Wrapped Cryptocurrency Tokens: What They Are and How They Work

4 min readOct 20, 2021

The inability to utilize BTC on Ethereum has always irked many. It’s impossible to move coins from one blockchain to another. Non-native assets may be used on a blockchain by using wrapped tokens to get around this restriction.

Tokens wrapped in the Ethereum network have the same price as their underlying assets, regardless if they aren’t on the identical blockchain or not.

Wrapped Tokens are ERC-20 Tokens that have the same value as the underlying asset they represent, either via the use of smart contracts or by being backed 1:1 by the underlying asset.

Wrapped Bitcoin, a token equal to one BTC, may be created at any time using an innovative contract mechanism that replicates the price in real-time and controls the underlying fund using supply and demand data gathered from user transactions. Wrapped token users trade their money for an asset that can be more readily mobilized by decentralized apps, equating to the value of the wrapped token (DApps).

Understand the working

Wrapped tokens have identical value, organizational responsibilities, and algorithmic safeguards, backed by the same quantity of the underlying or currency.

Because they don’t traverse multiple blockchains, wrapped token transactions may be processed considerably quicker by DApps. Despite their unpredictable nature, the wrapped tokens’ one-to-one relationship with their underlying assets ensures that users may trade with complete confidence.

The intricate architecture can offer native accessibility to other cryptocurrencies for DApp users without taxing each blockchain’s processing power. On Ethereum, a single little gas charge is all that’s required.

Most administration over wrapped tokens takes place via the assignment of responsibilities to organizations, primarily custodians who retain and mint (or waste) newly wrapped tokens as needed. Buyers of wrapped tokens utilize a medium provided by merchants, while users own the tokens themselves.

Tokens that have been wrapped with Ethereum

Tokens from different blockchains may be wrapped in Ethereum using the ERC-20 standard. To put it another way, you can utilize assets that aren’t built on Ethereum. Token wrapping and unwrapping on Ethereum cost gas, as you would anticipate. Token implementations may vary significantly.

Wrapped ether is a fascinating example of an Ethereum wrapped coin (WITH). ETH (ether) is used to pay for transactions, while ERC-20 is the standard technology for issuing tokens. ERC-20 tokens include things like (BAT) Basic Attention Token & OmiseGO (OMG).

Ethereum’s version of ether has been tokenized. The only problem is that ETH isn’t compatible since it was created before the ERC-20 standard. Having to swap between ether” or an “ERC-20 token becomes problematic because of this. For this reason, someone came up with wrapped ether (WITH). It’s an ERC-20-compliant version of ether in a wrapper.

Perks of Using Wrapped Token

Although several blockchains use their token protocols, these standards can’t be utilized across different chains (ERC-20 for Ethereum and BEP-20 for BSC). When using a blockchain with wrapped tokens, non-native tokens may be used in place of native tokens.

It is also possible to improve the efficiency of control and distributed exchanges by using wrapped tokens. Wrapping unused assets and repurposing them on another chain is a powerful way to link previously unconnected liquidity sources.

Finally, transaction times and costs are significant advantages. Despite its unique features, Bitcoin isn’t the quickest or the most economical to use, which isn’t a problem in and of itself, but it may sometimes be a pain in the neck. These drawbacks may be addressed by using a blockchain-based wrapper version with quicker transaction speeds and reduced transaction costs.

Wrapped tokens have drawbacks

There is a growing trend in the cryptocurrency industry to use wrapped tokens to store value. The present technology does not allow for cross-chain transactions to be carried out using wrapped tokens. Instead, these transactions must be routed via a custodian.

Decentralized solutions for 100% trustless wrapped token minting & redeeming are currently being developed and may become accessible in the future.

High gas prices make the minting process prohibitively expensive, and some slippage may occur.

Final Thoughts

Wrapped tokens help build additional blockchain bridges. Wrapped tokens are tokenized versions of assets native to another network, which aids the bitcoin and Decentralized Finance ecosystems. Wrapped tokens provide more efficient capital allocation and easier application liquidity sharing.