As the blockchain industry continues to grow, interoperability has become a key concern for developers and users alike. One of the most promising solutions to this problem is the concept of wrapped tokens. In this article, we will explore what wrapped tokens are, how they work, and how they are created.
What are Wrapped Tokens?
A wrapped token is a digital token that represents another digital asset, such as Bitcoin or Ethereum. It is created by locking the original asset on one blockchain and then minting a token on another blockchain that represents the locked asset. The wrapped token can then be used on the new blockchain, while the locked asset remains untouched on the original blockchain.
Wrapped tokens are used to enable interoperability between different blockchain ecosystems. They allow users to access the features of other blockchains without having to leave their current ecosystem. For example, a user could use a wrapped Bitcoin (WBTC) on the Ethereum blockchain to access decentralized finance (DeFi) applications, without having to sell their Bitcoin on a cryptocurrency exchange.
How do Wrapped Tokens Work?
The process of creating wrapped tokens typically involves the following steps:
- Locking the original asset: This involves sending the original asset to a custodian that holds it in escrow. The custodian is responsible for ensuring that the original asset is secure and can be redeemed at any time.
- Minting the wrapped token: Once the original asset is locked, a smart contract on the target blockchain mints the wrapped token and sends it to the user’s wallet. The wrapped token is typically pegged to the value of the original asset, which means that one wrapped token represents one unit of the original asset.
- Using the wrapped token: The wrapped token can now be used on the target blockchain, just like any other token. For example, a user could use WBTC to access DeFi applications on the Ethereum blockchain.
- Redeeming the original asset: If the user wants to redeem the original asset, they can do so by sending the wrapped token back to the custodian. The custodian will then release the original asset back to the user’s wallet on the original blockchain.
How are Wrapped Tokens Created?
Wrapped tokens are created through a process called token wrapping. This process involves creating a smart contract that holds the original asset in escrow and mints the wrapped token on the target blockchain. The smart contract also ensures that the wrapped token is always backed by the original asset, which means that users can trust that they will always be able to redeem the wrapped token for the original asset.
The process of token wrapping is typically overseen by a group of trusted custodians, who are responsible for holding and securing the original asset. Custodians can be individuals or companies, and they are typically chosen for their reputation and security practices.
Wrapped tokens are an important innovation in the blockchain industry, as they enable interoperability between different blockchain ecosystems. They allow users to access the features of other blockchains without having to leave their current ecosystem, and they provide a way to use digital assets in new and innovative ways. Wrapped tokens are created through a process called token wrapping, which involves creating a smart contract that holds the original asset in escrow and mints the wrapped token on the target blockchain. The process is overseen by a group of trusted custodians, who are responsible for holding and securing the original asset.