What is wrapped token?

What is wrapped token?

With the development of the market of decentralized, in particular Defi applications, there was a need to transmit liquid crypto assets from one network to another.

For this Legal action was , wrapped tokens are intended. Using WBTC, the user receives the value of BTC in the Ethereum or Tron ecosystem. WBTC can be left as a deposit for obtaining a loan in stablecoins or used in profitable farming – all this is unnoticed by centralized exchanges and services.

In addition, WBTC greatly simplifies the work of exchanges, wallets and services – there is a need to set up individual NODs.

How and when WBTC appeared

WBTC is the result of the Wrapped Tokens project, founded by three organizations: Bitgo, Kyber Network and Ren. Was first announced in October 2018 and officially launched on January 31, 2019.

The WBTC ecosystem has dozens of eminent certified merchants, including Compound, Maker, Blockfolio, Uniswap, Coingecko, Aave and 0x – they are responsible for the issue and burning WBTC.

How wrapped tokens are created and work

A wrapped token is available by moving a cryptoactive into a special storage and subsequent release of a wrapped token through a special smart contract.

In the example with WBTC, the user must make a BTC transfer to the specified address on the Bitcoin network, after which WBTC will be issued and moved to the desired address on the Ethereum network.

A special service that stores the basic asset in a smart contract is responsible for the release of a wrapped token and at the same time responsible for the release of a wrapped version of token. The exchange in the opposite direction occurs by burning WBTC in the Ethereum network and the subsequent “unlocking” of the pledge in the bitcoin network.

What does the cross-ministry have to do with it?

Cross-marshmuses are a set of automated smart contracts, which allows the asset from one network, saving them in a special storage, to another, by releasing a wrapped token in it.

The main task of bridges is to create compatibility for networks isolated from each other. For example, in order to start using BTC for farming on the Ethereum network, the user needs to somehow transfer the BTC coin to the ETH address-this is what the bridges are engaged in.

In the case of WBTC, a full list of trusted bridges can be found on the website of Wrapped BTC.

What are the cross-marks and wrapped tokens

In addition to WBTC, there are many wrapped tokens of other coins – their release is limited only by the technological capabilities of a particular network and applications. Here are a few examples:

Wrapped Ethereum (Weth)

Wrapped version of the ETH coin. Since most Defi applications on the Ethereum network work with the ERC-20 standard tokens, and the ETH coin does not belong to it (it was released until the standard is accepted), they decided to release Weth. It simplifies the process of exchange using ether.

Weth can be released in several dozen blockchains, including Polygon, Binance Smart Chain, Solana, Near, Avalanche and Fantom. This wrapped version of ETH is one of the most common tokens in the market of Defi applications and profitable farming. Weth is also used, for example, in trading on the Opensea NFT platform.

Wrapped tokens of the BNB Chain network

Binance blockchain developers have created a special Binance Bridge bridge for the release of wrapped versions of popular cryptoactives in their network. The user can wrap BTC, ETH, XRP, USDT, BCH, DOT and other coins to use the capabilities of the BNB Chain network itself and applications built on it.

Wrapped tokens on the SOLANA blockchain

One of the most popular bridges for SOLANA is Wormhole, connecting the network with Ethereum, Avalanche, Oasis, Binance Smart Chain and Polygon. A set of tokens and networks is constantly expanding.

Wrapped tokens on the Avalanche blockchain

In addition to many bridges controlled by individual applications, the developers launched the official Avalanche Bridge bridge from Ethereum in Avalanche with the ability to wrap popular steablecoins (USDC, USDT, BUSD) and other ERC-20 assets of the ERC-20 standard.

Wrapped tokens on the NEAR blockchain

The developers of this blockchain presented the Rainbow Bridge solution designed to transfer liquidity from Ethereum to Near. The team tried to give the opportunity to wrap the most popular tokens in Defi: Steiblcoins (USDT, DAI, TUSD), WBTC and Weth, decentralized exchanges (1inch, UNI), credit protocol tokens (AAVE, COMP) and exchange tokens (HT, CRO).

Risks of using wrapped tokens

The use of wrapped tokens is a convenient option for interacting with applications from a variety of networks. However, there are risks that should pay attention to.

Firstly, the cross-bridges, like any other smart contracts, may contain vulnerabilities in the code. This confirms the hacking of Wormhole on the SOLANA blockchain, which occurred in February 2022. Used the exploit, the attackers brought out about 120,000 Weth ($ 320 million at the time of hacking) from the project pool).

Secondly, there is a risk of centralization. Private keys that provide access to the funds stored in the bridge, can fall into the hands of attackers. The basic asset will simply be taken to a third -party address and the user will not be able to regain the key. This happened with the Axie Infinity project and their Ronin bridge in late March 2022. As a result, the hackers managed to deduce crypto assets for a total of about $ 625 million.

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