There are many mechanisms and projects developed within the blockchain environment that seeks to solve some of the limitations generated within the same environment, especially those that have to do with the scalability of the different existing blockchains.
How to manage cryptocurrencies such as Bitcoins or Ethereum, within the popular De Fi platforms, when these tokens are incompatible with the ERC-20 protocols? This is precisely the problem that generated the creation of the so-called “Wrapped Tokens”. Would you like what these tokens consist of? Why is this type of token necessary? o Which platforms use Wrapped Tokens?, Stay with me, and let's learn together about this interesting topic.
What are Wrapped Tokens and how do they work?
Wrapped Tokens are digital assets designed under the ERC-20 protocol or its equivalents (TRC-20) to represent other currencies such as BTC and ETH, in this way they allow them to be traded with them in environments where under normal conditions it would be impossible to do so.
To issue Wrapped Tokens, two mechanisms are used, one in which a company is used, such as BitGo for example, which is responsible for the custody of Bitcoins (BTC) and the issuance, through a smart contract, of Wrapped Bitcoins (WBTC) in a 1: 1 ratio.
The other mechanism is based on the transformation of Ethereums (ETH) into Wrapped Ethereums (WETH), this is achieved directly and in a decentralized way through smart contracts of the Ethereum network, so a company that serves custodian.
When Wrapped Tokens are created by a custodian company, as in the case of WBTCs, to return them to their original form (BTC) it is necessary to "burn" the WBTCs previously created to "release" the BTC that gave them origin.
The ETH predates the creation of the ERC-20 for this reason they cannot be used in their original form in systems based on ER-20 |
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Why were the Wrapped Tokens created?
Thanks to the growth and boom of the different De Fi projects, which are mostly supported by the Ethereum network and its ERC-20 protocol, the need to be able to include the currencies of greater prestige and relevance within the blockchain: BTC and ETH, however, both cryptocurrencies are not compatible with the ERC-20 protocol so in their “natural” form they cannot be traded within the De Fi, that is why Wrapped tokens are created that allow these cryptocurrencies to be endowed with the characteristics of ERC-20-based tokens.
It should be remembered that one of the main attractions of De Fi is the use of smart contracts, which allows the creation of decentralized exchanges, the creation of investment alternatives such as yield farming, liquidity pools, or cryptocurrency staking, all this within a decentralized environment, which allows these operations to be carried out anonymously and securely.
What blockchain platforms use Wrapped Tokens?
Any De Fi platform, Decentralized Exchange (DEX) or Exchange Application (Swap), that wants to expand the catalog of tokens that can be exchanged and include the most relevant ones (BTC and ETH), needs the Wrapped Tokens to be able to offer or accept said crypto assets within its market.
This is how decentralized exchanges such as Uniswap, SushiSwap, PancakeSwap, networks such as Avalance or Polygon, and even DEX such as Coinbase, Binance, Bittrex, Poloniex, or Kraken operate with Wtokens, this due to the problems of incompatibility of tokens that this type of mechanism solves.
Now I would like to know your opinion regarding the Wrapped Tokens, did you already know them ?, Were you familiar with the ER-20 protocol ?, Have you traded with this type of tokens ?, I hope to read your opinion in the comment box.
