Hi and welcome to a new Cryptomatics episode! In this video, we will briefly explain
what wrapped tokens are and how they work. We will also cover some of their pros and cons. What Are Wrapped Tokens? A wrapped token is a tokenized
version of another cryptocurrency that natively lives on a different blockchain. It is pegged to the value of the “original” token. Typically, it can be redeemed,
unwrapped, at any time. The original asset is put into a wrapper,
which is a kind of digital vault.
This allows the wrapped version to
be created on a different blockchain. Such tokens make it possible to move
information between two blockchains. They can be traded like any other cryptocurrency. Think of them as a passport that allows you to “travel” outside your asset’s native
blockchain, to other blockchains. How Do Wrapped Tokens Work? Such tokens usually require a custodian. This entity holds an equivalent amount
of the cryptocurrency to be wrapped. Let’s take Wrapped Bitcoin (WBTC). The custodian needs to hold one
Bitcoin for every minted WBTC. This entity can be a merchant, a decentralized
autonomous organization (DAO), a multi-sig wallet, or even a smart contract. When a merchant sends BTC to the
custodian, this entity mints WBTC according to the amount of BTC sent.
It then sends it to the merchant. If the merchant wants to exchange the WBTC back to
BTC, it puts in a “burn” request to the custodian. The latter burns the WBTC or unwraps
it and releases BTC from its reserve. Pros of Wrapped Tokens Wrapped tokens have several benefits, including: Interoperability They allow for non-native tokens
to be used on other blockchains. Higher transaction speed They ensure faster transaction services. Given that time is a valuable
asset in the crypto market and cryptocurrencies are volatile,
this is a great advantage. Liquidity They increase capital efficiency
and liquidity for exchanges, providing users with more trading options. Lower transaction fees. Cons of Wrapped Tokens Some of their disadvantages are: Custodian reliance – since a custodian is
required for this, it must be trustworthy. If it is somehow flawed, the
wrapping/unwrapping process is flawed as well.
Centralization – wrapped tokens are issued by
a custodian and are prone to centralization. Mint costs – the minting process can be
quite expensive due to high gas fees. Conclusion Wrapped tokens create bridges
between different blockchains, allowing an asset issued by one
blockchain to live on another. They make crypto-capital more
efficient and increase liquidity. They also ensure faster transactions. However, minting wrapped tokens can be costly. We hope you enjoyed this video! Let us know if there is more on
wrapped tokens you’d like us to cover and don’t forget to subscribe to
Cryptomatics for more DeFi content.