What are wrapped tokens?

What are wrapped tokens?

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by Alexandra Smirnova

3 years ago

The cryptocurrency market is becoming more popular every day. Despite the growing popularity of Ethereum blockchain applications, most of them only work with ETH, the native asset of the blockchain. However, thanks to the "Wrapped Token" technology, tokens from other blockchain networks can be used in Ethereum-based applications. Let's take a look at what wrapped tokens are and how they work.

Contents:

Security of wrapped tokens

What is a wrapped token and how does it work

A wrapped token is a type of token used to store the value of an asset it represents on the Ethereum network. For example, Wrapped Bitcoin (WBTC) is a version of Bitcoin on the Ethereum network. Each WBTC is equivalent to one BTC and has the same value.

Wrapped tokens are created using a special type of smart contract called "token bridges".

These bridges transfer a token from one blockchain network to another. For example, to create WBTC, a user sends a certain amount of Bitcoin to the WBTC smart contract, which returns an equivalent amount of WBTC to them.

Application of this type of tokens

The main application of wrapped tokens is decentralized finance (DeFi) projects. Most DeFi applications are based on Ethereum and only accept Ether or erc-20 tokens. Wrapped tokens allow the use of Bitcoin or other tokens from different blockchains in Ethereum network applications.

Security of wrapped tokens

The security of a wrapped token depends on the reliability of the smart contract. However, not all wrapped tokens are the same, and their security depends on the organization that creates and manages the token.

Wrapped tokens serve as bridges between different blockchain networks, allowing users to use different cryptocurrencies in applications. This expands the use of cryptocurrencies and creates more opportunities in areas such as DeFi.

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