To answer this question, it is first necessary to say that different blockchains offer different possibilities, but their nature is such that they cannot communicate with each other. For example, the Bitcoin blockchain does not know what is happening on the Ethereum blockchain and vice versa. Here, Wrapped Token can create a bridge between two different blockchains. A wrapped Token is an encrypted version of another digital currency.
The value of a Wrapped Token is completely dependent on the value of the currency it is based on and can usually be redeemed (sold) at any time. Redemption of the Wrapped Token means that you can return the Wrapped Token to the issuer and receive the original token back. The Wrapped Token indicates the value of a token that does not belong to another blockchain.
What is a wrapped token?
A wrapped Token is a digital currency whose value is linked to the digital currency or another major physical asset such as gold, stocks, and real estate. The original assets in the digital storage space are mixed or “wrapped” and new tokens are created for exchange on other platforms. wrapped Token enables the use of non-native assets on blockchains and creates a bridge or interface between networks and interactions in the digital currency space. These tokens can represent anything; It includes art and collectibles, commodities, digital assets, stocks, bonds, fiat currencies, and real estate.
Since wrapped tokens are linked to other assets, they must be managed by the authorities responsible for managing and stealing assets. In other words, these components are what connect the signal to the property or block it. Wrapped Bitcoin (Wrapped Bitcoin) with the abbreviation WBTC was the first wrapped Bitcoin token used by smart contracts in the Ethereum blockchain.
wrapped Token Bitcoin is not the only wrapped Token available, other wrapped Tokens include ERC-20 Ethereum and BEP-20 Binance Smart Chain compatible devices.
How wrapped tokens work?
At the request of exchanges such as Airswap, CoinList, AAVE, Xerox and Maker, a storage organization creates a certain amount of Rapid Tokens on a specific platform such as Ethereum. Simply put, each wBTC is one underlying unit (eg Bitcoin) owned by a custodian. However, a major problem with the wrapped Token generation and management process in the digital currency space is that a custodian must be trusted to hold the funds.
This trust and ownership of resources in the hands of an intermediary or third party contradict the goal of a free and decentralized environment. However, the existence of this intermediary is a necessary necessity; Because merchants can not only use wrapped tokens for cross-chain transactions. However, technology is developing and evolving rapidly, and we may see decisions to do so soon.
Review of the wrapped Token issuance process
The process is such that, for example, a user sends some bitcoins to a provider to generate wrapped Tokens. In our example, the provider sends WBTC to a user on the Ethereum network based on the amount of bitcoin sent, and vice versa when the user requests to withdraw their bitcoin asset. The provider acts as the creator and destroyer of the wrapped Token. In the case of WBTC digital currency, the issuance and management of these tokens are done by an independent decentralized organization. The reason why the value of each wrapped Token remains the same as the main cryptocurrency is the presence of support, otherwise, the balance will be disturbed and the value will decline. For this reason, when using a wrapped Token, we must be sure of the authenticity and trustworthiness of its creator.
wrapped Token on the Ethereum network
wrapped Tokens Ethereum tokens are ERC20-compatible currencies and have the same value as coins outside the Ethereum network. This means that you can use cryptocurrencies that are not native to the Ethereum network in this network. Of course, like any other transaction on the Ethereum platform, the process of creating and destroying Wrapped Tokens requires the payment of an Ethereum Gas fee. It should also be noted that the process of creating each quick icon can be completely different.
An interesting example of a Wrapped Token is the WETH cryptocurrency. Cryptocurrency Ethereum (ETH) is the base and main coin of Ethereum, which is used for various purposes in this blockchain. On the other hand, ERC20 is a technical standard that was added to the network after the creation of Ether cryptocurrency. As a result, Ether itself is not based on this standard. Many decentralized applications running on the Ethereum blockchain are currently facing the problem of users having to convert between ETH and the ERC20 standard. To solve this problem, the WETH cryptocurrency was born, which is a wrapped Token based on the ERC20 standard.
wrapped Tokens in BNB Smart Chain
Similar to tokens created on the Ethereum blockchain, Wrapped Token Bitcoin and many other cryptocurrencies can be created for use on the BNB Smart Chain. Binance Bridge allows you to exchange your crypto assets (Ethereum, Bitcoin, Bitcoin Cash, Tether, Ripple, Polkadot, and others) for use in BNB Smart China as a Fast Token based on the BEP20 standard. Once you transfer your assets to Binance Smart Chain, you can trade them or use them in various applications on the platform. Like Ethereum, the creation and deletion of Wrapped Token require the payment of fees, but in BNB Smart Chain these fees are much lower than in most blockchains.
What are the benefits of wrapped Tokens?
Although many blockchains have their cryptographic standards (such as ERC-20 Ethereum and BEP-20 Binance Smart Chain), you cannot use these standards across chains. wrapped Tokens allow other tokens to run on a different network.
In addition, wrapped Tokens increase liquidity and capital efficiency for centralized and decentralized exchanges. Because this feature allows you to use unused assets in other chains and increase market integration.
Wrapped cryptocurrencies, besides creating interoperability between different networks, are a financial system where capital has a high return. Additionally, it helps different platforms participate in liquidity. Tokenization allows the owner of asynchronous assets with decentralized applications (DApps) to invest in these projects.
One of the most important advantages of wrapped Tokens is saving processing time and reducing payments. There is no doubt that Bitcoin is great for what it is. But the duration of the transaction process and fees can be shortened by using its express version.
Another advantage of wrapped Tokens is that, for example, you can quickly acquire DeFi products with Bitcoin without losing the satoshi of your Bitcoins. In addition, the performance of wrapped Bitcoin tokens is higher compared to Bitcoin coins. Because you have more profitable opportunities in the Ethereum blockchain. For example, you can take advantage of things like smart contracts. The Bitcoin network does not have this capability.