Wrapped tokens

You've probably heard the concept of a Wrapped token or seen the token symbols WETH instead of ETH, WBTC instead of BTC. And if when you hear the term “wrapped” you imagine a token in a gift wrap, then this article is for you. If you know what it is, then it won’t be superfluous to consolidate your knowledge.

→ Introduction
→ Benefits of Wrapped Tokens
→ Examples of wrapped tokens

Introduction

A Wrapped Token is a cryptocurrency token that is created by transferring (wrapping) the original token onto another blockchain or protocol, making it available and usable in other ecosystems. This allows users to mix between different blockchains using the same tokens and expands liquidity options.

A wrapped token is used primarily for the convenience of transferring assets to other networks, and also, token wrapping increases the availability of assets for trading on various exchanges and decentralized financial platforms, increasing market liquidity and facilitating the exchange process between different tokens.

In general, any token can be wrapped, but currently only the most popular tokens are wrapped, for example, BTC (Bitcoin) or ETH (Ethereum).

The wrapped token is the same asset that is frozen on the original network and minted in the same equivalent with the Wrapped prefix. In simple words: if you own 1 ETH right now, you can wrap 1 ETH and receive 1 WETH to your address.

1 WETH and 1 ETH are completely equivalent assets.

Wrapped assets do not increase the issuance of the token, which means that:

when exchanging ETH for WETH, ETH will be frozen and WETH will be released.
when exchanging WETH for ETH, this means that WETH will be burned and ETH will be unfrozen

But for you, as users, this does not matter much. The main thing to understand is that any wrapped token is equivalent to the same unwrapped token.

Benefits of Wrapped Tokens

The benefits of wrapped tokens are significant. Basically, as we said, they give digital asset owners the freedom to explore other blockchains.

Most of the DeFi and DApps ecosystem is based on the Ethereum network. This can be quite inconvenient for BTC holders as they are effectively limited in the use of their assets until they can be exchanged for compatible tokens or sold.

Example: token wrapping

Example 1:

Imagine that you have an Ethereum address where you store ETH tokens. You use these tokens solely as a long-term investment and do not intend to exchange them for anything.

At the same time, you are actively using your other address - for example, on the Binance Smart Chain network. In order not to forget that you even have funds in the Ethereum network - you can wrap your ETH tokens and receive WETH. WETH is a wrapped ETH token that can be transferred to the Binance Smart Chain since there is no ETH token on the BSC network.

Through the bridge, you transfer WETH tokens to your address on the BSC network and now you store all your tokens in one address. Because WETH token is completely equivalent to ETH, you can exchange it for the same equivalent at any time.

Example 2:

Imagine that you are using the Ethereum network. Suddenly, the value of Bitcoin begins to skyrocket. You are interested in increasing your assets.

In order to buy Bitcoin as quickly as possible and without drawdown in the token rate through centralized services, all the user needs to do is exchange current tokens through DEX for WBTC. This way, you can store the wrapped Bitcoin in your address without even changing the address or network.

Examples of wrapped tokens

WBTC (Wrapped Bitcoin):

Underlying asset: Bitcoin (BTC).

Blockchain: Ethereum.

Goal: Provide the ability to use BTC in the Ethereum ecosystem and decentralized financial applications (DeFi).

Wrapping Process: Users send their BTC to a multisig (a special type of cryptocurrency wallet that requires the signature of multiple users to complete a transaction) wallet, and after verification they receive the corresponding amount of WBTC on the Ethereum blockchain.

WETH (Wrapped Ether):

Underlying asset: Ethereum (ETH).

Blockchain: Ethereum.

Goal: Ensure ETH is compatible with other platforms and decentralized applications that use the ERC-20 standard.

Wrapping Process: Users send their ETH to a smart contract, which creates an equivalent amount of WETH on the Ethereum blockchain.

renBTC:

Underlying asset: Bitcoin (BTC).

Blockchain: Ethereum.

Goal: To provide an opportunity for BTC holders to use their assets in the Ethereum ecosystem without having to sell BTC.

Wrapping Process: Users lock their BTC on the RenVM platform, and upon confirmation, they receive a corresponding amount of renBTC on the Ethereum blockchain.

Please note that stablecoins although they are not considered wrapped tokens, they fit almost all the characteristics of the concept of a wrapped token. Eg:

sUSD (Synthetix USD):

Underlying asset: US dollar (USD).
Blockchain: Ethereum.
Goal: To provide a stable digital currency pegged to the US dollar in the Ethereum ecosystem.
Wrapping Process: Users lock their digital assets on the Synthetix platform to create sUSD according to the current exchange rate.

Conclusion

Thus, we see wrapped tokens such as WBTC and WETH playing an important role in empowering cryptocurrency assets and decentralized financial services. They provide connectivity between different blockchains, allowing users to easily move and use their assets across different ecosystems.

Ultimately, wrapped tokens are not only an innovative technology, but also a tool that makes cryptocurrencies more flexible and functional for users around the world.

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