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Wrapped tokens have opened up new opportunities for crypto investors, allowing them to stake assets from one chain to another in tokenized form.
Read on to learn more about wrapped tokens, how they work, and which wrapped coins are the most popular.
Wrapped tokens explained
A wrapped token, also known as a wrapped coin, is a tokenized version of another cryptoasset. It’s called a wrapped token because the original digital asset is placed in a “wrapper,” essentially a digital vault that allows the wrapped version of the crypto to be created on another blockchain network.
Unlike the original asset, wrapped tokens can be used on non-native blockchain networks and eventually redeemed for the original crypto.
You can imagine that a wrapped token is similar to a stablecoin in that it derives its value from another asset, which in this case is fiat currency. However, with wrapped tokens, the value is derived from a cryptoasset.
Wrapped tokens improve interoperability between different blockchains, with the underlying tokens working cross-chain. For example, the Bitcoin (BTC) network doesn’t know what’s happening with the Ethereum (ETH) network at all. However, if you hold wrapped tokens, you can create connections between different blockchains and benefit from their functions.
Because wrapped tokens are tied to another asset, they are typically managed by a custodian that wraps and unwraps the asset. The first crypto asset to be packaged was bitcoin to form wrapped bitcoin (WBTC), used on the Ethereum network to allow bitcoin holders to deploy BTC in the Ethereum decentralized finance (DeFi) ecosystem.
How do wrapped coins work?
Wrapped coins typically require a custodian to mint tokens. The packaging process is initiated by retailers such as coin list, air changeand AAVE, which sends a request to the custodian to mint the wrapped version of the original token on another blockchain.
Using Wrapped Bitcoin (WBTC) as an example, the custodian must hold 1 BTC for every 1 WBTC minted. Evidence of this reserve is recorded in the chain.
The wrapped tokens are converted back into the original asset when the trader makes a request to the custodian to “burn” (destroy) the wrapped tokens and release the original asset from the reserves. In essence, the custodian acts as the wrapper of the asset.
Again, using wrapped Bitcoin as an example, for every existing WBTC token, there is the corresponding value of BTC held by the custodian.
Coins wrapped on top
Here is a list of the best wrapped tokens, ranked by market cap.
Wrapped bitcoins
Wrapped Bitcoin (WBTC) is the most popular wrapped token. Bitcoin ERC-20 conversion was started in 2019 by BitGoRen and Kyber and represents over 75% of the wrapped token market.
Wrapped Bitcoin is beneficial for users as they can use it to plug into DeFi protocols on Ethereum. This means that WBTC, a synthetic asset that offers the same level of risk versus the price of bitcoin, unlocks the potential of turning bitcoin into a high-yield asset. You can even use WBTC to earn returns from liquidity pools on Uniswap or Yearn Finance.
To get wrapped bitcoins, you can use merchants like CoinList to wrap your BTC. The merchant sends your BTC to a custodian who mints WBTC that matches the bitcoin you sent and keeps the original asset locked away.
If you decide to redeem your WBTC for bitcoin, the merchant sends a burn request to the custodian, who in turn destroys the wrapped bitcoin and releases your original bitcoin to you.
This system of minting and burning ensures that Bitcoin and WBTC are paired 1:1. You can also buy wrapped bitcoins on crypto exchanges. As of April 1, 2022, the total market capitalization of WBTC is over $12 billion.
Wrapped BNB
Wrapped BNB (WBNB) is a tokenized version of BNB that conforms to the BEP20 standard. Consequently, you can use wrapped BNB on the Binance Smart Chain (BSC) and not BNB.
WBNB can be traded directly with alt tokens on the Binance Smart Chain. Wrapped BNB has also been extended to ERC-20 to facilitate cross-chain transfers.
You can bridge your BNB to WBNB binance by utilizing its cross-chain asset conversion service. Additionally, you can also use WBNB on a handful of other chains like Solana and Terra.
As of April 1, 2022, the total market cap of Wrapped BNB is over $2.3 billion.
renBTC
renBTC (RENBTC) is the second most popular wrapped version of Bitcoin. renBTC tokens are ERC-20 compliant and pegged to the value of Bitcoin.
RENBTC was launched in 2021 and is minted on the RenVM. RenVM is an open protocol that provides cross-blockchain access for decentralized applications (dapps). RenVM supports cryptoassets like BTC, BCH and ZEC.
Minting renBTC is a fairly simple process, where you simply send your bitcoin to RenVM, which secures the asset and mints an equivalent number of renBTC tokens on Ethereum.
renBTC does not rely on a combustion mechanism to keep its value pegged to BTC, instead operating on a direct supply tie that ensures there is enough Bitcoin in reserve to cover the circulating supply of renBTC.
To redeem renBTC, all you have to do is send your renBTC to RenVM and your native Bitcoin will be refunded. The RENBTC tokens are destroyed to balance supply and reserves.
As of April 1, 2022, the total market capitalization of RenBTC is over USD 600 million.
Use cases for wrapped tokens
Since many crypto networks have their token standards, such as ERC20 for Ethereum and BEP20 for BSC, these standards cannot be ported across multiple chains.
Wrapped tokens allow the use of non-native tokens on a given blockchain.
Wrapped tokens can also be used to increase liquidity and capital efficiency for crypto exchanges and decentralized trading venues. The ability to package unused digital assets and deploy them across chains results in shared liquidity between disparate decentralized applications.
Also, wrapped tokens can be more commonly used on blockchain networks, which offer lower fees and faster transaction times than the native chains.
However, the main reason for wrapped tokens is to stake assets in the DeFi market to generate income. This was the original idea behind Wrapped BTC and is still the main driver of the wrapped token market today.
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Learn more:
– WBTC: Where Bitcoin meets DeFi
– What is Wrapped Bitcoin and what is so special about it?
– DeFi could rely on CBDC, but more bridges are needed with centralized funding – expert panel
– The IMF’s DeFi governance recommendations include these two steps
– ‘Crypto is dead. Long live crypto’: Veteran DeFi developer Andre Cronje calls for more regulation
– Two new ERC standards aim to standardize tokenized vaults and add a refund option to NFTs
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