Wrapped tokens such as WBTC facilitate the transfer of assets across blockchains. So what is the meaning of Wrapping and how does it work. If you want to know that let’s take a look at the article below.
What is the meaning of Wrapping?
Wrapped tokens make it possible to use cryptocurrencies from one blockchain on different blockchains. Because blockchains are independent systems, they cannot easily communicate with each other. It's a bit like different governments needing different currencies: just like you can't spend your euros in stores in the US, you can't spend your bitcoins on the Ethereum blockchain.
Wrapper tokens resolve this incompatibility. Wrapping the coin allows it to be used on non-native blockchains. Wrapped tokens are essentially the exchange of one token for an equal amount of another token through a smart contract or code on the blockchain that can store and send funds. Think of it like exchanging one dollar for four quarters. Although they both represent the same value, quarters are compatible with pinball machines while dollar bills are not.
How does it work?
Wrapped tokens are created and burned through a process called "minting" and "burning". To mint wrapped tokens like WBTC, the underlying asset (in this case, BTC) is sent to a custodian who stores the BTC in a digital vault. Once the base BTC is locked, an equivalent amount of WBTC can be minted.
This process can also be understood as "wrapping". The underlying asset is "wrapped" in a digital vault using a smart contract, and the newly wrapped asset is minted for use on another blockchain. To burn WBTC, follow the same process but in reverse. WBTC is removed from circulation and an equivalent amount of BTC is released from the digital vault and allowed to recirculate. Just as minting wrapped tokens can be thought of as “wrapping” the underlying asset to create a token of equal value for use on another blockchain, burning wrapped tokens can be thought of as “unwrapping” the underlying asset.
This process of minting and burning, or wrapping and unwrapping, means that all wrapped tokens, from WBTC to renDOGE (a wrapped form of Dogecoin), are backed by an equal amount of the base currency. For every 100 renDOGE minted, 100 DOGE are held to back the value of the wrapped token.
I hope this article will help you to learn what is the meaning of Wrapping and how does it work. Wrapped tokens help create more bridges between different blockchains. A wrapped token is a tokenized form of an asset that exists itself on another blockchain.
