What Are Wrapped Tokens?

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Wrapped tokens have opened new alternatives for crypto buyers by permitting them to deploy property from one chain to a different in tokenized kind.

Read on to find out about wrapped tokens, how they work, and which wrapped cash are the most well-liked.

Wrapped tokens defined

A wrapped token, additionally known as a wrapped coin, is a tokenized model of one other cryptoasset. It is known as a wrapped token as a result of the unique digital asset is put in a “wrapper,” primarily a digital vault, that permits the wrapped model of the crypto to be created on one other blockchain community.

Unlike the unique asset, wrapped tokens can be utilized on non-native blockchain networks and in the end redeemed for the unique crypto.

You can consider a wrapped token being much like a stablecoin in that it derives its worth from one other asset, which on this case is fiat forex. In the case of wrapped tokens, nonetheless, the worth is derived from a cryptoasset.

Wrapped tokens enhance interoperability between completely different blockchains with the underlying tokens working cross-chain. For occasion, the Bitcoin (BTC) community is totally unaware of what’s occurring with the Ethereum (ETH) community. However, in the event you maintain wrapped tokens, you’ll be able to create connections between completely different blockchains and profit from their features.

Because wrapped tokens are pegged to a different asset, they’re often managed by a custodian that wraps and unwraps the asset. The first crypto asset to be wrapped was bitcoin to kind wrapped bitcoin (WBTC), which is used within the Ethereum community to allow bitcoin holders to deploy BTC within the Ethereum decentralized finance (DeFi) ecosystem.

How do wrapped cash work?

Wrapped cash often require a custodian to mint tokens. The wrapping course of is initiated by retailers like CoinList, Airswap, and AAVE, who ship a request to the custodian to mint the wrapped model of the unique token on a distinct blockchain.

Using the instance of wrapped bitcoin (WBTC), the custodian wants to carry BTC 1 for every WBTC 1 that’s minted. Proof of this reserve is recorded on-chain.

The wrapped tokens are transformed again into the unique asset when the service provider places in a request to the custodian to “burn” (destroy) the wrapped tokens and launch the unique asset from the reserves. In essence, the custodian acts because the wrapper of the asset.

Again, utilizing the instance of wrapped bitcoin, for each WBTC token that exists, there may be the equal worth of BTC being held by the custodian.

Top wrapped cash

Here is a listing of the highest wrapped tokens ranked in response to market capitalization.

Wrapped bitcoin

Wrapped bitcoin (WBTC) is the most well-liked wrapped token. The ERC-20 conversion of bitcoin was launched in 2019 by BitGo, Ren, and Kyber and represents over 75% of the marketplace for wrapped tokens.

Wrapped bitcoin is helpful to customers as they’ll use it to plug into DeFi protocols on Ethereum. This means WBTC, an artificial asset providing the identical publicity to bitcoin’s worth, unlocks the potential to rework bitcoin right into a yield-bearing asset. You may even use WBTC to earn returns from liquidity swimming pools on Uniswap or Yearn Finance.

To pay money for wrapped bitcoin, you should use retailers reminiscent of CoinList to wrap your BTC. The service provider will ship your BTC to a custodian who mints WBTC equal to the bitcoin you despatched and retains the unique asset locked away.

If you determine to redeem your WBTC for bitcoin, the service provider will ship a burn request to the custodian, who will, in flip, destroy the wrapped bitcoin and launch your authentic bitcoin to you.

This system of minting and burning ensures that bitcoin and WBTC are pegged within the ratio of 1:1. You may buy wrapped bitcoin at crypto exchanges. As of April 1, 2022, the entire market capitalization of WBTC is over USD 12 billion.

Wrapped BNB

Wrapped BNB (WBNB) is a tokenized model of BNB that conforms to the BEP20 customary. Consequently, you should use wrapped BNB on the Binance Smart Chain (BSC) and never BNB.

WBNB might be traded instantly with alt tokens on the Binance Smart Chain. Wrapped BNB additionally prolonged to ERC-20 to facilitate cross-chain transfers.

You can bridge your BNB to WBNB on Binance through the use of its cross-chain asset conversion service. Moreover, you may also deploy WBNB on a handful of different chains, reminiscent of Solana and Terra.

As of April 1, 2022, the entire market capitalization of Wrapped BNB is over USD 2.3 billion.

renBTC

renBTC (RENBTC) is the second hottest wrapped model of bitcoin. renBTC tokens are ERC-20 suitable and pegged to the worth of bitcoin.

RENBTC was launched into the market in 2021 and is minted on the RenVM. RenVM is an open protocol that provides entry to cross-blockchain for decentralized purposes (dapps). RenVM helps cryptoassets reminiscent of BTC, BCH, and ZEC.

Minting renBTC is a fairly easy course of that includes you merely sending your bitcoin to RenVM, which secures the asset and mints an equal variety of renBTC tokens on Ethereum.

renBTC doesn’t depend on a burn mechanism to maintain its worth pegged to BTC however operates on a direct provide peg, making certain that there’s sufficient bitcoin in reserve to cowl the circulating provide of renBTC.

To redeem renBTC all that’s wanted is so that you can ship your renBTC to RenVM, and your native bitcoin will likely be refunded. The RENBTC tokens will likely be destroyed to take care of the availability and reserves at an equilibrium.

As of April 1, 2022, the entire market capitalization of RenBTC is over USD 600 million.

Wrapped tokens use instances

As many crypto networks have their token requirements, reminiscent of ERC20 for Ethereum and BEP20 for BSC, these requirements can’t be ported throughout a number of chains.

Wrapped tokens enable the usage of non-native tokens on a given blockchain.

Wrapped tokens can be used to extend liquidity and capital effectivity for crypto exchanges and decentralized buying and selling venues. The skill to wrap idle digital property and deploy them cross-chain results in shared liquidity between completely different decentralized purposes.

Also, extra typically, wrapped tokens can be utilized in blockchain networks that provide decrease charges and quicker transaction instances than the native chains.

The important raison d’être for wrapped tokens, nonetheless, is to deploy property within the DeFi market to earn yield. That was the unique concept behind wrapped BTC and stays the primary driver of the wrapped token market at this time.

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Learn extra:
– WBTC: Where Bitcoin Meets DeFi
– What’s Wrapped Bitcoin and What’s So Special About It?

– DeFi Could Rely On CBDC, But More Bridges With Centralized Finance Are Needed – Expert Panel
– IMF’s DeFi Governance Recommendations Include These Two Steps

– ‘Crypto is Dead. Long stay Crypto’: Veteran DeFi Developer Andre Cronje Urges More Regulation
– Two New ERC Standards Aim to Standardize Tokenized Vaults and Add Refund Option to NFTs


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