[Wrapped Tokens] - Crypto Academy / S4W6 - Homework post for professor @pelon53.
Question 1
Name at least 2 Blockchains that use the Wrapped BTC, excluding Ethereum, and show screenshots. Explain.
1- Tron Blockchain Wrapped Tokens
Tron Blockchain is popular for its cheap network transaction fees. The Tron blockchain host DApps that use the TRC-20 token standardization within its network, which are similar to the Ethereum ERC-20 standard. However, with the growing need for interoperability between blockchains, wrapped tokens were created to run on the Tron blockchain, such that tokens native to other blockchains can be used in DApps built on the Tron Blockchain.
These wrapped tokens are pegged to the same value as the main token and are minted and managed by a central organization to ensure the authenticity and safety of the tokens and the wrapped token. For instance,, a DApp built on Tron blockchain can accept deposits of Bitcoin using Tron wrapped Bitcoin token WBTC.
Bitgo, the company in charge of minting wrapped ERC-20 tokens, created the Tron wrapped tokens. Bitgo ensures that each wrapped token created is matched to an exact equivalent of the main token, for instance, if 1 WBTC is minted to be used as a TRC-20 token, an equivalent of 1 BTC is deposited to the Bitgo on-chain platform. This guarantee the safety of the invested BTC token.
At the end of the transaction, the minted WBTC token will be burnt and the BTC equivalent is released accordingly. Some other wrapped tokens available on Tron Blockchain are WETH, WBTT, WJST, WUNI, WDOT, etc.
2- Solana Blockchain
The Solana blockchain is a third-generation blockchain-based project, that focused on creating a sustainable solution to scalability and speed. Solana Blockchain uses the Wormhole communication bridge to attain interoperability of blockchain tokens on the Solana blockchain, where the ERC-20 token can be moved to the Solana blockchain as an SPL token.
These wrapped tokens are pegged to the same value as the main token and are minted and managed by a central organization to ensure the authenticity and safety of the tokens and the wrapped token. For instance, a DApp built on Solana blockchain can accept a deposit of Bitcoin using SPL wrapped Bitcoin token WBTC (sollet).
Question 2
What is the difference between the wETH of the Ethereum platform and the wETH of the TRON platform? Explain.
WETH on Ethereum
Ether is Ethereum blockchain native token. Ethereum blockchain is known as the most used blockchain for creating smart contracts and DApps, which lead to the creation of the ERC-20 token standard. ERC-20 token standard is the public tokenization standard used by DApps built on the Ethereum blockchain.
The ERC-20 tokens and Ether (ETH) are not compatible because the ETH was created before the ERC-20 standard. This lead to the creation of the wrapped Ethereum (WETH) tokens used within the Ethereum blockchain to enable interoperability between the Ether coin and other ERC-20 tokens.
Ideally, the created WETH tokens are pegged to the equivalent of ETH, which implies that price fluctuation does not affect the WETH, as the current price is used. This method manages the exchange between the token standards.
For instance, an Ethereum DApp Augur has a token REP which is an ERC-20 token. Trying to convert Ether to REP directly will not work as ETH does not conform to the ERC-20 token standards. But converting ETH to WETH, and the converting WETH to REP, will work because WETH is an ERC-20 token that is pegged to the equivalent of ETH.
WETH on Tron Blockchain
Tron Blockchain token standardization TRC-20 is similar to Ethereum ERC-20. The increasing cross-chain operation demand led to the creation of wrapped tokens in an attempt to improve interoperability between blockchains. The wrapped tokens were created by Bitgo in collaboration with other companies.
Wrapped Ether (WETH) is ERC-20 standardized tokens that enable ERC-20 tokens to operate on DApps built on the Tron blockchain. For instance, TronLink is a wallet (DApp) built on Tron blockchain, which accepts wrapped ERC-20 tokens like WETH.
Bitgo, the company in charge of minting wrapped ERC-20 tokens, created the Tron wrapped tokens. Bitgo ensures that each wrapped token created is matched to an exact equivalent of the main token, for instance, if 1 WETH is minted to be used as a TRC-20 token, an equivalent of 1 ETH is deposited to the Bitgo on-chain platform. This guarantee the safety of the invested BTC token.
Question 3
Make an investment of at least $ 5 of a Wrapped token. Explain the process with screenshots. You can use the JustSwap platform.
Wrapped Token Investment
For this illustration, I chose JustSwap DEX. To access the JustSwap DEX, a Tron blockchain-based wallet is required, and the most used of these wallets is the TronLink wallet. To connect your TronLink wallet to JustSwap:
First, visit TronLink's official website and choose from the available operating systems (Android, IOS, etc) and create a wallet account. Or download the chrome web extension plugin and create a wallet account.
For this illustration, I chose the chrome web extension on my windows PC. I downloaded the plugin and created a TronLink wallet account
Linking TronLink wallet to JustSwap
First, visit JustSwap's official website and click on Connect Wallet.
Next, Select the Tron based wallet, in this instance, the available wallet is TronLink wallet
Next, connect the TronLink wallet to the JustSwap platform through the chrome web extension plugin. Click connect after verifying the wallet of choice.
The TronLink wallet will be linked to the JustSwap DEX platform showing the available TRC-20 tradable token and the TRX balance of the wallet.
Next, select the wrapped ERC-20 based token to swap with TRX and the amount
For this illustration, I chose WETH as the wrapped token and the amount to swap is 101 TRX which is equivalent to 0.00217 WETH. Then click on Swap
Next, confirm the swap by clicking on Confirm swap. From the image below, a transaction fee of 0.303 TRX was charged as transaction fees. This is the percentage shared among liquidity providers as earned reward for providing liquidity.
TransLink wallet will require to sign the swap transaction. Click on sign from the TronLink wallet popup.
Next, the swap transaction will be approved and the 0.00217 WETH tokens will be added.
Question 4
Explain in detail the Wrapped token of the TRON Blockchain. Show screenshot.
Tron Blockchain
As previously explained, the Tron blockchain is popular for its cheap network transaction fees. The Tron blockchain host DApps that use the TRC-20 token standardization within its network, which are similar to the Ethereum ERC-20 standard. However, with the growing need for interoperability between blockchains, wrapped tokens were created to run on the Tron blockchain, such that tokens native to other blockchains can be used in DApps built on the Tron Blockchain.
The company in charge of minting wrapped ERC-20 token is Bitgo. They created the Tron wrapped tokens, in other to ensure transparency and authenticity of the wrap protocol, Bitgo ensures that each wrapped token created is matched to an exact equivalent of the main token.
Bitgo ensures that the wrapped tokens are pegged to the same value as the main token, and is minted and managed by a central organization to ensure the authenticity and safety of the tokens and the wrapped token. For instance, a DApp built on Tron blockchain can accept the deposit of ERC-20 token WETH using Tron wrapped Ethereum token WETH.
At the end of the transaction, the minted WETH token will be burnt and the ETH equivalent is released accordingly. Some other wrapped tokens available on Tron Blockchain are WETH, WBTT, WJST, WUNI, WDOT, etc.
The Wrapped ERC-20 token WUNI is the wrapped token equivalent of the native token of the UniSwap Dex (DApp) built on Ethereum blockchain, UniSwap is the top-recommended decentralized exchange on Ethereum block. Uniswap's native token is called UNI.
Question 5
What is a Wrapped token? What is burning a Wrapped token? What is its function? Prepare an example explaining the process.
Wrapped Token
Wrapped Tokens are token standards created to improve interoperability between different blockchains. Wrapped Token was created by a collaboration of 3 companies and is managed by Bitgo. Bitgo is a centralized body charge with minting, managing supply circulation, and burning of wrapped tokens. Wrapped tokens are created in equal proportion to the main token deposited. For instance, depositing 1 BTC will yield a wrapped BTC of equal proportion 1 WBTC.
A wrapped token is created by assigning an equal value of a deposited token stored safely by an issuer (which can be smart contracts, Bitgo, etc) in exchange for the wrapped version of the token. The assigned wrapped token can be exchanged for the main token equivalent, after which the wrapped token will be burnt to maintain the circulating supply and avoid double-spending. This concept of wrapped token greatly improves the interaction between DApps built of different blockchains, thus creating a more efficient decentralized finance system.
Burning A wrapped Token
Burning a wrapped token is an exchange request placed by the deposit, requesting to exchange the wrapped token back to the main token. The burning of wrapped tokens helps to manage the authenticity of wrapped tokens in circulation.
When a wrapped token is created, an equal amount of the main token is deposited to the issuer (Bitgo in this case), this allows the issuer to mint the equivalent of the main token as a wrapped token and issue it to the depositor. At the end of the transaction, the deposit will request to exchange the wrapped token back to the main token which results in burning of the wrapped token and release of the deposited token to the depositor.
Function of Wrap tokens
Some key functions of wrapped tokens include the following:
1- Interoperability
Ideally, wrapped tokens improve the interoperability of different blockchains, where DApps built on a Blockchain can accept tokens of other DApps built on another Blockchain.
2- Liquidity Generation
The wrapped token generated more liquidity for centralized and decentralized exchanges as tokens as moved from one Blockchain to another through exchange mediums.
Process Time
The use of the wrapped token for transactions reduces the waiting process time as some blockchains have higher transaction throughput per second. For instance, a wrapped BTC token WBTC (sollet) created on Solana Blockchain will be processed faster than using a traditional Bitcoin network.
Wrap Token Example
To illustrate how wrapped token work, consider the illustration below:
Let's assume a depositor wants to deposit BTC TronLink. As observed, Bitcoin Blockchain and Tron blockchain are different and not directly compatible. The depositor is required to use a wrapped BTC token for the operation.
The Depositor will request for wrapped WBTC token by depositing the BTC equivalent of the requested wrapped token to a verified issuer (Bitgo in this case).
When the issuer (Bitgo) receives and confirms the deposited BTC, an equivalent of the deposited amount is minted and sent to the Depositor. As observed, the WBTC issuer minted 1 WBTC and sent it to the Depositor.
The Depositor can now use the TRC-20 wrapped WBTC token to transact on TronLink ( Tron Blockchain).
At the end of the transaction, the Depositor spent 0.50 WBTC, which is equivalent to 0.50 BTC.
The Deposit wants to exchange the WBTC balance back to BTC. The Depositor sends a burn request to the issuer (Bitgo), by forwarding the WBTC balance to the issuer requesting the BTC equivalent.
Once the issuer acknowledges the burn request, the WBTC token is burnt, and the BTC equivalent is sent to the Depositor. In this instance, the issuers burn the received 0.50 WBTC and release the Bitcoin equivalent 0.50 BTC.
With the above processes, the Depositor has received the Bitcoin token.
Conclusion
Wrapped Tokens are token standards created to improve interoperability between different blockchains. the wrapped token is created by assigning an equal value of a deposited token stored safely by an issuer (which can be Bitgo, smart contracts, etc) in exchange for the wrapped version of the token. wrapped tokens improve the interoperability of different blockchains, where DApps built on a Blockchain can accept tokens of other DApps built on another Blockchain.
Ideally, the Wrapped token generated more liquidity for centralized and decentralized exchanges and also reduce the transaction process time as some blockchains have higher transaction throughput per second.
Thank you professor @pelon53 for this educative and insightful lesson.