WRAP: A Decentralized Bridge Between Ethereum and Tezos

By 2sats | 2sats | 9 Jan 2022

*obligatory not financial advice*

What is Wrap?

Wrap is a dApp on Tezos that allows Ethereum users to bridge their tokens to Tezos to utilize its lower fees and participate in its growing DeFi ecosystem. This makes both blockchains interoperable and brings liquidity to Tezos. The bridge has its own governance token that rewards its holders with fees for wrapping and unwrapping Ethereum assets.

Interoperability is important to scale and improve the crypto world as a whole. Each blockchain can have its own features and be different but the users cannot utilize them to their fullest if they can't bring their tokens and coins from one blockchain to another. Most common solutions for this work with a centralized middle man. WBTC for example is issued by BitGo, who stores BTC in their own wallet and issues Bitcoin tokens on Ethereum. This allows the holders of BTC to take advantage of the DeFi applications on Ethereum, but they depend on BitGo and need to trust them that their WBTC really is fully backed and safe. Wrap wants to provide such a service but with decentralized custody, similar to the Ren Network.

It works fairly simple. You connect an Ethereum and a Tezos address to the dApp. Then you can deposit an ETH token into their smart contract and receive w-Tokens in your Tezos wallet. If you want your tokens back on Ethereum, you need to deposit and burn your w-Tokens on Tezos. For example, if you deposit 10 USDC from Ethereum, you will receive 10 wUSDC (minus a wrapping fee). The wrapped tokens are always fully backed by the Wrap protocol and all provided tokens are stored in secure and decentralized custody. The bridge supports various high demand crypto assets like AAVE, UNI, CRO, COMP, MATIC, CEL, LINK, MKR, FTT and many more.

There is a 0.15% fee for wrapping and unwrapping tokens. This fee is paid in the w-Token of the asset you are bridging and can be earned by holders of the WRAP governance token by staking their WRAP on the pool of a supported token. The APYs they can earn is variable and depends on how many people are bridging the asset and how much WRAP is staked. Currently, the APY varies between 1% and 12% that is because there isn't as much demand for using ETH tokens on Tezos right now because the market has been rather bearish. A few months ago there were APYs of 20-50% and they could raise again if DeFi on Tezos keeps growing and the market starts to recover.

The protocol helps to bring the much needed liquidity to Tezos which helps its ecosystem to grow and if Tezos performs well it will bring more users to Wrap. However, most Ethereum users would rather send their tokens to second layers like Polygon. The Wrap protocol will hopefully add support to other popular blockchains too.

The WRAP Token

WRAP is the governance token of the Wrap protocol. The holders can vote on possible updates or changes like the wrapping fee or which tokens should be supported. The holders can also earn fees by staking their token. The more traffic the platform has, the more they can earn. So they have a strong incentive to improve the bridge. Governance rights will also have more demand if more funds are locked in the smart contracts. The token is relatively new and unknown, that’s why even Coingecko doesn't have much data available for it.

There is a max supply of 100,000,000 tokens, but this could be changed by the governance if ever needed. The token is actually an ERC20 token on Ethereum whose entire supply has been wrapped and brought to Tezos. The token distribution will take 7 years and 50% of them will go to "Quorum members" that run a Tezos and Ethereum node to do the necessary computations, 40% will go to users and liquidity providers for trading pairs with WRAP and wTokens and 10% will go to the developers. The distribution will constantly get lower until it becomes zero after the seventh year. Most of the supply is going to users and supporters of the protocol and rewards them for their participation.

The value of the token will increase if the bridge gets more traffic because the WRAP holders will earn more fees. The protocol strongly depends on the broader Tezos ecosystem because the more applications are using it the more demand will there be to use tokens from other blockchains there. One problem of the Wrap protocol is that most people would rather use their Ethereum token on Polygon or Optimism, but if they add support to other blockchains too it could bring some serious traffic to its protocol. However, Tezos has a growing number of DeFi projects and dApps and the WRAP token could grow with them. The token could be a risky but rewarding moon-shot due to its low market cap.

The token isn't supported by any centralized exchange but Tezos DEXes like Quipuswap and PlentyDeFi have trading pairs for it. You can store it in any Tezos wallet like the Temple Wallet.