Crypto tokens are digital assets on a blockchain and can be used as a store of value, a medium of exchange, or to represent a physical asset. Tokens come in various forms, but one of the most popular is wrapped tokens, which represent an underlying asset, such as a cryptocurrency, fiat currency, or commodity.

With the rise of decentralized finance (DeFi) and the increasing demand for new forms of digital assets, wrapped tokens have emerged as an innovative new way to interact with the crypto space. Wrapped tokens are digital assets “wrapped” in a blockchain, allowing users to trade and interact with traditional financial assets and cryptocurrencies on the same platform. In this blog article, we will explore the concept of wrapped tokens and their potential applications in crypto.

What are Wrapped Tokens in Cryptocurrency?

A wrapped token is a cryptocurrency asset created on one blockchain, “wrapped” into another token and transferred to another blockchain. For example, Ethereum (ETH) is a popular cryptocurrency that is “wrapped” into several other tokens, including Wrapped Bitcoin (WBTC) and Wrapped Ether (WETH). WBTC and WETH are essentially the same as ETH, but they are tokenized versions of ETH that are easier to trade and use on other blockchains. Therefore, ETH can be wrapped to make it usable on platforms that do not accept ETH directly.

Wrapped tokens are tokens that represent real-world assets on the blockchain. They are created by minting and released into circulation and can be burned, or unwrapped, to remove them from circulation. Minting a wrapped token is a simple process, and involves a user depositing the underlying asset into a custodial wallet and receiving the equivalent of the asset in the form of a token. For example, if a user wanted to mint a wrapped token representing one ounce of gold, they would deposit the gold into a custodial wallet and receive one ounce of the token in return.

To wrap a token, the token is first deposited into a “wrapper” smart contract on the blockchain. A smart contract is a computer program designed to facilitate and enforce the terms of a digital agreement between two or more parties. Smart contracts are used in the wrapping process to ensure the token is securely transferred from one blockchain to another. Once the token is deposited, the wrapper contract will issue a new token compatible with the blockchain. By doing this, users can access the advantages of both blockchains, such as different liquidity, lower fees, faster transactions, and more. The wrapped token is essentially a representation of the original asset on the new blockchain, allowing users to access the benefits of both networks.

Unwrapping tokens

Unwrapping a wrapped token is just as simple and involves burning the token and withdrawing the underlying asset from the wallet. For example, if a user burned one ounce of the gold-wrapped token, they would receive one ounce of gold from the custodial wallet.
To unwrap a token, users must send their wrapped tokens to a smart contract address designated for unwrapping. The smart contract then processes the transaction, checks the balance of the token, and sends the user the appropriate amount of the underlying asset. The process is automated and requires no manual intervention. This means that users can convert their wrapped tokens to the original asset on the blockchain. For example, if a user has wrapped ETH, they can unwrap it to get their ETH back. Alternatively, users can use a CEX which supports that token to convert it to USDT or USDC.

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Use Cases For Wrapped Tokens

Asset tokenization is a primary use case that can increase transaction speed, enhance transparency, boost usability, and improve scalability. Wrapped tokens can be used as stablecoins or to represent other cryptocurrencies. Additionally, tokenization can be used to enforce policies on-chain, making them more transparent and not dependent on a single party. Wrapped Tokens bridge the gap between BTC and token trading pairs on decentralized exchanges, providing necessary liquidity. They tokenize existing assets, create fiat-backed stablecoins, and enable users to securely transact with them, thus bringing the benefits of blockchain technology to the world.

In addition to allowing users to access different blockchains, wrapped tokens can be used for decentralized finance (DeFi) applications such as yield farming, lending, staking, and trading on decentralized exchanges (DEXs). Wrapped tokens are also used for liquidity mining, where users are rewarded for providing liquidity to DEXs.
To illustrate how this works, let’s look at a few examples.
• WBTC (Wrapped Bitcoin): WBTC is an ERC-20 token pegged to Bitcoin. This token is used to bring Bitcoin’s liquidity to the Ethereum network.
• Ethereum’s native token, Ether (ETH), can be wrapped to become a Wrapped Ether (WETH) token on the Binance Chain.
• Similarly, Binance Coin (BNB) can be wrapped to become a Wrapped Binance Coin (WBNB) token on the Ethereum blockchain.
• Another example is Synthetix’s. Synthetix Network Token (SNX) can be wrapped to become Wrapped Synthetix (SOL) on the Ethereum blockchain. Wrapping SNX with SOL allows users to use the DeFi features of the Ethereum blockchain, such as lending and staking, without switching to ETH.
• Additionally, Avalanche’s native token AVAX can be wrapped to become Wrapped Avalanche (WAVE) on the Ethereum blockchain. This enables users to take advantage of the various DeFi applications available on the Ethereum blockchain.
• Finally, Polygon has its own wrapped token, Wrapped MATIC (WMATIC), allowing users to access Polygon’s decentralized applications on the Ethereum blockchain.

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Limitations & Benefits

One of the main risks of using wrapped tokens is the potential for a lack of security. Wrapped tokens are built on top of existing blockchains, which means they are vulnerable to the same security issues as the underlying blockchain. This means that the security of the wrapped token depends on the security of the underlying blockchain. If a hacker can access the underlying blockchain, they could potentially access the wrapped token as well.
Another risk associated with wrapped tokens is the potential for market manipulation. Due to their liquidity, wrapped tokens are especially attractive to traders looking to make quick profits. As such, traders can take advantage of the liquidity of wrapped tokens to manipulate the market and profit at the expense of other traders.
Finally, there are some limitations to wrapped tokens as well. For example, because they are built on top of existing blockchains, the speed of transactions can be limited by the speed of the underlying blockchain. Furthermore, wrapped tokens are not always compatible with all exchanges, so it is essential to check that the exchange you are using supports the wrapped token you are trading.

Despite these risks and limitations, some benefits are associated with using wrapped crypto tokens. Some of the key advantages of using them are:
• Interoperability: Wrapped crypto tokens allow users to store, transfer and trade multiple cryptocurrencies in one platform. This makes it easier for users to access different markets and take advantage of market conditions.
• Lower transaction and gas fees: Wrapped crypto tokens can help users save money by eliminating the need for expensive third-party services to transfer funds between different currencies.
• Privacy: Wrapped crypto tokens offer users high-level privacy and anonymity. This can benefit those who want to keep their financial information private.
• More DeFi opportunities, increased liquidity, and capital: Wrapped assets also benefit users who want to access different protocols and platforms. For example, if you have WBTC, you can use it to trade on a decentralized exchange and use it to make payments on a different blockchain. In short, wrapped assets are an innovative way to access other digital assets on a single platform. They provide users the flexibility to diversify their digital asset holdings while retaining the same level of security and liquidity.
• Quicker transaction speeds: Wrapped tokens allow users to benefit from the speed and scalability of one blockchain while holding the original asset on another blockchain.
• Diversification: Wrapped assets are attractive for users who want to diversify their investment portfolio. They can use the wrapped coins to gain exposure to different types of digital assets while still retaining the same level of security and liquidity.

Wrapped tokens have become an important part of the cryptocurrency ecosystem, as they allow for greater liquidity and easier access to new markets. By tokenizing their assets, users can easily move funds between different blockchains while still holding their original coins or tokens, making trading and using their tokens easier. While wrapped tokens offer a great way to trade assets across different blockchains and exchanges easily, they also come with some potential risks and limitations. It is crucial to be aware of these risks and limitations when considering using wrapped tokens to make an informed decision and minimize the potential risks.

**At NeoNomad, we do not provide any advice or recommendations regarding cryptocurrency investments. All content on our website and articles is purely opinion and should not be taken as investment advice. We strongly advise all users to conduct their own research and due diligence before making any investment decisions.

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