Thats a wrap meaning in crypto stands for wrapped tokens. A wrapped token is a cryptocurrency token pegged to the value of another crypto. It’s called a wrapped token because the original asset is put in a wrapper, which allows the wrapped token to be created on another blockchain.
What is a wrapped token?
As mentioned, thats a wrap meaning in crypto stands for wrapped tokens, which is a tokenized version of another cryptocurrency. It’s pegged to the value of the asset it represents and typically can be redeemed for it (unwrapped) at any point. It usually represents an asset that doesn’t natively live on the blockchain that it’s issued on.
You could think of a wrapped token as being similar to a stablecoin in that it derives its value from another asset. In a stablecoin's case, that’s usually fiat currency. In a wrapped token’s case, it’s usually an asset natively living on another blockchain. This means that the wrapped tokens are of the same value as their native tokens.
The main function of wrapped tokens is that they increase interoperability between different blockchains – the underlying tokens can, in essence, go cross-chain.
How do wrapped tokens work?
Wrapped tokens typically require a custodian – an entity that holds an equivalent amount of the asset as the wrapped amount. This custodian can be a merchant, a multisig wallet, a DAO, or even a smart contract. If one wants to change BTC to WBTC, the custodian needs to hold 1 BTC for each 1 WBTC that is minted. Proof of this reserve exists on-chain.
A merchant sends BTC for the custodian to mint. The custodian then mints WBTC on ETHereum according to the amount of BTC sent. When the WBTC needs to be exchanged back to BTC, the merchant puts in a burn request to the custodian, and the BTC is released from the reserves. You can think of the custodian as the wrapper and unwrapper. In WBTC’s case, adding and removing custodians and merchants is performed by a DAO.
Benefits of wrapped tokens
Although many blockchains have their own token standards (ERC-20 for ETHereum or BEP-20 for BSC), these standards are not operable across multiple chains. Wrapped tokens allow non-native tokens to be used on a particular blockchain.
In addition, wrapped tokens can increase liquidity and capital efficiency both for centralized and decentralized exchanges. The ability to wrap idle assets and use them on another chain can create more connection between otherwise isolated liquidity.
Lastly, wrapped tokens greatly reduce transaction times and fees. A wrapped version on a more scalable blockchain may result in faster transaction times and lower fees.
In Conclusion
Thats a wrap meaning in crypto refers to wrapped tokens, which bring about benefits in interoperability in other blockchains, as well as lower transaction times and fees, among many others.
