Wrapped tokens what you should understand

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If you have been using a decentralized exchange like Metamask or Trust wallet, it means you must have come across "Wrapped tokens" or coins which are mostly seen on decentralized exchanges.

In one of my posts, which we discussed token swap and migration, which you can read here should in case you didn't, we make mention of Wrapped tokens using WETH for the illustration that was made.

Since in the previous post, we didn't discuss about wrapped token, today, is the perfect time for you to understand what wrapped tokens are all about.

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Wrapped tokens

"Wrapped tokens" are becoming more popular as most crypto investors and traders are interested in using cryptocurrencies aside from the blockchain that owns the cryptocurrency.

In the last post, we mentioned how WETH can be used on Binance Smart Chain which means wrapped token is created to allow you and me to use cryptocurrencies across different blockchain networks which is the main purpose for creating Wrapped tokens.

Based on what we have so far discussed, it means Wrapped token is the representation of an original token that can be used across different blockchain networks. Looking at the screenshot shared below, you will see Wrapped Bitcoin (WBTC), Wrapped Ether (WETH), Wrapped USDT (wUSDT), and many others which are pegged to the value of the cryptocurrency they represent.

_{screenshot gotten from trustwallet}

The wrapped tokens you are seeing are used for interoperability across different blockchains, which you can Wrap Ethereum and use on Binance Smart Chain.

Since the Wrapped token is a representation of the original token, it means for example, if you have 1 Wrapped Bitcoin (WBTC) you automatically have 1 BTC since it is pegged to the value of Bitcoin. Let's take a look at how wrapped tokens work.

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How Wrapped Tokens Work

In our previous post, we mentioned the wrapped token, using WETH as an example, today one will be using WBTC to give a perfect illustration of how wrapped token works.

Each wrapped token is backed by its original token which makes the wrapped token to be in the same value as its underlying token. A custodian is the key player of a wrapped token. A merchant, smart contract, or a decentralized autonomous organization can be a custodian for holding the original token so a wrapped token can be minted to the equal amount of the original token that is held.

Now, for instance you want to use 1 BTC on the Ethereum blockchain network, you will first ensure that you have converted it to 1 WBTC by transferring it to the custodian who will then mint it to 1 WBTC on the Ethereum blockchain network. After doing the transaction that made you change your 1 BTC to wrapped BTC, you can change it back to 1 BTC by putting it in a burning request for the custodian to release your 1 BTC.

Conclusion

_{Wrapped token is very important as they help create bridges between different blockchain networks. In this post, we have learned that the wrapper token represents its underlying asset and it is the token that you can use on another blockchain network.}

N/B: _{This post, is solely for educational purposes and not investment advice.}

Reference, Reference