Many crypto fans may be unfamiliar with the concept of Wrapped Tokens. However, for those who are unfamiliar with them, we will provide you with all of the knowledge you need to understand Wrapped Tokens.
What are wrapped tokens?
Wrapped Tokens are a new strategy for Bitcoin investors to earn great interest in the cryptocurrency they hold. Wrapped Tokens are tokens whose value is determined by the underlying coin.
The term wrapped is used because the original coin is wrapped and placed in the digital wallet. The wrapped version of that cryptocurrency can be created using that digital wallet.
Suppose the digital wallet creates a wrapped version of the saved Bitcoin. The value is determined by the Bitcoin that has been stored. However, it operates on a different Blockchain than the Bitcoin that has been stored. That token is itself a cryptocurrency, but its value varies based on the other coin to which it is connected. Even though they are both Bitcoin, they do not operate on the Bitcoin Blockchain.
One might ask why you want to create a copy of the cryptocurrency you own.
Secure platforms like Binance Smart Chain and Ethereum Blockchain hold the Wrapped Tokens. They hold the security of the network after being transformed into ERC or BEP tokens. However, keep in mind that Bitcoin, which is stored on the Bitcoin Blockchain, is separate from Wrapped Bitcoin, which is stored on the Ethereum Blockchain.
However, there are various bridges across Blockchains regarding the connection between Wrapped Tokens.
You don’t have to bother about wrapping or unwrapping your cryptocurrency if you’re a regular cryptocurrency user. Instead, you can treat these Wrapped Tokens as your original coin and exchange them in the same way.
Bitcoins that have been wrapped
Wrapped Bitcoin was initially released in January 2021. Wrapped Bitcoin was created to bring the liquidity and possibilities of Bitcoin to the Ethereum network, allowing it to take advantage of the ERC-20 token’s benefits.
Decentralized finance (Defi) transactions are impossible to invest in with bitcoins. However, because they run on the Ethereum network, the wrapped version of Bitcoins can easily become part of transactions made by decentralized finance or any other Defi applications.
Wrapped Bitcoins have opened up lots of new possibilities for cryptocurrency lovers. Although wBTC’s market value is similar to Bitcoin, Wrapped Bitcoin has functions and attributes that are vastly superior to Bitcoin’s. Wrapped Bitcoins can also be used in a variety of applications, such as decentralized finance.
Is Bitcoin Wrapped Better Than Bitcoin?
Bitcoin’s technology, without a doubt, has some downsides. The money on the Bitcoin Blockchain, for example, can only be moved in Bitcoins. It does not accept any other cryptocurrencies. In fact, the Bitcoin Blockchain can only process four transactions per second, with a 10-minute average confirmation time. As a result, we may conclude that the Bitcoin network is slow and inefficient. Things began to change with the advent of WBTC and BTCB.
WBTC is a tokenized Bitcoin that has a one-to-one peg value to Bitcoin. BTCB stands for Bitcoin BEP-2. They’re both Bitcoins, but they don’t reside on the Bitcoin blockchain; instead, they’re Ethereum (ERC-20) tokens that run on the Ethereum or Binance networks.
Take WBTC as an example: if a person has money in that token, he can use smart contracts to invest in any decentralized finance platform, such as Aave. It will also let users to access their wallets, deposit cryptocurrencies, and take out loans.
Customers who lend money to decentralized platforms via smart contracts can earn up to 4 percent interest per year at a fixed rate. At the same time, crypto borrowers are pledged as collateral, which is returned to the person who lent the token if the borrower defaults. Aside from that, Bitcoin holders who require funds but do not want to sell their Bitcoin can take out a loan in the form of stablecoins by taking out a mortgage on their WBTC. Stablecoins’ value is determined by the US dollar or any other fiat currency.
How Wrapped Tokens works
A custodian is required for Wrapped Token transactions. Custodian is a legal entity with the same assets as the wrapped amount. A merchant, a DAO Decentralized Autonomous Organization, a multisig wallet, or a smart contract can all be custodians. The custodian must retain one BTC in the case of one WBTC. Prove that the custodian has assets equivalent to the amount of WBTC supplied and that they are accessible on the chain.
The question is, how does the wrapping process happen? The merchant will first pay the BTC to the custodian, who will mint them. Then, depending on the quantity of BTC given by the merchant, the custodian will mint WBTC on the Ethereum Blockchain.
The merchant will make a burning request to the custodian in order to convert wrapped Bitcoin tokens into Bitcoin tokens, and the BTC will be released from the reserve. This is known as BTC unwrapping.
The custodian is responsible for all the wrapping and unwrapping of bitcoin. In the case of WBTC, the DAO Decentralized Autonomous Organization is responsible for the addition and removal of custodians and merchants.
The Decentralized Autonomous Organization consists of seventeen members of Defi space that have a contract to add or remove Wrapped Bitcoins custodians and merchants.
When the merchants send real Bitcoins to the custodian existing on the Bitcoin Blockchain, the custodian will issue an equal number of Bitcoin tokens on Ethereum.
Benefits of Wrapped Tokens
Although Wrapped Tokens provide many chances and benefits, some of the most important ones are listed here.
Multiplatform access
Tokens that aren’t native to a Blockchain can work on it and benefit from it. Even if some Blockchains have specific rules for their tokens, such as Ethereum’s ERC-20 or Binance Smart Chain’s BEP-20, other networks cannot use them. Wrapped Tokens allow users to use foreign tokens on a variety of networks that enable smart contracts.
Increase liquidity and resource
Wrapped Tokens have the potential to boost liquidity and resource usage on various decentralized exchange systems. Assets that aren’t being used on one Blockchain can be wrapped and used on another. This method helps in the connectivity of previously isolated Blockchain liquidity.
Less transactional fee
Asset transactions on the Bitcoin Blockchain can be time-consuming and expensive in certain circumstances. Wrapped Tokens on pNetwork, on the other hand, offer a high transactional speed and low fees, especially when transferred across layer two networks like Arbitrum and Polygon.
Is It a Good Idea to Invest in Wrapped Tokens?
In the bitcoin era, decentralized financing is important. According to several experts, investing in Wrapped Tokens is a good decision. Take a look at the fact that about 800 million dollars worth of Bitcoin was converted into Bitcoin tokens in just one year. This gives you an idea of how popular Wrapped Tokens are becoming.
In 2021, the total quantity of Bitcoin tokens on the Ethereum Blockchain has climbed to 189,000 Bitcoins. That means a record 1 percent of the current circulating amount of Bitcoin, 18.73 BTC, is invested in decentralized finance in the form of Wrapped Bitcoin Tokens.
Wrapped Tokens will improve the capital efficiency and liquidity of both decentralized and controlled exchanges by allowing funds to be moved across numerous networks that would otherwise stay isolated.
Are Wrapped Tokens Safe?
Technically, the wrapped BTC are safe because they are stored on secure systems such as Binance Smart Chains or Ethereum. In addition, they hold the security protocols of these Blockchains after they are transformed into the network’s standard coins.
The Wrapped Tokens must have complete trust in the custodian that keeps the funds, which is a drawback. The Bitcoin token holders will be left with nothing if the custodian is untrustworthy and unlocks and releases the Bitcoin assets to another organization.
Wrapped Tokens’ security level is decided by how the custodian holds them. A central custodian bridge, for example, is a company that stores bitcoins. Its main goal is to create Ethereum ERC-20 tokens. Customers must have complete faith in the organization’s ability to safely store their Bitcoin assets and not send them to a third party. Checking for insurance or a guarantee if things go bad is an excellent approach to determine the trustworthiness of these organizations.
In the world of decentralized cryptocurrencies, a Decentralized smart-contract-managed bridge is an ideal solution for avoiding the involvement of any third party. Customers may only trust the code of immutable time-stamped smart contracts in such a situation.
Wrapped Tokens allow you to profit from your Bitcoin holdings, which was previously impossible. Furthermore, because both WBTC and BTCB are closely tethered to Bitcoin, Wrapped Token holders can benefit if the market price of Bitcoin rises. Customers can also reinvest their interest in financial services, resulting in a higher profit margin.
There are several tools available, such as WBTC savings accounts, where you can deposit your money and receive better interest rates than any other central bank.
Summary
To summarize, Wrapped Tokens are the cherry on the cake for the cryptocurrency market, which is already booming. If you own Bitcoin, you should consider converting your assets to WBTC or BTCB. So you don’t miss out on this chance to make some extra money with your Bitcoin assets.
Wrapped Tokens are also a good approach to building more bridges across different blockchains. These bridges are used to move assets that are native to other blockchains, allowing multiple blockchains to interchange and use information more easily. Wrapped Tokens open up a whole new universe where interest rates are higher than ever before, and different apps can share liquidity