Certain cryptocurrency assets only exist on a single blockchain network, for example, BTC resides only on the Bitcoin network. To increase interoperability between networks, wrapped tokens were created. For example, Ethereum, Cosmos, Avalanche, etc. users can now buy Wrapped Bitcoin (WBTC), which provides exposure to BTC without having to use the Bitcoin network. This is most commonly done by binding assets in a smart contract on one network and using a corresponding smart contract on another network to create a representation of it. BitGo does this with Bitcoin and holds it in custody while issuing WBTC to Ethereum. The graphic below illustrates this well. The process of using wrapped tokens to interact between blockchains is known as cross-chain bridging. In contrast, with native bridging, an asset actually exists on different networks and therefore no smart contract locks are required to ensure interoperability. Going forward, some assets will be cross-chain while others will be multi-chain, in what will become known as an “omnichain” future. This will be important so that the entire blockchain can be seamlessly connected and there are no isolated pockets of liquidity. A simple use case for this could be to pay for your coffee with USDC on Polygon. If you don’t have that exact asset, your Wrapped ETH (WETH) on Cosmos should be able to be automatically converted to USDC on Polygon to be compatible with the payment method received. Different assets are converted in different ways, which is why omnichain functionality will be important.
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