Hi Publish0x community! Welcome back in this new article of my “Easy & Short Cryptocurrencies Made Accessible” area.
In this article we talk about more features of Wrapped Ethereum!
In the last E&S article I introduced you Wrapped Ethereum (WETH) and I said that WETH is the Wrapped Ethereum version. Wrapped tokens, such as WETH or Wrapped Bitcoin, are tokenized versions of cryptocurrencies that are pegged to the value of the original coin. Almost every major blockchain has a wrapped version of its native cryptocurrency such as Wrapped BNB , Wrapped AVAX or Wrapped Fantom .
What makes Wrapped Ethereum unique?
Wrapped tokens, such as WETH, WBTC, and others, allow tokens to live on multiple chains. For example, if an investor wants to hold Ether but use it on the Avalanche blockchain, he will need Wrapped Ethereum to have price exposure to ETH while not using the Ethereum blockchain. This increases the liquidity and capital efficiency of blockchains because it allows investors to wrap resources and distribute them on other chains.
Bitcoin is particularly popular in this regard because it is seen as a "digital gold" asset in the cryptocurrency space. Investors can store their Bitcoin but use it for farming or other DeFi assets by wrapping it. Coin wrapping can also reduce transaction time and fees. Ethereum suffers from high gas fees, so wrapping it on another blockchain allows investors to trade Ether at a much lower cost.
On the other hand, wrapping the coins means investors have to go through a custodian and take on additional risk that way. Decentralized exchanges can have smart contract risks, while custodians like Thorchain can be hacked. So far, there is no fully decentralized solution to wrap coins universally. Also, not every chain can wrap every token. Although versions of WETH exist on most major blockchains, the reverse is not always true.
Image source: https://www.coinmama.com/blog/defi-explained/
What are the advantages for Blockchains in creating wrapped tokens?
Creating a wrapped token has many more advantages for the target platform than the source platform, because a wrapped token steals liquidity from the other Blockchain. If we always take the case of BTC buying 1 Bitcoin the liquidity ends up in this same platform, buying instead 1 WBTC the liquidity spent goes to Ethereum and not to Bitcoins. In this way, people who want to invest in Bitcoin, that is, in a currency that follows that price trend, do so by buying, however, a cryptocurrency that works on the Ethereum platform and that increases to the detriment of BTC its liquidity volume.
Have you already used wETH into DeFi?
Next Sunday I’ll introduce to you a new cryptocurrency.
Be sure to follow my profile for receive the notification of my next articles on Publish0x