The cryptocurrency market is gaining more popularity every day, and while the popularity of Ethereum-based applications is rapidly increasing, most applications built on Ethereum are limited to working only with ETH (ETH), which is Ethereum’s native asset. On the other hand, through the “Wrapped Token” technology, tokens from other blockchain networks can be used in Ethereum-based applications. So, what exactly are these Wrapped tokens and how do they work? Let’s take a closer look.
What is a Wrapped Token?
A Wrapped token, also known as a wrapped coin, is a type of token used to store the value of the token it represents on the Ethereum network. In other words, a Wrapped token is a cryptocurrency that represents a specific asset and is found on another blockchain. For example, Wrapped Bitcoin (WBTC) is a version of Bitcoin on the Ethereum network. Each WBTC is equivalent to one BTC and carries the same value.
The purpose of Wrapped tokens is to enable Ethereum-based applications, especially decentralized finance (DeFi) projects, to use assets that are not on the Ethereum network. This allows assets outside of Ethereum to take advantage of the benefits provided by Ethereum-based applications.
How Do Wrapped Tokens Work?
Wrapped tokens are created using a special type of smart contract called “token bridges.” A token bridge transfers a token from one blockchain to another. For example, to create Wrapped Bitcoin (WBTC), a user first sends a certain amount of Bitcoin to a WBTC smart contract. The smart contract then sends back the same amount of WBTC to the user. This process allows Bitcoin to be stored in an Ethereum wallet and enables the user to use Bitcoin in Ethereum-based applications.
The value of a wrapped token is tied to the value of the original token it represents. In other words, the value of WBTC is the same as the value of Bitcoin, creating a 1:1 value relationship between the original token and the wrapped token.
Use Cases of Wrapped Tokens
The most important use case for wrapped tokens is decentralized finance (DeFi) projects. DeFi applications allow users to deposit their cryptocurrencies, lend them, and earn profits, but most DeFi applications are Ethereum-based and only accept Ether (ETH) or Ethereum-based tokens.
Wrapped tokens provide a solution for using Bitcoin or other tokens from another blockchain in Ethereum-based applications. For example, a user can deposit their Bitcoin in a DeFi application and earn interest using Wrapped Bitcoin (WBTC).
Are Wrapped Tokens Secure?
Since wrapped tokens represent a certain amount of cryptocurrency, the reliability of the institutions that create and manage these tokens is crucial. When wrapped tokens are created, specific security measures are taken to ensure that the represented cryptocurrencies are stored and managed correctly.
The security of a wrapped token lies in the verifiability of the smart contract. When a wrapped token is created, the smart contract that performs this operation is visible to everyone on the network. This allows everyone to verify the accuracy and reliability of the wrapped token.
However, not all wrapped tokens are equal, and their security depends on the organization that creates and manages the token. Therefore, it is always necessary to conduct your own research before acquiring a wrapped token.
In conclusion, wrapped tokens serve as bridges between various blockchain networks, allowing users to use different cryptocurrencies in Ethereum-based applications. This expands the usability of cryptocurrencies and creates more opportunities in areas such as DeFi.
