Cryptocurrency has become more popular nowadays and there a lots of reasons for that. With the usage of crypto, you are getting online anonymity and security when talking about online purchases. However, here comes another issue the lack of interoperability between various blockchains. The trouble is that all the cryptocurrencies work perfectly fine in the native blockchain, though cannot be ported to others. Here is where wrapped crypto can be really helpful.
In this article, you will get detailed information about wrapped tokens and how do they function.
Unveiling the Mechanics of Wrapped Tokens
Wrapped token is like a creation of the next level in the crypto world. Before this method was implemented, there were no chances that crypto assent could be applied to other blockchains. Decentralized currencies have now become a new way of simplifying online transactions. A huge benefit of wrapped tokens is that there is no need to have lots of crypto wallets.
What are the mechanisms of the wrapping process? This algorithm is really simple to understand. Users need smart contracts and can start exploring wrapped tokens’ technology. Special custodians are responsible for the process of conversion. For instance, if you want to get one wrapped Solana token, then you will need to send the same amount to the custodian. Then this currency will be locked up in a vault where the wrapping process will finish. The same process is for the majority of other cryptocurrencies.
In case the user would like to return the original token, everything is also made by the custodian. You will need to send a wrapped one and get the original in return.
Wrapped Bitcoin: A Closer Look
Wrapped Bitcoin is created by sort of “freezing” a needed amount of currency via a smart contract and getting access to the same amount but already as a wrapped BTC. You are literally taking BTC out of circulation and in return you are receiving a wrapped asset. This currency can be easily used on any blockchain with the same exact value. So the original Bitcoin and wrapped BTC is rated 1:1.
Deciphering the Inner Workings of Wrapped Bitcoin Tokens
Now, wrapping is a little bit more understandable, but how is everything working? For instance, a user wants to use wBTC in the Ethereum blockchain, and then convert this currency back to Bitcoin. Let’s get into the details.
To start the process, the user sends BTC to a Custodian. After Bitcoin is received, the fee is taken, and wrapped Bitcoin is sent to the needed address. If you have mentioned Ethereum address then crypto will be sent there. Of course, if describing the whole process, it will look more difficult than we have just described. However, regular users won’t be involved in all the steps and the process will be really simple.
To return your Bitcoin, you are sending wBTC to the Custodia and get your regular cryptocurrency. There are some good Custodians so you won’t have issues with finding a secure one.
Advantages of Token Wrapping
The most obvious reason why wrapped token was created is trading. It was so challenging to reach new opportunities in other blockchains if you have only Bitcoins. That’s why wrapping is a really helpful mechanism for traders predominantly.
Of course, there are exchanges for trading purposes, where you can have a couple of currencies to choose from. Usually, such exchanges like Binance are offering only Stablecoin, fiat, and BTC pairs. In case you are searching for a broader perspective of trading then wrapped BTC is a good option to consider.
Understanding crypto pairs is important for any trader. There are some mechanisms of functioning when currencies can be bought only with other specific cryptocurrencies. By having this understanding, investors can benefit from arbitrage opportunities. For instance, they can gain higher profits from differences between markets.
With a wrapped Bitcoin, you can get more opportunities to higher your profitability as an investor. This is broadening your profit together with getting new experience in this sphere of trading.
As for the accessibility of wrapping, now almost any huge blockchain system offers wrapped tokens. That makes the experience with Polkadot or Binance more enjoyable and easier.
One more important thing that you are getting with the wrapped token is minimizing the transaction time and payments on different blockchains. As practice shows usually wBTC is faster than regular Bitcoin.
These are only some general pluses of the wrapped token usage, of course, each client can specify some other benefits which were viral for them. Whether this method works for your specific case and whether you can really profit from it – this is another story. Only your personal experience will show the real gane for you.
Diving into Wrapped Ethereum
As rather obvious, you can convert ETH into wETH. This wrapped currency can be used together with ERC-20 compatible apps. This is possible because ERC-20 was created on the basis of Ethereum blockchain.
One of the biggest issues of Ethereum conversion is the fee costs of Smart Contract. It is really high when compared with some other currencies and that is mainly because of its popularity among the users.
Wrapped tokes are a rather useful option and have lots of benefits, but how about some drawbacks? Are there any serious troubles when using this method of conversion?
Examining the Downsides of Token Wrapping
There should not be any price difference between Bitcoin and wrapped Bitcoin, the rate is 1:1. However. As practice shows there is still minimal slippage which you lose during the wrapping and unwrapping process. So, you should pay attention to this detail.
Also, we have already discussed the fees. Each crypto wrapping will cost you something. That’s why, it is recommended to calculate all the possible fees prior to the conversion.
The last thing that is a little bit bothering for users is centralization. Because custodians are getting power over the whole process, a usual question arises – is it really as secure and decentralized as it should be?
Ensuring the Safety of Wrapped Tokens
When you are using cryptocurrency, you can be sure of safety, anonymity, and confidentiality. Mainly, it is possible because of the decentralized approach towards the system. That’s why most crypto users are not afraid of their safety. Is the same level of safety guaranteed by the wrapped tokens’ usage?
The biggest consideration that most users have is related to Custodian. This is a rather centralized approach and there might be some issues. When talking about Bitcoin, in particular, the process cannot be fully automated with the help of Smart Contact. And this wrapping is occurring via BitGO. This is definitely a controlled program.
So, the whole decentralized method of cryptocurrency is more and more centralized with the use of such programs. As for now, BitGo has nearly 1.4 percent of total BTC. That can potentially lead to some manipulations. Luckily, there are no serious arguments and most users are okay with such a situation.
The founder of Ethereum has mentioned that he is more bewildered that a single institution will hold a huge percentage of Bitcoin keys in his cryptocurrency.
Despite all the concerns, investors still apply wrapped tokens as an awesome method that simplifies the process immensely.
Lots of challenges were connected with the interoperability of the cryptocurrency. The necessity for new changes and tools was felt for such a long time that wrapped tokens came right in time. It is a functional method that is used by lots of investors around the globe.
Token wrapping is not an ideal approach and there are some minor issues as with any other online system. You can hardly find a perfect solution for all the users. Despite some minor drawbacks, it is greatly reducing the inconveniences of investors greatly. The usage of a token for several different blockchains is already a huge plus. Users don’t have the necessity to store various tokens for various blockchains.