What are Wrapped Tokens?

Introduction

Wrapped tokens are cryptocurrency tokens pegged to the value of another asset. These wrapped tokens are called this way because the original asset is put in a wrapper. A wrapper is a digital vault that allows a wrapped token version to be minted on another blockchain.

What is a wrapped token?

A wrapped token is a tokenized version of an asset, usually another cryptocurrency, but it can also be an NFT. Wrapped tokens are pegged to the value of the asset they represent and can generally be redeemed for it (unwrapped) at any point. Wrapped tokens more often than not represent an asset that doesn’t natively live on the blockchain that it’s issued on; however, with the increased popularity of fractionalized NFTs, this has begun to change as these assets are usually wrapped on the native chain. Another way you can think of a wrapped token is of it being similar to a stablecoin. Stablecoins derive their value from another asset. In the case of most stablecoins, it’s usually a fiat currency like the USD or the Euro. In the case of a wrapped token, it’s usually an asset living natively on another blockchain.

How do wrapped tokens work?

To explain how wrapped tokens work were are going to use WETH (Wrapped ETH) as an example. WETH is a tokenized version of ETH and is the most wrapped asset as it is used on both Ethereum and other blockchains. WETH Comes in many forms, from an ERC-20 token to Solana SPL and BSC BEP20 tokens. WETH is supposed to hold a one-to-one peg to the value of Ethereum, allowing users to use ETH on different blockchains.

Wrapped tokens on Ethereum

Ethereum is currently the largest smart contract platform, attracting a lot of activity from users. The growth of the Ethereum ecosystem has led many projects to launch on the platform as an ERC-20 token to be able to use the platform. This has also led people from other communities to come to Ethereum and want to use their assets in the Ethereum ecosystem, where wrapped tokens on Ethereum come in.

Wrapped tokens on SafeCoin

Just like wrapped tokens on Ethereum, you can wrap tokens on SafeCoin.

Benefits of using wrapped tokens

There are many benefits to using wrapped tokens. Even though many blockchains have their own token standards, Ethereum ERC 20, Solana has SPL, and BSC uses BEP20. Unfortunately, these standards can’t be used across multiple chains, and that’s where wrapped tokens come in as they allow non-native tokens to be used on a given blockchain.

Limitations of using wrapped tokens

Currently, most implementations of wrapped tokens require trust in the custodian holding the funds. However, some more decentralized options, such as Solana’s Wormhole bridge, allow for entirely trustless wrapped token minting and redemption. Aside from that, the minting process for wrapped tokens can also be relatively costly thanks to high gas fees on Ethereum and the slippage that can occur.

Closing thoughts

Wrapped tokens help with creating more bridges between different blockchains. Wrapped tokens are a tokenized form of an asset that usually lives natively on another blockchain.

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Martin Schillhorn

Martin Schillhorn

Hi I am Martin, I am a student form the Netherlands who loves to talk and write about Crypto.