Ethereum)
WMATIC (Wrapped Matic)
But there are also wrapped tokens that don’t start with a ‘W’. Instead start with a symbol prefix for another network. Example:
RENZEC (renZEC)
RENDOGE (renDOGE)
RENBTC (renBTC)
The value of each wrapped token is the same as the value of the original token. Only investors need to understand, wrapped token is not the original token but is a reflection of the original token.
The wrapping process
To produce a wrapped token, what is required is the entity responsible for carrying out the wrapping process and having the original token amount equal to the wrapped token amount.
For example WBTC: the entity needs to have 1 BTC for 1 WBTC generated.
The entity can be anyone whether it is an investor, a multisig wallet, a decentralized autonomous organization (DAO), or a smart contract.
The wrapping process can be detailed through:
Investors send BTC to the entity for the production of a wrapped version.
The entity then mines WBTC in Ethereum based on the amount of BTC sent.
For unwrapped, the investor will place a WBTC burning instruction to the responsible entity before the BTC is handed over to the investor.
In conclusion…
It can be concluded that the presence of wrapped tokens helps the interoperability function in cryptocurrencies and the decentralized financial ecosystem (DeFi).
Investors can get any wrapped token on any crypto exchange platform that supports this asset.
