19 Mar, 24

What are Wrapped Tokens?

wrapped tokens banner
Zerocap

Zerocap

Wrapped tokens are an important solution in the world of cryptocurrency, designed to foster interoperability between different blockchains. By creating a bridge between disparate blockchain networks, wrapped tokens enable cryptocurrencies from one blockchain to be used and operated on another, despite the original blockchain’s technical limitations.

At its core, a wrapped token is a type of cryptocurrency that represents a pegged equivalent value of another cryptocurrency on a different blockchain. This concept is akin to wrapping a physical asset into a digital form, allowing it to operate seamlessly on platforms and ecosystems beyond its native environment. The primary purpose of wrapped tokens is to ensure interoperability and liquidity across various blockchain networks, enhancing the functionality and utility of existing cryptocurrencies.

Understanding Wrapped Tokens

Wrapped tokens work by representing a cryptocurrency from one blockchain on another blockchain. The most notable example is Wrapped Bitcoin (WBTC), which allows Bitcoin to be used within the Ethereum ecosystem. This process involves locking the original assets in a digital vault and issuing an equivalent amount of the new tokens on the target blockchain, which can then be used in decentralized finance (DeFi) applications, traded, lent, or borrowed​​​​.

The Role of Wrapped Tokens in DeFi

Wrapped tokens have found a significant use case in the decentralized finance (DeFi) sector. By bridging different blockchains, they enable a wider range of assets to participate in the DeFi ecosystem, thereby increasing liquidity and capital efficiency on DeFi platforms. Users can wrap assets from blockchains like Bitcoin and use them in Ethereum-based DeFi applications, taking advantage of Ethereum’s smart contracts and lending protocols​​.

Benefits and Limitations

The main advantages of using wrapped tokens include improved liquidity, enhanced interoperability between blockchains, and access to DeFi services across platforms. However, the process relies on trusted custodians to hold the original assets, which introduces a centralized point of potential failure. Despite this, wrapped tokens are pivotal in bridging assets between blockchains, facilitating a more interconnected and efficient cryptocurrency landscape​​.

Conclusion

Wrapped tokens represent a critical development in the cryptocurrency space, addressing the long-standing issue of interoperability between blockchains. By enabling the free flow of assets across different networks, they not only enhance the utility and efficiency of the crypto ecosystem but also pave the way for the next generation of blockchain innovation and integration.

FAQs

  1. What is a Wrapped Token?
    • A wrapped token is a cryptocurrency that represents another cryptocurrency on a different blockchain, enabling interoperability and functionality across blockchain networks.
  2. How do Wrapped Tokens Work?
    • Wrapped tokens involve locking the original cryptocurrency in a digital vault and issuing a new token on a different blockchain that represents the original asset’s value.
  3. What is the most popular example of a Wrapped Token?
    • Wrapped Bitcoin (WBTC) is the most prominent example, allowing Bitcoin to be used on the Ethereum blockchain.
  4. Why are Wrapped Tokens important for DeFi?
    • They enhance liquidity, interoperability, and access to DeFi applications across different blockchains, facilitating a more integrated and efficient cryptocurrency ecosystem.
  5. What are the limitations of Wrapped Tokens?
    • The process requires trust in custodians who hold the original assets, introducing a potential centralized point of failure in an otherwise decentralized system.

About Zerocap

Zerocap provides digital asset liquidity and digital asset custodial services to forward-thinking investors and institutions globally. For frictionless access to digital assets with industry-leading security, contact our team at [email protected] or visit our website www.zerocap.com

DISCLAIMER

This material is issued by Zerocap Pty Ltd (Zerocap), a Corporate Authorised Representative (CAR: 001289130) of AFSL 340799. Material covering regulated financial products is issued to you on the basis that you qualify as a “Wholesale Investor” for the purposes of Sections 761GA and 708(10) of the Corporations Act 2001 (Cth) (Sophisticated/Wholesale Client). This material is intended solely for the information of the particular person to whom it was provided by Zerocap and should not be relied upon by any other person. The information contained in this material is general in nature and does not constitute advice, take into account the financial objectives or situation of an investor; nor a recommendation to deal. Any recipients of this material acknowledge and agree that they must conduct and have conducted their own due diligence investigation and have not relied upon any representations of Zerocap, its officers, employees, representatives or associates. Zerocap has not independently verified the information contained in this material. Zerocap assumes no responsibility for updating any information, views or opinions contained in this material or for correcting any error or omission which may become apparent after the material has been issued. Zerocap does not give any warranty as to the accuracy, reliability or completeness of advice or information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Zerocap and its officers, employees, representatives or associates do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This is a private communication and was not intended for public circulation or publication or for the use of any third party. This material must not be distributed or released in the United States. It may only be provided to persons who are outside the United States and are not acting for the account or benefit of, “US Persons” in connection with transactions that would be “offshore transactions” (as such terms are defined in Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”)). This material does not, and is not intended to, constitute an offer or invitation in the United States, or in any other place or jurisdiction in which, or to any person to whom, it would not be lawful to make such an offer or invitation. If you are not the intended recipient of this material, please notify Zerocap immediately and destroy all copies of this material, whether held in electronic or printed form or otherwise.
 Disclosure of Interest: Zerocap, its officers, employees, representatives and associates within the meaning of Chapter 7 of the Corporations Act may receive commissions and management fees from transactions involving securities referred to in this material (which its representatives may directly share) and may from time to time hold interests in the assets referred to in this material.  Investors should consider this material as only a single factor in making their investment decision.

Like this article? Share
Latest Insights

19 Mar, 24

Ethereum Smart Contracts: How They Changed Crypto

Ethereum, launched in 2015, revolutionized the digital world by introducing “smart contracts,” self-executing contracts with the terms of the agreement directly written into code. This

19 Mar, 24

Main Crypto Events in the World

The world of cryptocurrencies is dynamic and ever-evolving, with numerous conferences and events held globally to foster innovation, collaboration, and networking among crypto enthusiasts. Here’s

19 Mar, 24

What is Ethena Finance?

Ethena Finance (ENA/USDe) is emerging as a notable player in the cryptocurrency and decentralized finance (DeFi) sectors. Powered by its proprietary stablecoin, USDe, Ethena aims

Receive Our Insights

Subscribe to receive our publications in newsletter format — the best way to stay informed about crypto asset market trends and topics.

Want to see how bitcoin and other digital assets fit into your portfolio?

Contact Us
Ready to sign up?
Create an Account