What is a Wrapped Token? A Quick Guide Into Tokenized Assets
- Wrapped tokens are tokenized versions of cryptocurrencies like BTC or ETH held on the Ethereum blockchain. Their price is always the same as that of the original cryptocurrency.
- These tokens have shown major growth over the last months. They represent an important part of DeFi.
- Tokenized Bitcoin is a lot more compatible with the Ethereum ecosystem than the original BTC. This makes wrapped Bitcoin easier to use within DeFi.
What is a wrapped token?
As DeFi is on the rise, the demands to integrate Bitcoin and Ethereum into this ecosystem have been growing. These major cryptocurrencies would bring large liquidity and momentum into DeFi. However, decentralized finance is based on the Ethereum platform, and most of the DeFi assets are ERC20 tokens — which BTC and ETH are not compatible with.
Wrapped tokens solve this problem by bringing major cryptocurrencies to the Ethereum network. Wrapped Bitcoin (wBTC), Wrapped Ethereum (wETH), and dozens of other wrapped tokens allow for operations with tokenized BTC and ETH on Ethereum. These tokens are backed by the underlying cryptos’ price which makes them their complete ERC-20 doubles.
Perks of the wrapped tokens — they are…
- More accessible. Wrapped tokens allow the Ethereum DApps native access to Bitcoin and other major cryptos. They fill the “embarrassing lack of Bitcoin-Ethereum bridge” that Vitalik Buterin once defined.
- Easier to implement. If you want to use Ether in a DApp, you will need to recode your smart contract so that it accepts both ETH and ERC20 tokens. This job is hard to do. It’s much easier to tokenize Ether — wrap it to make it ERC20-compatible.
- Cheaper and faster. You don’t need to make cumbersome cross-chain transactions anymore. Ethereum makes blocks every 15 seconds. As a result, you only have to pay one minimal Ethereum gas fee, and the TX will go much faster.
How do wrapped tokens work?
Some of the wrapped tokens are held, minted (issued), and burned by centralized entities. BitGo is the digital asset platform that is the custodian for wBTC. Other wrapped tokens, such as wETH and renBTC, exist in smart contracts and don’t need an intermediary to mint them.
There are several ways to convert between wETH to ETH and other tokenized assets. In some wallets, you can “wrap” and “unwrap” your ETH or BTC right in the app. As for wBTC, you can buy it on ChangeNOW.
Use cases of particular wrapped tokens
Wrapped BTC — Bitcoin on the Ethereum blockchain
- wBTC brings liquidity into decentralized exchanges and Ethereum DApps. One of the main cons of DEXs is that they lack in trading volume — wBTC intends to solve this problem by bringing smart contract-based Bitcoin trading there.
- You can use wBTC in MakerDAO as collateral. Maker is one of the largest DeFi projects that allows for making loans in crypto. Adding wBTC as a collateral option makes the platform more accessible.
- You can earn interest from your wBTC on several DeFi projects. Uniswap DEX and Compound provide such opportunities.
WETH — ERC20-compatible version of Ether
- wETH token facilitates peer-to-peer trading on Ethereum-based DEXs. Tokenized Ether makes it easy to trade Ether with other ERC20 tokens.
- Wrapped Ether powers Maker transactions. Again, Ether itself is not used as collateral in MakerDAO — when you put up your ETH, it gets converted to wETH right away.
“Hopefully, there’s no future for wETH” — this is what the official website or wETH states. Hopes are that Ether will once become compliant with the ERC20 standard. We’ll see.
RenBTC — non-intermediary alternative to wBTC
RenBTC is similar to wBTC because it provides cross-chain liquidity transfers for Bitcoin and Ethereum networks. But this token is different in a way that there’s no central authority that regulates its minting process. Recently, its price has grown by 200% in less than a week, which seems to support this value proposition.
A wider look at wrapped tokens
Technically, wrapped tokens are not only about DeFi. The first Bitcoin on Ethereum blockchain, wBTC, appeared in January 2019, while wETH was created in 2018. Moreover, such stablecoins as Tether and USD Coin are also sometimes called wrapped tokens — because these are the tokenized versions of other currencies (US Dollar, in this case) on Ethereum and other blockchains.
But the biggest rise of wrapped tokens was tied to the recent growth of DeFi. Another tokenized asset tBTC has been launched just a few days ago; wBTC now stands in the Top-30 cryptos, having raised its market cap by 5 times since June. Finally, more Bitcoin is wrapped on Ethereum today than is being mined!
DeFi has brought a great incentive into tokenized assets. Who knows — maybe this is that very scaling layer-two solution for Bitcoin that we’ve been waiting for.
Wrapped tokens are a great solution for making cross-chain interaction much more accessible and easy. It’s always a good idea, however, to remember what you get them for — tokenized BTC is a great tool to use in DeFi, but if there’s no such purpose, it might be good to continue holding the original Bitcoin to avoid any sorts of smart contracts’ bugs and other surprises. So, please do your own research, and enjoy the possibilities that the wrapped tokens bring!