Wrapped Tokens: Creating Connections Across Diverse Blockchain Networks

By letssittt | Letssittt | 14 Jun 2024


Introduction

In the constantly developing field of blockchain and cryptocurrencies, the idea of having compatible blockchains has become a big trend. As for the most successful approach aimed at achieving the mentioned interoperability, one of the simplest and most effective solutions is the use of wrapped tokens. Wrapped tokens are a new concept that change the existing crypto environment by providing the possibility of the assets’ interaction with different blockchains, making them fill with liquidity, spurring further development, and creating new financial instruments. Generally, this article considers the wrapped tokens to explain the strengths, the technology that forms the base of these tokens, the current tendencies, and the perspectives for further development.

What are Wrapped Tokens?

Wrapped tokens are cryptocurrencies that essentially stand for an entirely different cryptocurrency from a different block chain. In other words, they are ERC20 tokens for Bitcoin, BCH or Litecoin on the Ethereum platform, or native tokens of Ethereum on the Binance Smart Chain. “Wrapped” means that the original asset is safely kept, but there is a token issued of the same value on another blockchain. Thus, the main practical application of wrapped tokens is to connect two different blockchains, thus increasing the compatibility and turnover of assets.

Example: WBTC is an ERC20 token, which is securitized at a 1:1 ratio with Bitcoin and utilized the Ethereum platform. It enables people with Bitcoin to interact with the Ethereum based decentralized finance applications without having to sell their bitcoins for ether.

How the whole concept of Wrapped Tokens works

The creation of wrapped tokens involves several steps and key participants:

1. Custodians: Companies, financial institutions and others that are in a position to safely store the original items. For instance, in the case of WBTC, companies such as BitGo possessing the real BTC.

2. Issuers: These are platforms or protocols, which on one end mint, that is, create the wrapped tokens, while on the other end burn, that is destroy them. Counterparts make sure that the total supply in the wrapped token relates to the amount of the original asset included in custody.

3. Smart Contracts: Specifically, the smart contracts are responsible for the creation and destruction of rings and managing the process is smooth, secure, and transparent. In case a user desires to swap his/her BTC to WBTC, the predetermined smart contract issues an equivalent amount of WBTC proportional to the BTC stored at the custodian.

Benefits of Wrapped Tokens

  • Enhanced Liquidity: They make pair tokens in one blockchain liquid in the other blockchain by wrapping them. For instance, WBTC allows Bitcoin to be utilized in DeFi applications since it establishes Bitcoin on the Ethereum blockchain.
  • Interoperability: Wrapped tokens enable the use of assets across multiple blockchains since they enhance the creation of a multi-chain ecosystem whereby various blockchains can interconnect and expand on one another.
  • DeFi Inclusion: Wrapped tokens let bitcoins and other non-Ethereum based assets to benefit from the DeFi revolution and subsequently it opens up a range of financial opportunities including lending, borrowing and yield farming.
  • Efficiency: Such trades involving the wrapped tokens have been found to be faster and cheaper as compared to the base chain. For example, transferring BTC via Ethereum may take lesser time, and is cheaper compared to using the Bitcoin network.

Case Studies

Case Study 1: WBTC or Wrapped Bitcoin

Looking at the success of wrapped tokens, the case of Wrapped Bitcoin (WBTC) will be used. Currently, WBTC is among the most widely used wrapped tokens; since January 2019, more than 200000 BTC or about $6 billion has been locked as WBTC on the Ethereum network. This success is attributed to several factors:

Integration with DeFi Protocols: WBTC can be used in most of the DeFi applications including Uniswap, Aave, and Compound to earn yield and get access to financial services while holding BTC.

Seamless Conversion: To convert BTC to WBTC or to convert WBTC back to BTC, the general flow involves merchants and custodians.

Trust and Transparency: WBTC has credible custodians and all reserves backing it undergo audibility and therefore users have trust in it.

Case Study 2: Specifically, it is about Wrapped Ether (WETH) and Ethereum DeFi Ecosystem.

Background: Ethereum is currently hailed as the most popular blockchain in the world of decentralized finance or DeFi for short with lending, borrowing and trading protocols. However, the native Ether (ETH) token was partially compatible with the ERC-20 standard upon which many DeFi applications were based.

Challenge: To facilitate the incorporation of Ether with DeFis, it was then necessary to create a wrapped Ether or WETH.

Solution: WETH was launched in Ether as the new ERC-20 token version of Ether. WETH is backed 1:1 by Ether, stored through a smart contract managed by a custodian. It made it possible to use Ether in other DeFi applications such as lending, borrowing, and trading among others without hassle of conversion.

Results:

  • Increased Liquidity: WETH greatly enhanced the usage of Ether in the Ethereum DeFi economy because it helped to increase the liquidity of Ether and make trading and lending operations more efficient.
  • Improved Interoperability: WETH played a role of a simple connector between Ether and other DeFi applications based on ERC-20 standard, thus enabling interaction between Ether and a number of other decentralized applications.
  • Expanded Use Cases: The provision of WETH enabled Ether holders to engage in more applications of DeFi like earning an interest through lending and borrowing.

Case Study 3: Currently, all assets are wrapped on the Binance Smart Chain.

Background: Thus, Binance Smart Chain (BSC) became one of the main competitors to Ethereum in terms of TPS and transaction fees. However, it became possible to note certain disadvantages of BSC when creating a decentralized ecosystem – absolute incompatibility with other popular blockchains, including Ethereum.

Challenge: As a result of integration with other blockchains a need to enhance liquid assets was created between BSC and other blockchains to facilitate the use of wrapped tokens, The use of BSC added functionality to the creation of wrapped tokens to be functional with other networks.

Solution: Binance created a complex of an application connected to the Ethereum network, which allows users to wrap their assets and use them on the Binance Smart Chain. Some of them include; Wrapped bitcoin, Wrapped ethers and other ERC-20 tokens.

Results:

  • Expanded DeFi Opportunities: Users could now put their Ethereum based assets onto BSC in the form of wrapped assets allowing them to take part in new opportunities in the DeFi space.
  • Improved Liquidity: When the wrapped tokens were brought in the BSC DeFi market, it paved way to the increased depth and moreover improved the liquidity to enable trading and lending.
  • Cross-chain Interoperability: Binance cross-chain bridge enabled the transfer of assets between Ethereum and BSC in both directions to integrate the systems.

Thus, these cases show how wrapped tokens are valuable tools for developing connections and improving the connection between different blockchains to expand the scope of DeFi.

The Current Trend and Growing Environment

Wrapped tokens are not just limited to WBTC as people ponder on the idea. Numerous other wrapped assets have emerged to address different use cases and blockchains:

  • Wrapped Ether (WETH): On Ethereum, ETH itself needed to be wrapped into WETH to abide by the standard of ERC-20, thus enabling multiple DeFi activities.
  • Wrapped Binance Coin (WBNB): In the Binance Smart Chain, BNB is self-syndicated so as to increase its liquidity and compatibility with other chains.
  • Cross-chain Bridges: Products such as the Binance Bridge and the Ren Protocol that allow for the movement of value from one chain to another underlines the current discourse of having multiple chains.

Latest Research and Innovations

The study done recently shows how wrapped tokens can be the most effective in making blockchain networks integrated. Lauded by a study conducted by Stanford University, wrapped tokens are claimed to play the role of uniting the segregated blockchains by improving liquidity and usability of a cryptoeconomy. Moreover, the new improvements of the cross-chain solutions for communication such as Polkadot, Cosmos and other are extended the possibilities of the wrapped tokens and thus initiated the path to the single world of crypto.

Future Prospects: As a result, we present a Multichain Ecosystem.

Expansion to New Blockchains

Consequently, it is quite encouraging to note that the wrapped tokens are set to grow, and expand to other new and developing blockchains. When new blockchains such as Polkadot, Solano, and Avalanche start to get more adoption, this problem of interoperability intensifies. With more new ecosystems opening the ability to bring assets from established blockchains such as Bitcoin and Ethereum into these new systems creates a way to boost the innovation and the use of decentralized applications (dApps).

Standardization and Protocol Upgrades

Two promising possibilities which are on the near-time period time horizon are the expansion of the concept of wrapped tokens, and the new versions of the protocols. Standardization of the wrapped tokens could be simplified with the aid of growing a single set of rules for this procedure that could make the work of builders and customers easier. Some improvements to the protocol boom the safety, ability, and compatibility of wrapped tokens for the future of go-chain alternate.

Wrapped Tokens and NFTs

The sphere of non-fungible tokens, additionally referred to as NFTs, is any other which could gain substantially from the usage of wrapped tokens. Here, via enveloping NFTs, the creators can allow switch on distinctive blockchains. Such pass-chain competencies should create fresh packages like the use of NFTs as a collateral to secure loans in DeFi structures or as the form of asset illustration, for you to enhance the use case for digital belongings and raise their value.

Integration with Traditional Finance

With the boom of CeFi and DeFi services, wrapped tokens would possibly emerge as the brand-new bridge between CeFi and DeFi industries. Traditional banks and economic firms integrating wrapped tokens can offer their clients with blockchain infrastructure-primarily based offerings, which might also consist of international bills, asset control, and greater importantly, fractional possession of real-international gadgets. Perhaps, this integration ought to deliver the not unusual public nearer to adopting cryptocurrencies for this reason injecting greater capital into the markets.

Challenges and Considerations

While the possibilities of wrapped tokens are interesting, positive challenges have to be addressed to make sure their large adoption and fulfillment:

  1. Security Risks: Being based totally on blockchain generation, the safety of wrapped tokens specifically relies upon at the custodians of the tokens and clever contracts. One breach in any part of this gadget is possibly to draw severe losses. To reduce these risks, it is critical to have ordinary audits and paintings at the development of more steady tactics and processes.
  2. Regulatory Uncertainty: The criminal widespread of cryptocurrencies continues to be rising and growing, and its far doubtful how wrapped tokens will be categorized via the governments of various nations. There is a first rate need to present extra clarity in regulation as to broaden a stable prison protection device for the corporations after they gave out the wrapped tokens.
  3. User Education: In this case, for wrapped tokens to go mainstream, the consumers must be aware of the advantages that go with using the tokens, and how they can be used appropriately. In this respect, many educational activities carried out by blockchain projects and the related industry can be quite valuable.

Conclusion

Wrapped tokens are one of the real breakthroughs in the sphere of blockchain technology and present a very effective way of addressing issues related to the interaction and the exchange of assets between different blockchains. Their capability to support what are, in fact, advanced cross-chain trade possibilities are significant for the development of decentralized finance, NFT, and even traditional finance. As the technology gets adopted and new cases of applications appear, wrapped tokens are expected to become the foundations of the multichain future.

Overall, it can be concluded that, due to the presented concept of wrapped tokens, it is possible to consider integration between different blockchains as a set of opportunities for creating new value propositions in the context of the development of the cryptocurrency industry. Thus, the trends identified in this paper depict that with additional research, improvements in the innovative technology aspect, and more emphasis on security and regulatory laws, wrapped tokens will predetermine further development of the blockchain industry which will expand a set of possibilities for a more interconnected and diverse digital economy. The flight of wrapped tokens has only just started, and their possibilities are enormous for changing the financial world.

 

References

  1. https://blockchain.oodles.io/blog/wrapped-tokens/
  2. https://www.coinbase.com/learn/your-crypto/what-is-wrapped-crypto#:~:text=Wrapped%20crypto%20tokens%20are%20digital%20assets%20that%20mirror,from%20one%20blockchain%20to%20be%20used%20on%20another.
  3. https://medium.com/coinmonks/rise-of-wrapped-crypto-tokens-bridging-gap-between-blockchains-da2abfa22a22
  4. https://decrypt.co/resources/what-are-wrapped-tokens
  5. https://cointelegraph.com/explained/wrapped-crypto-tokens-explained
  6. https://www.benzinga.com/insights/cryptocurrency/24/05/39095894/wrapped-bitcoins-price-increased-more-than-3-within-24-hours
  7. https://beincrypto.com/why-binance-delist-four-altcoins/

 

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