What are Wrapped Cryptocurrency Tokens (WBTC and WETH) and How Do They Work?
Welcome to our latest post on the topic of wrapped tokens. In this article, we will delve deeper into the concept of wrapped tokens, how they work, and why they are needed in the ever-evolving world of blockchain and cryptocurrency.
A wrapped token, also known as a "proxy token" or "pegged token," is a digital asset that is designed to overcome the interoperability challenges of different blockchain networks. These tokens allow for the use of non-native assets on different platforms by "wrapping" the original token into a digital vault and minting a new token that can be used on other platforms. This increases the accessibility and functionality of different cryptocurrencies, making them more versatile and user-friendly.
One of the main benefits of wrapped tokens is their ability to bridge the gap between different blockchain networks, which often have different characteristics and are not easily compatible with each other. For example, Bitcoin and Ethereum, the two most popular blockchain networks, have different characteristics and are not easily compatible with each other. Without wrapped tokens, users would have to go through a time-consuming and potentially costly process of converting their Bitcoin to Ethereum, and then converting it to an ERC-20 compatible token. However, with the existence of WBTC (Wrapped Bitcoin), users can easily convert their Bitcoin to WBTC, which is an Ethereum-based token that is equivalent to 1 BTC. This allows users to easily access services and platforms that only accept ERC-20 tokens.
Another example of wrapped tokens is WETH (Wrapped Ether). Ether, the native currency of the Ethereum blockchain, was created before the ERC-20 standard was implemented. This means that Ether is not directly compatible with ERC-20 tokens, which are a standard for creating and issuing smart contracts on the Ethereum blockchain. WETH solves this issue by allowing Ether to be wrapped in a smart contract, making it ERC-20 compatible. This means that WETH can be directly exchanged for other ERC-20 tokens, and can also be converted back to Ether at a 1:1 ratio.
Imagine you have a toy that is a car, but you want to play with it in a playground that only accepts airplanes. Wrapped tokens work like a wrapper for your toy car, that makes it look like an airplane so you can play with it in the playground. So, you put your toy car in the wrapper and now it looks like an airplane, and you can play with it in the playground with all the other airplanes.
Wrapped tokens also enable liquidity providers to earn a yield on their assets by becoming liquidity providers in pools, as well as it's also used in decentralized exchanges (DEXs) like Uniswap.
In summary, wrapped tokens are a vital component in the ever-evolving world of blockchain and cryptocurrency. They overcome interoperability challenges and increase the accessibility and functionality of different cryptocurrencies. They bridge the gap between different blockchain networks and make it easy for users to access different services and platforms. As the world of blockchain and cryptocurrency continues to evolve, we can expect to see an increase in the use of wrapped tokens and their importance in the ecosystem.