what is wrapped token?

        Wrapped tokens are another version of tokenized cryptocurrencies. It is pegged to the value of the asset and can usually be recovered (unwrapped) at any time. Also, it usually refers to an asset that does not exist on its own on the blockchain on which the wrapped token was issued.

        You can think of a wrapped token as similar to a stable coin whose value is derived from other assets . In the case of stable coins, usually fiat currencies , wrapped tokens derive their value from assets that exist on other blockchains.

Because it is a system with clear boundaries, there is no good way to pass information between blockchains. Wrapped tokens increase interoperability between different blockchains ,Token Migration Platform Development and the underlying tokens can natively cross each chain.

         If you’re an average user, you don’t have to worry about the wrapping or unwrapping process. You can trade wrapped tokens like any other cryptocurrency. As an example, you can trade WBTC/BTC on Binance Market.

How do wrapped tokens work?

         Take, for example , Wrapped Bitcoin (WBTC) , a tokenized version of Bitcoin on Ethereum. WBTC is an ERC-20 token that is linked 1:1 to the value of Bitcoin, allowing you to effectively use BTC on the Ethereum network.

         Wrapped tokens usually require a custodian to hold assets equal to the wrapped quantity. This could be a merchant or multi-signature wallet , decentralized autonomy (DAO) or smart contract migration. For WBTC, an administrator must hold 1 BTC to generate 1 WBTC. Evidence of these holdings exists on-chain.

But how does the wrapping process work?

             The seller sends BTC to the manager. The administrator creates WBTC on Ethereum equal to the amount of BTC received. If WBTC needs to be exchanged back to BTC, the seller will ask the manager to burn it, and the BTC will be returned from the holdings. You can think of these managers as wrappers or unwrappers. In the case of WBTC, Token swap platform development the process of adding and removing managers and sellers is carried out by a decentralized autonomous organization (DA) .

           Some communities refer to Tether (USDT) as a wrapped token, but this is not exactly the case. USDT is usually traded 1:1 with USD. Tether does not hold physical USD that exactly matches the USDT reserve they hold. Instead, Tether’s reserves consist of cash and real-world cash equivalents, assets, and outstanding loans. However, the concepts are very similar. Each USDT token acts as a kind of wrapped version of the fiat currency USD.

Limitations of wrapped tokens:

           Most wrapped tokens implemented today require the trust of the administrator to hold funds. With current technology, wrapped tokens cannot be used for full cross-chain transactions and usually have to go through a custodian.

         However, more decentralized options are being developed, which may lead to the creation and redemption of wrapped tokens in a completely trustless way.

         In addition, the process of creating a wrapped token can be relatively expensive due to the high gas fee, and some slippage may occur.

Concluding:

          Wrapped tokens allow more connections between different blockchains. Wrapped tokens are tokenized versions of assets that exist on other blockchains. This helps the interoperability of cryptocurrencies and the Decentralized Finance (DeFi) ecosystem. Wrapped tokens increase capital efficiency and allow applications to easily share liquidity.