What are wrapped tokens?

In order to be able to use one’s credits without restrictions in the ecosystems of different cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH), so-called wrapped tokens are often used. Everything important about this here.

Anyone interested in Decentralized Finances (DeFi) or DApp quickly encounters the situation: amounts are held in the crypto account, but these cannot simply be transferred in the specific case desired. This is because the major cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH) are technologically based on their own blockchains and these are not directly compatible with each other. This problem is solved with wrapped tokens. “Wrapped” here is to be understood in the literal sense of “wrapped”. This is because a wrapped token is virtually wrapped and stored in the corner so that its digital counterpart is secured 1:1 when used in a foreign ecosystem.

Background on Wrapped Bitcoin (WBTC)

The most important wrapped token in terms of market capitalization and awareness is called Wrapped Bitcoin (WBTC) and makes BTC fit for the Ethereum ecosystem as an ERC-20 token. So behind every WBTC, including subunits like Satoshi, is an original, real Bitcoin. The generation of wrapped tokens, the exchange mechanism and also the destruction of wrapped tokens is handled by an administrator. This can be a company, but also a smart contract or other entities. In the case of Wrapped Bitcoin, it is several established crypto companies that organize WBTC. That they keep their promise of 1:1 coverage of Wrapped Bitcoin by real BTC can be seen on the blockchains at any time.

Wrapped tokens on Binance

To use Bitcoin in the Binance smart chain ecosystem, Bitcoin BEP2 (WBTC) is used. The principle is the same as that of WBTC. The Binance Coin (BNB) ecosystem allows a variety of popular cryptocurrencies to be conveniently and easily converted into wrapped tokens in the BEP-20 standard via a bridge. The big advantage: this opens up various opportunities to generate passive income with crypto.

By the way, there is little to be done with DeFi under Ethereum without wrapped tokens. This is because actual, original ETH are not directly compatible with ERC-20 tokens. Here, platforms usually take over the process wrapping elegantly, but one detail bothers: in order to transfer and generate/destroy tokens, Ethereum transaction fees are incurred. These are notoriously uncomfortably high for ETH and one reason why DeFi likes to switch to Binance and other alternatives.

Conclusion: Wrapped tokens are hard to imagine the crypto industry without them

Wrapped tokens solve a real problem in the crypto scene and are even indispensable for many more complex investment strategies. They still usually require a certain trust in the administrator (“custodian”), but systems that function completely autonomously and automatically are increasingly emerging here. Stablecoins like Tether (USD) are not to be confused with Wrapped Tokens, as they are covered by fiat. If you operate with wrapped tokens, you should keep an eye on the fees, which can quickly become an expensive surprise, especially in the Ethereum ecosystem.

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