One of the biggest challenges with cryptocurrency is the fact that blockchains lack interoperability. Cryptocurrencies exist on certain blockchain technology and as such, you cannot transfer them to another network.
This is the primary reason why you cannot operate Ethereum on the Bitcoin blockchain. However, there is a solution to circumnavigate this challenge and this is through wrapped tokens. This is a type of token, whose value is attached to another type of crypto. In simpler terms, it is an original token that has been wrapped.
The main advantage of wrapped tokens is the fact that they can be created on a different blockchain network. This is very important as it tends to resolve the interoperability challenge on blockchains. With wrapped tokens, there is some form of bridge created to make it easier for cryptocurrencies to relate. Wrapped tokens are versions created on a blockchain that they were not issued on. These are versions of other cryptocurrencies which are tokenized.
Wrapped tokens are the same as stablecoin in that their value is attached to the value of another cryptocurrency. The hurdle of lack of interoperability across chains is addressed by wrapped tokens. As such, it is easier for users to be able to move and transfer information between blockchains. You can trade wrapped tokens in the same way as other crypto assets.
How Wrapped Tokens Work
Wrapped tokens have so much to offer as they are aimed at making the cryptocurrency markets more efficient. When a wrapped token is created, it will need to have a base that will serve as the custodian. This will have a value that is equal to the amount of the tokens wrapped.
There are different types of custodians that can be used for wrapped tokens including the Decentralized Autonomous Organization, merchant, a smart contract, or a multisig wallet. A good example of a wrapped token is a WBTC, which means that the custodian will have 1 Bitcoin for every single WBTC. This is what serves as proof of the existence of the token on the chain.
Why are Wrapped Tokens Important?
If you are a trader and have been Bitcoin Circuit, you are aware that each of the coins has a native blockchain, with its own standards or rules. This is one of the main reasons why you cannot have your coins trading across different chains, which can be limiting. One of the benefits of wrapped tokens is the fact that they allow tokens to be used on different chains. For instance, a merchant may send BTC for a custodian to mint. However, the custodian will mint WBTC on the Ethereum chain. The value of the WBTC will be equivalent to the BTC that was sent.
There are some traders who may confuse Tether or USDT for a wrapped token. It is true that the Tether trades 1-for-1 with US dollars. However, the value of the Tether is not equivalent to a physical USD. There are other factors that influence this value, but generally this is the concept of wrapped tokens. The other benefit of wrapped tokens is the fact that they tend to increase capital efficiency and liquidity on CEX and DEX. This is made possible by the fact the coins are wrapped and can be traded on other chains.
Wrapped tokens will provide access to an asset to live on other blockchains besides their native chains. This is a concept that has truly opened up the cryptocurrency and there is so much activity going on. There is the advantage of reduced costs and fees when trading with wrapped coins. Transactions also seem to be executed faster and in a seamless manner. Wrapped tokens are very useful and will aid crypto trading in a significant manner.
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