Wrapped tokens are essential tools for enhancing interoperability between different blockchain ecosystems. This article explains what wrapped cryptocurrencies are, why they are beneficial, and highlights some of the main wrapped assets like WBTC and WETH.
How does wrapping work?
Wrapping is a process that involves representing a cryptocurrency on a blockchain that it’s not native to. This is typically done through the creation of a new token that is pegged in value to the original asset. The original asset is locked in a smart contract, and the equivalent amount of the new token is minted on another blockchain. This allows the wrapped version to be used within that blockchain’s ecosystem, enabling activities such as trading, staking, and lending.
Why wrap an asset?
The primary purpose of wrapping a cryptocurrency is to enable interoperability among different blockchains. This is crucial because many blockchains operate independently with their own protocols and cannot natively communicate with each other. Wrapping allows assets from one chain to be used in the decentralized applications (DApps) on another, greatly expanding their utility and enhancing liquidity across the crypto market.
BTC vs WBTC
Bitcoin (BTC) is the original cryptocurrency that operates on its own blockchain. It is primarily used for transactions and as a store of value. Bitcoin’s blockchain is renowned for its security and the robustness of its decentralized network. However, its utility is generally limited to the functions available within its own network.
Wrapped Bitcoin (WBTC) is an ERC-20 token designed to bring Bitcoin’s value into the Ethereum ecosystem. By wrapping BTC, users can utilize Bitcoin within Ethereum’s DeFi ecosystem, participating in activities like lending, borrowing, and yield farming which are not possible on Bitcoin’s native blockchain. WBTC maintains a 1:1 value with BTC, secured through a network of custodians who hold the actual BTC.
Other types of wrapped BTC
- BTC.b is a wrapped version of Bitcoin on the Avalanche Network. BTC is moved to Avalanche via the Avalanche Bridge.
- tBTC is a trust-minimized, decentralized wrapped Bitcoin on the Ethereum blockchain. It enables users to securely use Bitcoin in Ethereum’s DeFi without relying on centralized entities for token issuance.
- sBTC is a synthetic asset that tracks the price of Bitcoin and is used primarily within the Synthetix ecosystem. It allows for Bitcoin exposure within the Ethereum ecosystem without the need to hold actual BTC.
ETH vs WETH
Ethereum (ETH) is the native cryptocurrency of the Ethereum network, used to fuel transactions and operate decentralized applications. As the backbone of the Ethereum ecosystem, ETH is crucial for the execution of smart contracts and general network operations.
Wrapped Ether (WETH) is an ERC-20 compatible version of ETH. The primary reason for wrapping Ether is to ensure compatibility with ERC-20 standards required by many DeFi applications. WETH helps standardize ETH for use in smart contracts and transactions within the Ethereum ecosystem, making it interoperable with other ERC-20 tokens and simplifying its integration into various financial protocols.
Other types of wrapped ETH
- stETH (Lido Staked ETH) represents Ethereum that has been staked in Ethereum 2.0’s beacon chain but remains liquid and usable within the DeFi ecosystem. stETH is pegged 1:1 to ETH and allows holders to earn staking rewards.
- frxETH (Frax Ether) is part of the Frax Finance system, representing another version of staked ETH. It is also pegged 1:1 to ETH and accrues rewards to a sister token sfrxETH (Staked Frax Ether).
- pxETH (Pirex ETH) is a derivative that represents staked ETH in the Dinero protocol. It uses the same mechanism as frxETH where all staking rewards accrue to a sister token, apxETH. pxETH is pegged 1:1 to ETH.
Other wrapped assets
In addition to Bitcoin and Ethereum, the concept of wrapping extends to a wide array of other cryptocurrencies. This includes tokens like DOT, BNB, ADA, SOL, and many others, which can be wrapped to participate in ecosystems outside their native blockchains. For instance:
- Wrapped DOT (wDOT) allows Polkadot’s native token to be used in Ethereum’s DeFi applications, bringing DOT’s governance and staking features into a new ecosystem.
- Wrapped BNB (wBNB) is used on the Ethereum blockchain and other compatible networks, facilitating the use of BNB in various decentralized applications beyond the Binance Smart Chain.
- Wrapped ADA (wADA) enables Cardano’s ADA to interact with Ethereum-based DeFi protocols, increasing its liquidity and utility across blockchains.
- Wrapped SOL (wSOL) standardizes the native Solana token for compatibility with DeFi applications and other protocols that require ERC-20 type tokens.
Wrapped cryptocurrencies play a crucial role in the evolution of the blockchain ecosystem by addressing interoperability and liquidity challenges. They expand the utility of base cryptocurrencies like Bitcoin and Ethereum, allowing them to be leveraged in new and innovative ways across various platforms. Understanding these tools is essential for anyone looking to engage deeply with the crypto market.