Do you know what a Wrapped Token is and what it is for? by Karupanocitizen
There are many mechanisms and projects developed within the blockchain environment that seeks to solve some of the limitations generated within the same environment, especially those that have to do with the scalability of the different existing blockchains.
How to manage cryptocurrencies such as Bitcoins or Ethereum, within the popular De Fi platforms, when these tokens are incompatible with the ERC-20 protocols? This is precisely the problem that generated the creation of the so-called “Wrapped Tokens”. Would you like what these tokens consist of? Why is this type of token necessary? o Which platforms use Wrapped Tokens?, Stay with me, and let's learn together about this interesting topic.
What are Wrapped Tokens and how do they work?
Wrapped Tokens are digital assets designed under the ERC-20 protocol or its equivalents (TRC-20) to represent other currencies such as BTC and ETH, in this way they allow them to be traded with them in environments where under normal conditions it would be impossible to do so.
To issue Wrapped Tokens, two mechanisms are used, one in which a company is used, such as BitGo for example, which is responsible for the custody of Bitcoins (BTC) and the issuance, through a smart contract, of Wrapped Bitcoins (WBTC) in a 1: 1 ratio.
The other mechanism is based on the transformation of Ethereums (ETH) into Wrapped Ethereums (WETH), this is achieved directly and in a decentralized way through smart contracts of the Ethereum network, so a company that serves custodian.
When Wrapped Tokens are created by a custodian company, as in the case of WBTCs, to return them to their original form (BTC) it is necessary to "burn" the WBTCs previously created to "release" the BTC that gave them origin.
The ETH predates the creation of the ERC-20 for this reason they cannot be used in their original form in systems based on ER-20 |
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Why were the Wrapped Tokens created?
Thanks to the growth and boom of the different De Fi projects, which are mostly supported by the Ethereum network and its ERC-20 protocol, the need to be able to include the currencies of greater prestige and relevance within the blockchain: BTC and ETH, however, both cryptocurrencies are not compatible with the ERC-20 protocol so in their “natural” form they cannot be traded within the De Fi, that is why Wrapped tokens are created that allow these cryptocurrencies to be endowed with the characteristics of ERC-20-based tokens.
It should be remembered that one of the main attractions of De Fi is the use of smart contracts, which allows the creation of decentralized exchanges, the creation of investment alternatives such as yield farming, liquidity pools, or cryptocurrency staking, all this within a decentralized environment, which allows these operations to be carried out anonymously and securely.
What blockchain platforms use Wrapped Tokens?
Any De Fi platform, Decentralized Exchange (DEX) or Exchange Application (Swap), that wants to expand the catalog of tokens that can be exchanged and include the most relevant ones (BTC and ETH), needs the Wrapped Tokens to be able to offer or accept said crypto assets within its market.
This is how decentralized exchanges such as Uniswap, SushiSwap, PancakeSwap, networks such as Avalance or Polygon, and even DEX such as Coinbase, Binance, Bittrex, Poloniex, or Kraken operate with Wtokens, this due to the problems of incompatibility of tokens that this type of mechanism solves.
Now I would like to know your opinion regarding the Wrapped Tokens, did you already know them ?, Were you familiar with the ER-20 protocol ?, Have you traded with this type of tokens ?, I hope to read your opinion in the comment box.
We keep reading!
hello @karupanocitizen,
is an interesting name of these tokens, the truth was not aware of their existence or at least how they work, I will investigate a little more on the subject to see what are the tokens involved, thanks for the information and also for bringing to the community this topic.
Greetings @trabajosdelsiglo, a pleasure to be able to bring interesting topics to the community, I think that the more we know about the cryptographic environment, the more opportunities we have to develop in it, thank you for commenting
Hi @karupanocitizen
What you just explained in this post is very important, because it is key to understand these concepts in order to get more benefits in some projects, I think it is very important. Thanks for the simple explanation.
Thanks to you friend @josevas217 for taking the time to read my publication and express your opinion about it, indeed this type of solutions allows us to be able to negotiate, within De Fi environments, with the currently existing cryptocurrency with the highest value, which represents a great advantage for all
Have a happy day
Hello friend, excellent information, the truth is that it is important to know many more, it is a very wide world hehehe and sometimes complicated. Greetings.
Thank you very much friend @franyeligonzalez for letting me know your opinion, some topics are somewhat confusing to understand and much more difficult to explain, but the important thing is to keep learning more and more.
Greetings!
Greetings my friend. This solution of wrapped tokens is really very useful for BTC holders to access the services of DeFi platforms without having to sell their coins to participate, this way they still have possession of their BTC.
Right friend @emiliomoron, it is a way to diversify the use of BTC and accommodate it in environments where, by their nature, it would not have been possible to use them. Thanks for letting me know your opinion, greetings.
Hello @karupanocitizen very interesting your explanation you clarified some doubts about the implementation of this type of tokens, if I know some but had not investigated about it, thanks for educating us about it.
See you later, have a great weekend.
Thank you my dear friend @amestyj, for taking the time to read my post, a pleasure to be able to prepare useful content for everyone
ETH can be used directly on Ethereum blockchain within ERC20 smart contracts, but not on other blockchains (for example TRC20 token contracts can't handle ETH, BNB or receive TRX directly)... Used tokens don't need to be burned, they can be returned to "owner" address when unwrapping.
Thanks for the comments @mtl1979
With regard to ETH, as you mentioned well within its own network it can be used through the ERC-20, not so in other platforms, I think I did not know how to explain it well.
Now, according to what I understand, to create WBTC you must necessarily go through BitGo who issue WBTC with a 1: 1 ratio depending on the BTC received, when wanting to receive the BTC back, it is necessary to "burn" the previously issued WBTC, which is what I understand is known as "unwrap".
Greetings, have a happy day
Unwrapping doesn't by definition imply burning, or wrapping imply by definition minting... Some wrapped tokens do it, but not all... Some wrapped tokens are preminted and limited to maximum supply of the coin that it represents... If someone tries to wrap or unwrap more than circulating supply, it will fail (and revert).
Hi @karupanocitizen, first of all thanks for sharing with all users this information, which is important in the world of cryptocurrencies, as I am still inspecting this field and there is a lot of information to be processed in this field and more when it comes to establishing bridges between one digital currency and another. Greetings
Greetings @ sidalim88, we are all in this learning process, the important thing is to continue acquiring more and more knowledge to get the most out of this environment. Greetings