Wrapped tokens make it possible to use cryptocurrencies from one blockchain on different blockchains. So what exactly are wrapped tokens and are wrapped tokens safe? If you want to know that, let’s take a look at the article below.
What are wrapped tokens?
Wrapped crypto tokens are cryptocurrencies pegged to the value of the original crypto asset or assets such as gold, real estate, stocks, etc.
Newly minted tokens are created by "wrapping" raw assets into digital vaults. With the help of wrapper tokens, non-native assets can be used on any blockchain and create interoperability in the crypto space by building bridges between networks. They can represent anything, including fiat currencies, real estate, equity, commodities, art and collectibles, and crypto assets. Wrapped tokens must be handled and handled by the escrow organization that will wrap and unwrap the asset.
wBTC or Wrapped Bitcoin is the first use case of wrapped tokens on the Ethereum blockchain via smart contracts. In addition to Bitcoin, wrapped tokens are other assets that mainly comply with the Ethereum ERC-20 and Binance Smart Chain BEP-20 standards. Also, oddly enough, ETH does not conform to ERC-20 tokens, even though they are issued on Ethereum, since it was developed before them. Therefore, similar to Bitcoin, Ethereum needs to be wrapped to comply with the ERC-20 standard.
How do Wrapped Tokens Work?
Merchants and exchanges such as Airswap, 0x, AAVE or Maker can request custodians to mint wrapped tokens on blockchains such as Ethereum in the amount of original tokens they sent to said custodians. Likewise, when wrapped tokens need to be converted back to the original asset, they can request the custodian to release the token or asset from the reserve.
The existence of a custodial organization, which involves trust in a decentralized trustless blockchain ecosystem, can be objected to. Since traders cannot independently issue and spend wrapped tokens across blockchains, custodians become a necessary stakeholder. Although as technology develops, we can look for more decentralized options in the near future.
Are wrapped tokens safe?
Wrapped Bitcoin tokens are safe from a technical standpoint. Once converted to ERC-20 or BEP-20 tokens, the security of the associated network will be guaranteed, and these tokens will likely be hosted on a secure platform such as Ethereum or Binance Smart Chain.
The need to have confidence in the custodian holding the underlying asset is one of the main disadvantages of wrapping BTC tokens. If the custodian unlocks and releases the real bitcoins to others, the owner of wBTC will be holding a useless asset. Users must ensure that the hosting organization is at least backed by guarantees and insurance in case something goes wrong.
I hope this article will help you to learn what are wrapped tokens and are wrapped tokens safe. Achieving interoperability between different blockchains is a challenge for the industry. One problem is that as more blockchains are created, the number of bridges required to ensure assets on one blockchain can be easily transferred to each other grows exponentially.
