Crypto Education: Wrapped Tokens Explained | Animation | Cryptomatics

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.

You May Also Like