Concept of Wrapped tokens - How Cryptocurrencies Are Being Used On Other Blockchains
Cryptocurrencies are exclusive to the blockchains they are created on. You cannot trade Ethereum on another decentralized application or blockchain like hive and you cannot trade hive on a decentralized application like Ethereum.
The main aim of cryptocurrencies is to make it accessible to everyone and to make it decentralized. Meaning to allow people have access to their assets when they want it.
Therefore, the fact that cryptocurrencies are largely restricted to the blockchains they’re created on defeats this purpose.
Due to this, a method was introduced which allows for other blockchains to be able to have access and fully use such cryptocurrencies. No, don’t get carried away quiet yet🙂, you still cannot just up and send Ethereum or bitcoin to the tron blockchain but a system has been made for that.
This leads us to wrapped tokens. In English, wrap means to take an object and put something like a paper or wrappers around it. To give the object some kind of mystery.
Wrapped tokens work in a similar way. The cryptocurrency is taken and wrapped so that it can be used by other blockchains. Let’s go back to the tron and btc example.
I stil cannot send trx to btc blockchain because that would just result in a loss of funds. But with wrapped tokens, I can send wrapped trx to the bitcoin blockchain and be able to use it as if it was on its own blockchain.
But how is this done? The wrapped trx that will be sent to the bitcoin blockchain will be pegged at the same value of the trons in the trons blockchain. So if trx on the tron blockchain is $0.05, it will be $0.05 on the bitcoin blockchain. If bitcoin is $27000 on its network, it will be the same on the tron blockchain.
Wrapped tokens are not just lying around like other cryptocurrencies but instead they go through a minting processed.
The user sends a request to the custodian or customer service that deals with wrapped tokens. Let’s use Ethereum as an example.
So if I am the one sending Ethereum from Ethereum blockchain to the bitcoin blockchain, I will transfer an amount of ETH to the custodian of the Ethereum blockchain. This Ethereum is then blocked by the custodian so that I cannot spend it.
The custodian then mints the equivalent of the Ethereum I sent into wrapped bitcoin. That wrapped token which is now wrapped bitcoin is sent to me and I can use it as if it were btc on bitcoin blockchain.
Whatever I do to it be it use it to make profit or lose money affects it like it was bitcoin and at the end of the day, when I mint it back for my original Ethereum, there’s a reflection of the activities I carried out with it.
Wrapped tokens are generally denoted by a small r at their beginnings. A wrapped btc is wBTC, a wrapped Ethereum is wETH, wrapped trx is wtrx, among others.
Wrapped tokens increase accessibility like I’ve said. But what does it mean? It means that it opens more opportunity for the crypto and its users. It allows for the use cases of these cryptocurrencies to materialize.
Wrapped tokens are safe to use. They’re pegged at the same value as the original crypto and so one shouldn’t worry about anything. A 0.1% increase or decrease in the coin affects it’s wrapped token and that reflects as well.
Once there’s more market for the crypto to be traded, there’s an increased liquidity. Hence, wrapped tokens help create and increase liquidity.
Generally, wrapped tokens allow for more usability of traditional cryptocurrencies of the blockchains. Bitcoin was the first to have it wrapped followed by Ethereum. We now have wrapped TRX, wrapped XRP, among others. There’s no doubt a lot of crypto projects will hop on the wrapped tokens trains as it gains more acceptance and popularity.
Thank you.
Posted Using LeoFinance Beta
