Introduction

Have you ever imagined of an option to manage your crypto assets from outside of its native blockchain? As of now, there are no simple ways of doing this directly but we can always use wrapped tokens for this purpose. But before diving into the topic, let's define what wrapped tokens really are and what benefits they could bring to crypto users.

This type of token is a cryptocurrency that has exactly the same value as another coin by wrapping it up in a vault. This ensures that the asset can run on a separate blockchain which is impossible otherwise. The main use case is when users are allowed to trade on platforms using different blockchains without actually selling their current crypto assets. 

How do Wrapped Tokens Work

Each specific blockchain has its own specifications and functions differently. In most cases different blockchains cannot interact with each other as they are separate entities. For example, we cannot use Bitcoin on the Ethereum blockchain directly but wrapped tokens allow us to do so. They serve as a bridge between two blockchains. A custodian is essential for a token to be wrapped. The custodian is who guarantees that the wrapped token is priced the same as the original coin. 

A smart contract can be used as a custodian as well as multisig wallet or DAO. The wrapped tokens are minted to and burnt from an entity which is called the merchant. 

The Kyber Network acts as a merchant for wBTC. Republic Protocol also plays a similar role. The User is the holder of the wrapped crypto. Assets are exchanged for wrapped tokens with a help of merchants. This is done by the custodians. This is done through two processes- Minting is the process through which a custodian wraps a token. Post this the wrapped token can function on a different blockchain altogether. To convert the token back to its original form, it needs to be unwrapped. This is done through a process called burning.  It must be mentioned that there is no price change in an original token and wrapped token both when it is minted and it is burnt. Wrapped ones can function normally on a different blockchain. 

Wrapped tokens on Ethereum

Wrapped tokens on Ethereum (ETH tokens) are the ones that have been wrapped to comply with the ERC-20 standards. These tokens are entities of different blockchains but they can be used on the Ethereum blockchain which provides a whole utility of services, more advanced than other blockchains. We can consider Wrapped Bitcoin (WBTC), wETH crypto or Bitcoin BEP-2 as examples as well as liquid asset tokens.

A person can directly swap bitcoins for these wrapped tokens directly on most wallets. But prior to this, one should buy crypto on redot.com or any similar exchange. We have to understand that both of them are bitcoins but the unique thing about them is that they do not operate on the bitcoin blockchain. They are active in the ERC-20 and Binance BEP-2 blockchain. 

Wrapped Ether (wETH crypto) is one of the most interesting use cases of wrapped coins. You need to pay some extreme fees these days to make transactions on the Ethereum network and there are some tech linitatios on the current version of Ethereum. So BAT (Basic attention) is an example of such a token that solves some issues. ETH however was developed before ERC-20 standards kicked in. To use ETH on the Ethereum network, the tokenized version was created.

Benefits of wrapped tokens

Let's take a look at why wrapped tokens have a future. First of all, they help to connect various types of crypto projects. We have already mentioned wBTC which can simplify the use of Bitcoin. Creating the DApps or a new DeFi service can also be made based on wrapped coins. And here's a few more reasons to take a closer look at wrapped crypto:

1. Wrapped coins can also help projects increase their liquidity. This works both in centralized and de-centralized assets.

2. Using wrapped crypto reduces transaction time which is essential for Bitcoin as it may result in big losses due to the high volatility of this asset. Extreme volatility in the crypto market makes time a precious asset and fast transactions can increase wealth big time!

• It can help to increase the security level because of an increase in control of private keys. 

• Transaction fees may also be lowered in this case. 

Having mentioned the pros of using wrapped tokens, it must be mentioned that they also have cons. The crypto industry was born as the answer to a centralized financial system with the aim to decentralize it. But using wrapped tokens may be called two steps back from decentralization and a few steps towards centralization as those tokens are usually issued by a custodian who still has control over it. 

Minting and burning require gas fees which might result in slippage. This might result in losses in trades of greater volume. This is a disadvantage. 

Conclusion

Wrapped coins are responsible for the data exchange between different blockchains and result in increased efficiency. We have to understand that the technology behind BTC is actually getting obsolete as time passes and wrapping BTC is continually becoming an essential utility to increase transaction speed and also helps users access different services on the ERC-20 network. 

A very important point is that users will continue to benefit from price gains in BTC because both WBTC and BTCB are directly linked to Bitcoin. They are not separate entities but transformed into something which can be used in multiple blockchains. But if you are a fan of traditional crypto, you can always create an account on Redot and start crypto trading or buy either BTC or ETH as a long-term investment. 

Minting and burning may take minimal costs but it is quite easy to transfer crypto from one blockchain to the other. This gives power to the users to capitalize on the volatile crypto market and enable them to make profits out of the latest developments. There is firm belief about the utility of wrapping coins and there are a plethora of stakeholders attached to this. 

Wrapping up tokens is bridging gaps and creating amazing networks allowing users a whole different world of utilities. The upcoming tech innovations hold a lot of interesting things to every crypto user and this new type of coin can increase the adoption of new and existing coins.