The concept of wrapped tokens and their use in DeFi
Today I will be talking about wrapped tokens so please I want to break down some things about wrapped tokens, what they really mean, it's benefits to defi and usecases and even challenges, so let's dive right in.
Often times we hear tokens are pegged to an underlying value of the united states of american dollar which is the stable coin, well in the case of wrapped coin they are also pegged to an underlying value of an existing asset only that this time is not to dollar but instead their value is pegged to an existing cryptocurrency asset. Yes I know we might be wondering how could this possibly be? Well it's quite a simple process, first we deposit the underlying asset into smart contract and ofcourse how the thing works is this whatever equivalent of the original cryptocurrency asset that was deposited in the smart contract we receive a corresponding amount of wrapped tokens which is then issued to us, simply to get wrapped tokens deposit 2 tokens of the original asset into smart contract and get 2 wrapped tokens.
Thats simply what wrapped tokens entails, their value is pegged to that of the original asset, and we have an example of wrapped token which is wrapped Ethereum otherwise know as (WETH), gotten from wrapping the main asset ethereum to get the equivalent erc-20 token that's Wrapped Ethereum (WETH) token.
One of the benefits per say of wrapped tokens is interoperability, yes when something is interoperable in blockchain that is that means it serves as a gateway or bridge on the blockchain helping it to achieve a purpose or goal per say, that's to say the ease with which assets move across other decentralized financial platforms is facilitated by wrapped tokens which is one of the benefits of wrapped tokens which is meant by it being interoperable.
Wrapped tokens also in their own way goes a long way in enhancing liquidity of an asset and how they do is, is actually quite simple apart from being interoperable they are able to ensure compatibility of an asset to other defi services or lending platforms so to speak which goes a long way to enhance the liquidity of the particular asset class and this is due to the fact they have been made to be compatible to various forms decentralized exchanges which no doubt increases it's liquidity state.
Wrapped tokens has a very important use to defi, yes a token is often valued depending on the utility it provides and wrapped token has proven itself to be quite useful to defi and actually help to facilitate trading in the defi space, ofcourse we know that trading usually takes place on decentralized exchanges it's a must so one of the role of wrapped tokens it's to ensure this trading process on defi and making sure the standard it's provided for this process to go on seamlessly yes the process of buying and selling on decentralized exchanges.
Defi which is decentralized finance for short as we know it's a platform for financial services which means things such as borrowing and lending are afforded as they are part of the financial services, but then just like in tradtional settings when borrowing from a financial institution we often provide a form of physical collateral, well how does that work in digital finance then, well on defi this wrapped tokens okay an integral role here as they often help to facilitate this lending and borrowing process, but how? That's because often times the wrapped tokens are used as the collateral in defi space when borrowing or lending as the case maybe, so wrapped tokens serves as collateral in other to make the whole process seamless.
Also on defi one token is easily swapped to another token, that's one feature any decentralized exchange should offer and yes you guessed it right, wrapped tokens help to streamline the whole process of swapping tokens on the defi space so indeed their usecase to defi is beyond question as they are integral indeed and helps in facilitating most things done in defi and a very key usecase they provide indeed.
Well the major challenge in this wrapped token is risk, what risk is that, that's the risk of ending up centralized. But how can that be? Well we know that the original asset has to be deposited into a smart contract and then a corresponding number of wrapped tokens will come out ofcourse this is facilitated by a mechanism and if it becomes so that this platform or mechanism used for this process of getting wrapped token is under the custody or control of an individual or a single entity instead of a decentralized body then there is risk of this wrapped token being centralized and the goal of achieving decentralization could be defeated, so this is one such challenge here.
Conclusion
Well hopefully we have come to understand the concept of wrapped tokens as we have WETH as an example and clearly the roles of wrapped tokens is without question to defi, so I understand it's vital we know this and hopefully the challenge facing it will be combated to provide more impetus for it to continue to deliver the fine service it has been giving to defi
https://twitter.com/frank_anayo/status/1761651627184803970?t=pJdhxyNpXQdafO0fIKhrPQ&s=19
Very nice concept. Your post was in detail. Happy to read. Good job my friend. Thanks for sharing.
Good to see you enjoyed it
Brother posted a very nice discussion about the use of DeFi from which I understood a lot, thank you.
Thanks for sharing this comment, I appreciate friend
Well written, I really enjoyed reading and I'm sure no of the challenges facing wrapped coins can stop it from rendering the vital service it offers. Thanks again.
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You regularly post very important and instructive topics, thank you very much for presenting them so beautifully
Thanks for reading through
You have nicely presented the concept of wrapped tokens. thank you Good luck to you.