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Wrapped Token

A wrapped token is a cryptocurrency that represents another crypto asset on a different blockchain, allowing it to be used in ecosystems where it is not natively supported. Wrapping enables cross-chain compatibility and enhances liquidity and utility across decentralized platforms. A wrapped token maintains a 1:1 peg with the original asset and is typically backed by it in custody or via smart contracts.

Wrapped tokens are essential in DeFi, bridging assets like Bitcoin to Ethereum as WBTC, or enabling the use of ETH on non-Ethereum chains. They improve interoperability without compromising the value of the underlying asset.

How Wrapped Tokens Work

  1. Asset Locking - The original asset is locked in a smart contract or by a custodian.
  2. Token Issuance - An equivalent amount of wrapped tokens is minted on the target blockchain.
  3. 1:1 Peg Maintenance - The wrapped token mirrors the value of the original asset.
  4. Redemption Process - Users can redeem wrapped tokens to receive the original asset by burning the wrapper.
  5. Bridge Infrastructure - Cross-chain bridges or custodial services facilitate wrapping and unwrapping processes.

Key Features

  • Cross-Chain Utility - Allows non-native tokens to be used in different blockchain environments.
  • Pegged Value - Maintains a 1:1 ratio with the original asset.
  • Redeemable - Can be exchanged back for the original asset at any time.
  • Smart Contract or Custodian-Based - Backed by decentralized or centralized mechanisms.
  • DeFi Compatibility - Enables tokens like BTC to participate in Ethereum-based lending, trading, and staking.

Benefits of Wrapped Tokens

  • Enhanced Liquidity - Increases token availability across multiple chains.
  • DeFi Access - Enables popular assets to interact with dApps, DEXs, and protocols.
  • Interoperability - Bridges isolated blockchain ecosystems.
  • Value Preservation - Users retain exposure to the original asset’s value.
  • Flexible Movement - Tokens can be wrapped and unwrapped as needed based on platform access.

Use Cases of Wrapped Tokens

  1. WBTC on Ethereum - Allows BTC holders to interact with Ethereum DeFi protocols.
  2. WETH (Wrapped ETH) - Used for token swaps and liquidity pools where ERC-20 compatibility is required.
  3. Wrapped Assets on BNB Chain - Tokens like BTCB represent Bitcoin on the Binance ecosystem.
  4. Cross-Chain Lending - Users borrow or lend wrapped tokens across different Layer 1 and Layer 2 chains.
  5. Bridging Stablecoins - Stablecoins like USDC are wrapped to move between networks (e.g., Ethereum to Polygon).
  6. Multichain dApps - Wrapped tokens help developers build dApps with assets from multiple blockchains.

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