Introduction
Cryptocurrencies are the primary by-product of a blockchain network. Cryptocurrencies can exist outside of their native blockchain issuers in the form of wrapped tokens. This article is all about the wrapped form of ETH and how it works.
What is a Wrapped Token?
A wrapped token is a type of cryptocurrency that represents the precise value of a given token on another blockchain. A wrapped token may follow a varied variety of token standardization protocol. Wrapped cryptocurrencies exist on a different blockchain environment such that they allow minting new tokens that are complaint with the new ecosystem.
At the same time, they are transferred from one blockchain to another. Wrapped Bitcoin or WBTC and wrapped Eth or WETC are good examples of wrapped tokens. Wrapping term is used to describe minting and creation of new tokens based on the existing digital assets.
How Do Wrapped Tokens Work?
Wrapped token stands for a different crypto value present on a different blockchain network or have a unique token standard.
When the blockchain is present within a new ecosystem outside of its native network, it is in wrapped form. Here are three main sources that have the ability to create wrapped tokens:
Merchants
Merchants are the entities who lock the native token to create or mint new crypto coins on a different network such as enclosing ETH to mint WETC on the Bitcoin blockchain. In order to unlock the committed ETH, WETC is burned.
Custodians
Custodians are firms that ensure securing Bitcoin reserves on Bitcoin native blockchain and they utilize the minting process to complete the process.
Wrapped Token DAOs
Decentralized Autonomous Organizations or DAOs add or remove merchants and/or custodians to create or burn wrapped tokens. DAOs use multi-sig wallets for this process.
How to Wrap Tokens?
Here are some simple and easy steps to wrap a given cryptocurrency:
- Merchant sends required amount of tokens such as ETH to custodian.
- Custodians receive the tokens from merchants and store them in a crypto wallet with proof of publication on-chain.
- A reciprocal and equal amount of Wrapped ETH tokens are minted on the foreign blockchain such as Bitcoin.
In order to redeem the given cryptocurrencies, merchants follow the same process in reverse order with the difference of sending Wrapped tokens to burn addresses. DAOs enable issuance of decentralized and secure wrapped tokens.
However, wrapped tokens are also issued on centralized protocols and smart contracts. There are various types of wrapped cryptocurrencies such as Wrapped ETH and Wrapped MATIC, and renBTC etc.
Advantages of Wrapped Cryptocurrencies
There are many issues related to the banking network on account of thousands of exchange platforms with hundreds of fiat currencies listed on them. Cryptocurrencies remove the complications from this complex network with ease of money transfer from one point to another.
People can face trouble with forex when they are visiting a new country because they may not be able to find the right exchange suited for their requirements.
Cryptocurrency users can face the same issue when they are transferring one token to various blockchains. Wrapped ETH solves this issue and eases the obstacles that the investors are facing to send one crypto coin from one blockchain to another. Wrapped tokens allow direct transfer from network to network on centralized exchanges.
What is Wrapped Ethereum?
Ethereum accounts for 20% of the total crypto market capitalization. It hosts various decentralized applications such as layer-2 solutions, lending platforms, para-chain projects, DEXs, etc.
The total value locked (TVL) is the measure of locked or staked cryptocurrencies. TVL for DeFi is $42 billion whereas Ethereum blockchain accounts for $25 billion of the DeFi TVL.
Wrapped tokens on Ethereum blockchain follow the ERC-20 token which is a native token standardization on this platform. Wrapped tokens increase scalability and transaction efficiency.
At the same time, considering the token hosting size and massive liquidity on Ethereum increases the practicality of token wrapping for ERC-20 compliance. ERC-20 token was created after creation of ETH token therefore wrapped version of ETH is used on all DeFi protocols.
Conclusion
Wrapped tokens are encapsulated form of regular cryptocurrencies that represent their inherent value. They carry many benefits and enable better scalability and utility for tokens across multitude of blockchain ecosystems.
