What Is A Wrapped Token? Why Do We Need It?

2 mins read

By Danielle Davis

If you’re in the world of crypto, you are probably aware of one of the biggest current issues of the industry. 

It’s called Interoperability.

There is now an unprecedented amount of capital being invested in the crypto space along with increased adoption rates (especially since Bitcoin crushed all-time-highs again), and greater numbers of blockchains available, both big & small.

Interoperability means connecting isolated blockchains

Cryptocurrency consists of multiple chains each with its own native assets: Ethereum, Bitcoin, Polkadot, Binance Smart Chain, etc. This means that a token cannot be taken from one chain and simply sent to another because it doesn’t exist on that blockchain. There is, however, one way to work around this limitation. This is known as “Wrapped Tokens.” 

Wrapped Tokens Do Not Contain the Original Token

A wrapped token is essentially one token on the “destination” blockchain pegged to the value of the “origin” token. For example,  wrapped Bitcoin is pegged to the price of Bitcoin but exists on the Ethereum blockchain. It is not Bitcoin, but it represents Bitcoin in that it is locked in a vault back on its original chain. 

How Do I Get Wrapped Tokens? 

You can simply buy already wrapped tokens on the chain you wish to have them on.  There is enough liquidity of the wrapped tokens where you can simply buy WBTC on ETH via Uniswap. However, you can also wrap your Bitcoin from its native chain and receive WBTC on the ETH network. 

What Happens To Your Tokens When You Wrap Them? 

Despite the name, the tokens are not actually “wrapped”.  This allows them to move across other blockchains. Tokens are, however, staked in a locked vault. When you do this, an equal value of a new token on the “destination” blockchain is generated for you. This new token then becomes a direct representation of the value of the original asset.

Also keep in mind that you can unstake tokens to unwrap them, or remove them from this “vault”, to get the original back. 

Benefits of Wrapped Tokens

Every blockchain is different and enforces its own standards, meaning that many tokens cannot be used across other chains.  Wrapped tokens allow for non-native tokens to be used on other blockchains.

You can compare wrapping to a loaner car you use while yours is in the shop: a quick fix to an outstanding issue. 

Wrapped tokens increase liquidity and capital efficiency for exchanges as they offer their users greater trading options.

Lastly, the transaction fees and times can vary on each chain which can be to your benefit.  If you are moving an asset like Bitcoin, we all know that the transaction times can be very long. Moving WBTC is much quicker. 

Limitations Of Wrapped Tokens

Wrapped tokens are a form of staking which requires a custodian to hold the tokens in the vault. So it’s not decentralized. Fees for wrapping tokens are also quite high, but buying them already wrapped will help alleviate that cost. 

While a wrapped token is not the same thing as the original token on its native chain, using them can simplify our lives by letting us work across chains without any barriers. Interoperability, though, is still a huge challenge in the crypto space, and hopefully, soon we will see more solutions to the problem.  

For more on Wrapped Tokens,  visit HERE